NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Balance Sheets
|
|
Unaudited
|
|
|
As restated
(A)
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
98,555
|
|
$
|
90,054
|
|
Restricted cash (Note 10)
|
|
84,778
|
|
|
-
|
|
Pre-funded social
welfare grants receivable (Note 2)
|
|
-
|
|
|
2,965
|
|
Accounts receivable, net (Note 3)
|
|
113,924
|
|
|
109,683
|
|
Finance loans
receivable, net (Note 3)
|
|
50,811
|
|
|
62,205
|
|
Inventory (Note 4)
|
|
10,369
|
|
|
12,887
|
|
Total current assets before settlement assets
|
|
358,437
|
|
|
277,794
|
|
Settlement assets (Note 5)
|
|
68,566
|
|
|
149,047
|
|
Total
current assets
|
|
427,003
|
|
|
426,841
|
|
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of September: $130,655; June: $129,185
|
|
25,222
|
|
|
27,054
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 7)
|
|
94,241
|
|
|
88,331
|
|
GOODWILL (Note 8)
|
|
279,158
|
|
|
283,240
|
|
INTANGIBLE ASSETS, net (Note 8)
|
|
121,824
|
|
|
131,132
|
|
DEFERRED INCOME TAXES
|
|
8,007
|
|
|
6,312
|
|
OTHER LONG-TERM ASSETS, including
reinsurance assets (Note 7 and Note 9)
|
|
245,150
|
|
|
256,380
|
|
TOTAL ASSETS
|
|
1,200,605
|
|
|
1,219,290
|
|
LIABILITIES
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Short-term credit
facilities for ATM funding (Note 10)
|
|
84,778
|
|
|
-
|
|
Short-term credit facilities (Note 10)
|
|
3,313
|
|
|
-
|
|
Accounts payable
|
|
23,134
|
|
|
35,055
|
|
Other payables
|
|
82,292
|
|
|
47,994
|
|
Current portion of
long-term borrowings (Note 10)
|
|
33,937
|
|
|
44,695
|
|
Income taxes payable
|
|
13,898
|
|
|
5,742
|
|
Total current liabilities before settlement obligations
|
|
241,352
|
|
|
133,486
|
|
Settlement obligations (Note 5)
|
|
68,566
|
|
|
149,047
|
|
Total
current liabilities
|
|
309,918
|
|
|
282,533
|
|
DEFERRED INCOME TAXES
|
|
43,567
|
|
|
46,606
|
|
LONG-TERM BORROWINGS (Note 10)
|
|
11,660
|
|
|
5,469
|
|
OTHER LONG-TERM LIABILITIES, including insurance policy
liabilities (Note 9)
|
|
3,419
|
|
|
38,580
|
|
TOTAL
LIABILITIES
|
|
368,564
|
|
|
373,188
|
|
COMMITMENTS AND CONTINGENCIES (Note 19)
|
|
|
|
|
|
|
REDEEMABLE COMMON STOCK
|
|
107,672
|
|
|
107,672
|
|
EQUITY
|
|
COMMON STOCK (Note 11)
|
|
|
|
|
|
|
Authorized: 200,000,000 with
$0.001 par value;
Issued and
outstanding shares, net of treasury - September: 56,833,925; June:
56,685,925
|
|
80
|
|
|
80
|
|
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
|
|
276,865
|
|
|
276,201
|
|
TREASURY SHARES, AT COST: September: 24,891,292; June:
24,891,292
|
|
(286,951
|
)
|
|
(286,951
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note
1 and 12)
|
|
(189,528
|
)
|
|
(184,436
|
)
|
RETAINED EARNINGS (Note 1)
|
|
832,426
|
|
|
837,625
|
|
TOTAL NET1 EQUITY
|
|
632,892
|
|
|
642,519
|
|
NON-CONTROLLING INTEREST
|
|
91,477
|
|
|
95,911
|
|
|
|
|
|
|
|
|
TOTAL
EQUITY
|
|
724,369
|
|
|
738,430
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES, REDEEMABLE COMMON STOCK
AND
SHAREHOLDERS
EQUITY
|
$
|
1,200,605
|
|
$
|
1,219,290
|
|
(A) Certain amounts shown here do not correspond to the
Companys 2018 financial statements and reflects an adjustment made, refer to
Note 1 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands, except per share
|
|
|
|
data)
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
125,884
|
|
$
|
152,558
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
goods sold, IT processing, servicing and support
|
|
72,316
|
|
|
74,652
|
|
|
|
|
|
|
|
|
Selling,
general and administration
|
|
41,878
|
|
|
43,934
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
10,794
|
|
|
8,966
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
896
|
|
|
25,006
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
1,876
|
|
|
5,044
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
2,759
|
|
|
2,121
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX EXPENSE
|
|
13
|
|
|
27,929
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 18)
|
|
6,490
|
|
|
10,277
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME BEFORE EARNINGS FROM
EQUITY-ACCOUNTED INVESTMENTS
|
|
(6,477
|
)
|
|
17,652
|
|
|
|
|
|
|
|
|
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
|
|
1,373
|
|
|
2,075
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
(5,104
|
)
|
|
19,727
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING
INTEREST
|
|
95
|
|
|
244
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME ATTRIBUTABLE TO NET1
|
$
|
(5,199
|
)
|
$
|
19,483
|
|
|
|
|
|
|
|
|
Net (loss) income per share, in U.S.
dollars
(Note 14)
|
|
|
|
|
|
|
Basic (loss) earnings
attributable to Net1 shareholders
|
|
$(0.09
|
)
|
$
|
0.34
|
|
Diluted
(loss) earnings attributable to Net1 shareholders
|
|
$(0.09
|
)
|
$
|
0.34
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(5,104
|
)
|
$
|
19,727
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
Movement in foreign
currency translation reserve
|
|
(13,322
|
)
|
|
(13,880
|
)
|
Movement
in foreign currency translation reserve related to equity-accounted
investments
|
|
5,430
|
|
|
(227
|
)
|
Total other comprehensive (loss) income, net of taxes
|
|
(7,892
|
)
|
|
(14,107
|
)
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
(12,996
|
)
|
|
5,620
|
|
Add (Less) comprehensive loss (income) attributable to
non-controlling interest
|
|
2,705
|
|
|
(133
|
)
|
Comprehensive (loss) income attributable to
Net1
|
$
|
(10,291
|
)
|
$
|
5,487
|
|
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, 2017
(dollar
amounts
in
thousands)
|
|
Net 1 UEPS Technologies, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
of
|
|
|
|
|
|
Number of
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Non-
|
|
|
|
|
|
Redeemable
|
|
|
|
of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Shares, Net
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Net1
|
|
|
Controlling
|
|
|
|
|
|
Common
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
of Treasury
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Total
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2017
|
|
81,261,029
|
|
$
|
80
|
|
|
(24,891,292
|
)
|
$
|
(286,951
|
)
|
|
56,369,737
|
|
$
|
273,733
|
|
$
|
773,276
|
|
$
|
(162,569
|
)
|
$
|
597,569
|
|
$
|
2,766
|
|
$
|
600,335
|
|
$
|
107,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
(Note 13)
|
|
588,594
|
|
|
|
|
|
|
|
|
|
|
|
588,594
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
|
|
|
|
|
|
|
869
|
|
|
|
|
|
869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock
compensation charge (Note 13)
|
|
(30,635
|
)
|
|
|
|
|
|
|
|
|
|
|
(30,635
|
)
|
|
(42
|
)
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock based-
compensation charge related to equity-accounted investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,483
|
|
|
|
|
|
19,483
|
|
|
244
|
|
|
19,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,996
|
)
|
|
(13,996
|
)
|
|
(111
|
)
|
|
(14,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2017
|
|
81,818,988
|
|
$
|
80
|
|
|
(24,891,292
|
)
|
$
|
(286,951
|
)
|
|
56,927,696
|
|
$
|
274,353
|
|
$
|
792,759
|
|
$
|
(176,565
|
)
|
$
|
603,676
|
|
$
|
2,899
|
|
$
|
606,575
|
|
$
|
107,672
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
5
NET 1 UEPS
TECHNOLOGIES,
INC.
Unaudited
Condensed
Consolidated
Statement
of
Changes
in Equity for the three
months
ended
September
30, 2018 (dollar
amounts
in
thousands)
|
|
Net 1 UEPS Technologies, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
of
|
|
|
|
|
|
Number of
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Non-
|
|
|
|
|
|
Redeemabl
|
|
|
|
of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Shares, Net
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Net1
|
|
|
Controlling
|
|
|
|
|
|
Common
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
of Treasury
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Total
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2018
|
|
81,577,217
|
|
$
|
80
|
|
|
(24,891,292
|
)
|
$
|
(286,951
|
)
|
|
56,685,925
|
|
$
|
276,201
|
|
$
|
812,426
|
|
$
|
(159,237
|
)
|
$
|
642,519
|
|
$
|
95,911
|
|
$
|
738,430
|
|
$
|
107,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction of error (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,199
|
|
|
(25,199
|
)
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2018 as
restated
|
|
81,577,217
|
|
$
|
80
|
|
|
(24,891,292
|
)
|
$
|
(286,951
|
)
|
|
56,685,925
|
|
$
|
276,201
|
|
$
|
837,625
|
|
$
|
(184,436
|
)
|
$
|
642,519
|
|
$
|
95,911
|
|
$
|
738,430
|
|
$
|
107,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
(Note 13)
|
|
148,000
|
|
|
|
|
|
|
|
|
|
|
|
148,000
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
587
|
|
|
|
|
|
|
|
|
587
|
|
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge related to equity-accounted investment (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to
non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,729
|
)
|
|
(1,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,199
|
)
|
|
|
|
|
(5,199
|
)
|
|
95
|
|
|
(5,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
income (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,092
|
)
|
|
(5,092
|
)
|
|
(2,800
|
)
|
|
(7,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2018
|
|
81,725,217
|
|
$
|
80
|
|
|
(24,891,292
|
)
|
$
|
(286,951
|
)
|
|
56,833,925
|
|
$
|
276,865
|
|
$
|
832,426
|
|
$
|
(189,528
|
)
|
$
|
632,892
|
|
$
|
91,477
|
|
$
|
724,369
|
|
$
|
107,672
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
6
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(5,104
|
)
|
$
|
19,727
|
|
Depreciation and amortization
|
|
10,794
|
|
|
8,966
|
|
Earnings from equity-accounted investments
|
|
(1,373
|
)
|
|
(2,075
|
)
|
Interest on Cedar Cell note (Note 7)
|
|
(156
|
)
|
|
-
|
|
Fair value adjustments and re-measurements
|
|
(82
|
)
|
|
91
|
|
Interest payable
|
|
110
|
|
|
(88
|
)
|
Facility fee amortized
|
|
87
|
|
|
133
|
|
(Profit) Loss on disposal of property, plant and equipment
|
|
(127
|
)
|
|
105
|
|
Stock-based compensation charge, net (Note
13)
|
|
587
|
|
|
827
|
|
Dividends received from equity accounted investments
|
|
-
|
|
|
912
|
|
Decrease (Increase) in accounts receivable,
pre-funded social welfare grants receivable and finance loans receivable
|
|
14,296
|
|
|
(39,141
|
)
|
Decrease (Increase) in inventory
|
|
2,185
|
|
|
(1,526
|
)
|
(Decrease) Increase in accounts payable and
other payables
|
|
(9,480
|
)
|
|
3,429
|
|
Increase in taxes payable
|
|
8,354
|
|
|
8,838
|
|
Decrease in deferred taxes
|
|
(3,634
|
)
|
|
(991
|
)
|
Net cash provided by (used
in) operating activities
|
|
16,457
|
|
|
(793
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(3,118
|
)
|
|
(1,473
|
)
|
Proceeds from disposal of property, plant and equipment
|
|
274
|
|
|
316
|
|
Proceeds on return of investment (Note 7)
|
|
284
|
|
|
-
|
|
Investment in Cell C (Note 7)
|
|
-
|
|
|
(151,003
|
)
|
Investment in equity of equity-accounted
investments (Note 7)
|
|
-
|
|
|
(72,846
|
)
|
Net change in settlement assets
|
|
75,931
|
|
|
212,649
|
|
Net
cash provided by (used in) investing activities
|
|
73,371
|
|
|
(12,357
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from bank overdraft (Note 10)
|
|
84,655
|
|
|
31,880
|
|
Repayment of long-term borrowings (Note 10)
|
|
(10,260
|
)
|
|
(14,260
|
)
|
Long-term borrowings utilized (Note 10)
|
|
7,801
|
|
|
95,431
|
|
Dividends paid to non-controlling interest
|
|
(1,729
|
)
|
|
-
|
|
Payment of guarantee fee (Note 10)
|
|
(136
|
)
|
|
(552
|
)
|
Repayment of bank overdraft (Note 10)
|
|
-
|
|
|
(2,952
|
)
|
Net change in settlement obligations
|
|
(75,931
|
)
|
|
(212,649
|
)
|
Net
cash provided by (used in) financing activities
|
|
4,400
|
|
|
(103,102
|
)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(949
|
)
|
|
(3,846
|
)
|
Net increase (decrease) in cash, cash equivalents and
restricted cash
|
|
93,279
|
|
|
(120,098
|
)
|
Cash, cash equivalents and restricted
cash beginning of period
|
|
90,054
|
|
|
258,457
|
|
Cash, cash equivalents and restricted cash end of
period (1)
|
$
|
183,333
|
|
$
|
138,359
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
(1) Cash, cash equivalents and restricted cash as of September
30, 2018, includes restricted cash of approximately $84.8 million related to
cash withdrawn from the Companys various debt facilities to fund ATMs. This
cash may only be used to fund ATMs and is considered restricted as to use and
therefore is classified as restricted cash. Refer to Note 10 for additional
information regarding the Companys facilities.
7
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the
Unaudited Condensed Consolidated Financial Statements
for the three
months ended September 30, 2018 and 2017
(All amounts in tables
stated in thousands or thousands of U.S. dollars, unless otherwise stated)
1. Basis of Presentation and Summary of Significant
Accounting Policies
Unaudited Interim
Financial Information
The accompanying unaudited
condensed consolidated financial statements include all majority-owned
subsidiaries over which the Company exercises control and have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) and the
rules and regulations of the United States Securities and Exchange Commission
for Quarterly Reports on Form 10-Q and include all of the information and
disclosures required for interim financial reporting. The results of operations
for the three months ended September 30, 2018 and 2017, are not necessarily
indicative of the results for the full year. The Company believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements should
be read in conjunction with the financial statements, accounting policies and
financial notes thereto included in the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 2018. 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, collectively, unless the context
otherwise requires. References to Net1 are references solely to Net 1 UEPS
Technologies, Inc.
Restatement of Form10-K
for the year ended June 30, 2018
Subsequent to the issuance of the
Form 10-K, and as disclosed in the Form 8-K dated November 8, 2018, the Company
announced that it would restate its consolidated financial statements for the
year ended June 30, 2018, included in the Companys Annual Report on Form 10-K
for the year ended June 30, 2018, due to the identification of an error in its
accounting for its investment in an equity security. The Company incorrectly
classified and recorded its investment in Cell C Proprietary Limited (Cell C),
an unlisted company that the Company elected to carry at fair value using the
fair value option, as available-for-sale and recorded the change in its fair
value of $25.2 million, net of taxation of $7.3 million, in other comprehensive
income for the year ended June 30, 2018. The Company has now determined that the
investment in Cell C should have been accounted at fair value with changes in
fair value recorded in the statement of operations. The tables below present the
impact of the restatement on each of the Companys financial statements for the
year ended June 30, 2018:
Consolidated
balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Correction
|
|
|
Restated
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Accumulated other comprehensive loss
|
$
|
(159,237
|
)
|
$
|
(25,199
|
)
|
$
|
(184,436
|
)
|
Retained earnings
|
|
812,426
|
|
|
25,199
|
|
|
837,625
|
|
Total equity
|
$
|
738,430
|
|
$
|
-
|
|
$
|
738,430
|
|
Consolidated
statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2018
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Correction
|
|
|
Restated
|
|
|
|
(in
thousands, except per share data)
|
|
Change in fair value of equity securities
|
$
|
-
|
|
$
|
32,473
|
|
$
|
32,473
|
|
Income before income taxes
|
|
67,893
|
|
|
32,473
|
|
|
100,366
|
|
Income tax expense
|
|
41,353
|
|
|
7,274
|
|
|
48,627
|
|
Net income before earnings from equity-accounted
investments
|
|
26,540
|
|
|
25,199
|
|
|
51,739
|
|
Net income
|
|
38,270
|
|
|
25,199
|
|
|
63,469
|
|
Net income attributable to Net1
|
$
|
39,150
|
|
$
|
25,199
|
|
$
|
64,349
|
|
Net income per share, in United States
dollars:
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to Net1 shareholders
|
|
0.69
|
|
|
0.44
|
|
|
1.13
|
|
Diluted earnings attributable to Net1
shareholders
|
|
0.69
|
|
|
0.44
|
|
|
1.13
|
|
8
1. Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Restatement of Form10-K
for the year ended June 30, 2018 (continued)
Consolidated statement of comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2018
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Correction
|
|
|
Restated
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Net income
|
$
|
38,270
|
|
$
|
25,199
|
|
$
|
63,469
|
|
Net unrealized income on asset available for sale, net of
tax
|
|
25,199
|
|
|
(25,199
|
)
|
|
-
|
|
Total other comprehensive income (loss)
|
|
3,234
|
|
|
(25,199
|
)
|
|
(21,965
|
)
|
Comprehensive income
|
$
|
41,504
|
|
$
|
-
|
|
$
|
41,504
|
|
Consolidated
statement of changes in equity
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated other
|
|
|
|
earnings
|
|
|
comprehensive loss
|
|
|
|
(in
thousands)
|
|
As reported June 30, 2018
|
$
|
812,426
|
|
$
|
(159,237)
|
|
Correction of misstatement
|
|
25,199
|
|
|
(25,199
|
)
|
As restated June 30, 2018
|
$
|
837,625
|
|
$
|
(184,436
|
)
|
Consolidated
statement of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2018
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Correction
|
|
|
Restated
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Net income
|
$
|
38,270
|
|
$
|
25,199
|
|
$
|
63,469
|
|
Fair value adjustment
|
|
212
|
|
|
(32,473
|
)
|
|
(32,685
|
)
|
Increase (Decrease) in deferred taxes
|
|
(1,308
|
)
|
|
7,274
|
|
|
5,966
|
|
Net cash provided by operating activities
|
$
|
132,605
|
|
$
|
-
|
|
$
|
132,605
|
|
The restatement does not affect
the current financial results reported on this Quarterly Report on Form 10-Q.
For more information concerning the restatement, please see the Current Report
on Form 8-K filed by the Company with the Securities and Exchange Commission
(SEC) on November 8, 2018.
Recent accounting
pronouncements adopted
In May 2014, the Financial
Accounting Standards Board (FASB) issued guidance regarding
Revenue from
Contracts with Customers
. This guidance requires an entity to recognize
revenue when a customer obtains control of promised goods or services in an
amount that reflects the consideration which the entity expects to receive in
exchange for those goods or services. In addition, the standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. The guidance was originally set to
be effective for the Company beginning July 1, 2017, however in August 2015, the
FASB issued guidance regarding
Revenue from Contracts with Customers,
Deferral of the Effective Date
. This guidance deferred the required
implementation date specified in
Revenue from Contracts with Customers
to
December 2017. Public companies may elect to adopt the standard along the
original timeline. The guidance became effective for the Company beginning July
1, 2018. The Company elected the modified retrospective transition method upon
adoption of this guidance. The adoption of this guidance did not have a material
impact on the Companys financial statements, except for the additional footnote
disclosures provided.
In January 2016, the FASB issued
guidance regarding
Recognition and Measurement of Financial Assets and
Financial Liabilities
. The guidance primarily affects the accounting for
equity investments, financial liabilities under the fair value option and the
presentation and disclosure requirements for financial instruments. The guidance
requires changes in the fair value of the Companys equity investments, with
certain exceptions, to be recognized through net income rather than other
comprehensive income. In addition, the guidance clarifies the valuation
allowance assessment when recognizing deferred tax assets resulting from
unrealized losses on available-for-sale debt securities. This guidance became
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 adoption of this guidance did not have a
material impact on the Companys financial statements.
9
1. Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Recent accounting
pronouncements adopted (continued)
Equity securities are measured at
fair value. The Company may elect to measure equity securities without readily
determinable fair values at cost with adjustments for observable changes in
price or impairments for the identical or a similar investment of the same
issuer. We perform a qualitative assessment on a quarterly basis and recognize
an impairment loss if there are sufficient indicators that the fair value of the
equity security is less than carrying value. There were no changes in the fair
value of our equity securities recorded during the three months ended September
30, 2018. Changes in fair value will be recorded in our condensed consolidated
statement of operations in future periods within a caption titled changes in
fair value of equity securities
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 became effective
for the Company beginning July 1, 2018, and must be applied retrospectively. The
Company has elected to classify distributions received from equity method
investees using the nature of the distribution approach. This election requires
the Company to evaluate each distribution received on the basis of the source of
the payment and classify the distribution as either operating cash inflows or
investing cash inflows. The adoption of this guidance did not have a material
impact on the Companys financial statements and the Company was not required to
make any retrospective adjustments.
In January 2017, the FASB issued
guidance regarding
Clarifying the Definition of a Business
. This guidance
provides a more robust framework to use in determining when a set of assets and
activities is a business. Because the current definition of a business is
interpreted broadly and can be difficult to apply, stakeholders indicated that
analyzing transactions is inefficient and costly and that the definition does
not permit the use of reasonable judgment. The amendments provide more
consistency in applying the guidance, reduce the costs of application, and make
the definition of a business more operable. The guidance became effective for
the Company beginning July 1, 2018. The adoption of this guidance did not have a
material impact on the Companys financial statements.
In January 2017, the FASB issued
guidance regarding
Simplifying the Test for Goodwill Impairment
. This
guidance removes the requirement for an entity to calculate the implied fair
value of goodwill (as part of step 2 of the current goodwill impairment test) in
measuring a goodwill impairment loss. The guidance is effective for the Company
beginning July 1, 2020. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The
Company has elected to early adopt this guidance beginning July 1, 2018. The
adoption of this guidance did not have a material impact on the Companys
financial statements.
In May 2017, the FASB issued
guidance regarding
CompensationStock Compensation (Topic 718): Scope of
Modification Accounting
. The guidance amends the scope of modification
accounting for share-based payment arrangements and provides guidance on the
types of changes to the terms or conditions of share-based payment awards to
which an entity would be required to apply modification accounting under
Accounting Standards Codification 718. Specifically, an entity would not apply
modification accounting if the fair value, vesting conditions, and
classification of the awards are the same immediately before and after the
modification. The guidance became effective for the Company beginning July 1,
2018. The adoption of this guidance did not have a material impact on the
Companys financial statements.
In June 2018, the FASB issued
guidance regarding
Improvements to Nonemployee Share-Based Payment
Accounting
. The guidance simplifies the accounting for share-based payments
granted to non-employees for goods and services and aligns the guidance for
these share-based payments with guidance applicable to accounting for
share-based payments granted to employees. The guidance is effective for the
Company beginning July 1, 2019. Early adoption is permitted. The Company has
elected to early adopt this guidance beginning July 1, 2018. 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, 2018
In February 2016, the FASB issued
guidance regarding
Leases
. The guidance increases transparency and
comparability among organizations by requiring the recognition of lease assets
and lease liabilities on the balance sheet. The amendments to current lease
guidance include the recognition of assets and liabilities by lessees for those
leases currently classified as operating leases. The guidance also requires
disclosures to meet the objective of enabling users of financial statements to
assess the amount, timing, and uncertainty of cash flows arising from leases.
This guidance is effective for the Company beginning July 1, 2019. Early
adoption is permitted. The Company expects that this guidance may have a
material impact on its financial statements and is currently evaluating the
impact of this guidance on its financial statements on adoption.
10
1. Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Recent accounting
pronouncements not yet adopted as of September 30, 2018 (continued)
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 August 2018, the FASB issued
guidance regarding
Disclosure Framework: Changes to the Disclosure
Requirements for Fair Value Measurement.
The guidance modifies the
disclosure requirements related to fair value measurement. This guidance is
effective for the Company beginning July 1, 2020. Early adoption is permitted.
The Company is currently assessing the impact of this guidance on its financial
statements disclosure.
2. Pre-funded social welfare grants receivable
Pre-funded social welfare grants
receivable represents primarily amounts pre-funded by the Company to certain
merchants participating in the merchant acquiring system. The Companys contract
with the South African Social Security Agency expired on September 30, 2018, and
therefore the Company no longer pre-funds social welfare grants. The July 2018
payment service commenced on July 1, 2018 but the Company pre-funded certain
merchants participating in the merchant acquiring systems on the last day of
June 2018.
3. Accounts receivable, net and finance loans receivable,
net
Accounts receivable, net
The Companys accounts receivable, net, as of September 30,
2018 and June 30, 2018, is presented in the table below:
|
|
|
September 30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2018
|
|
|
|
|
|
2018
|
|
|
Accounts receivable, trade, net
|
|
$
|
38,240
|
|
|
|
|
$
|
49,365
|
|
|
Accounts receivable, trade, gross
|
|
|
39,632
|
|
|
|
|
|
50,466
|
|
|
Allowance for doubtful accounts
receivable, end of period
|
|
|
1,392
|
|
|
|
|
|
1,101
|
|
|
Beginning of year
|
|
|
1,101
|
|
|
|
|
|
1,255
|
|
|
Reversed
to statement of operations
|
|
|
(2
|
)
|
|
|
|
|
(47
|
)
|
|
Charged to statement of
operations
|
|
|
1,089
|
|
|
|
|
|
642
|
|
|
Utilized
|
|
|
(832
|
)
|
|
|
|
|
(776
|
)
|
|
Foreign currency
adjustment
|
|
|
36
|
|
|
|
|
|
27
|
|
|
Current portion of payments to agents in
South Korea amortized over the contract period
|
|
|
20,695
|
|
|
|
|
|
21,971
|
|
|
Payments to agents in
South Korea amortized over the contract period
|
|
|
36,641
|
|
|
|
|
|
39,554
|
|
|
Less:
Payments to agents in South Korea amortized over the contract period
included
in
other long-term assets (Note 7)
|
|
|
15,946
|
|
|
|
|
|
17,582
|
|
|
Loans provided to Finbond
|
|
|
1,074
|
|
|
|
|
|
1,107
|
|
|
Contingent purchase consideration
|
|
|
8,033
|
|
|
|
|
|
-
|
|
|
Other receivables
|
|
|
45,882
|
|
|
|
|
|
37,240
|
|
|
Total
accounts receivable, net
|
|
$
|
113,924
|
|
|
|
|
$
|
109,683
|
|
|
11
3. Accounts receivable, net and finance loans receivable,
net (continued)
Finance loans receivable,
net
The Companys finance loans
receivable, net, as of September 30, 2018 and June 30, 2018, is presented in the
table below:
|
|
|
September
|
|
|
|
|
|
|
|
|
|
|
|
30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2018
|
|
|
|
|
|
2018
|
|
|
Microlending finance loans receivable, net
|
|
$
|
46,078
|
|
|
|
|
$
|
57,504
|
|
|
Microlending finance loans receivable, gross
|
|
|
52,453
|
|
|
|
|
|
61,743
|
|
|
Allowance for doubtful microlending
finance loans receivable, end of period
|
|
|
6,375
|
|
|
|
|
|
4,239
|
|
|
Beginning of year
|
|
|
4,239
|
|
|
|
|
|
3,717
|
|
|
Charged
to statement of operations
|
|
|
4,271
|
|
|
|
|
|
4,348
|
|
|
Utilized
|
|
|
(2,117
|
)
|
|
|
|
|
(3,588
|
)
|
|
Foreign
currency adjustment
|
|
|
(18
|
)
|
|
|
|
|
(238
|
)
|
|
Working capital finance receivable, net
|
|
|
3,834
|
|
|
|
|
|
3,959
|
|
|
Working capital finance receivable,
gross
|
|
|
16,180
|
|
|
|
|
|
16,123
|
|
|
Allowance for doubtful working capital finance
receivable, end of period
|
|
|
12,346
|
|
|
|
|
|
12,164
|
|
|
Beginning
of year
|
|
|
12,164
|
|
|
|
|
|
3,752
|
|
|
Charged to statement of
operations
|
|
|
181
|
|
|
|
|
|
8,415
|
|
|
Foreign
currency adjustment
|
|
|
1
|
|
|
|
|
|
(3
|
)
|
|
Current portion of other finance loans receivable
|
|
|
899
|
|
|
|
|
|
742
|
|
|
Total
other finance loans receivable
|
|
|
17,060
|
|
|
|
|
|
13,025
|
|
|
Less included in other
long-term assets
|
|
|
16,161
|
|
|
|
|
|
12,283
|
|
|
Total finance loans receivable, net
|
|
$
|
50,811
|
|
|
|
|
$
|
62,205
|
|
|
4. Inventory
The Companys inventory comprised
the following category as of September 30, 2018 and June 30, 2018.
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Finished goods
|
$
|
10,369
|
|
$
|
12,887
|
|
|
$
|
10,369
|
|
$
|
12,887
|
|
5. Settlement assets and settlement obligations
Settlement assets comprise (1)
cash received from the South African government that the Company holds pending
disbursement to recipient cardholders of social welfare grants and (2) cash
received from customers on whose behalf the Company processes payroll payments
that the Company will disburse to customer employees, payroll-related payees and
other payees designated by the customer.
Settlement obligations comprise
(1) amounts that the Company is obligated to disburse to recipient cardholders
of social welfare grants, and (2) amounts that the Company is obligated to pay
to customer employees, payroll-related payees and other payees designated by the
customer.
The balances at each reporting
date may vary widely depending on the timing of the receipts and payments of
these assets and obligations.
12
6. Fair value of financial instruments
Fair value of financial instruments
Initial recognition and measurement
Financial instruments are
recognized when the Company becomes a party to the transaction. Initial
measurements are at cost, which includes transaction costs.
Risk
management
The Company manages its exposure
to currency exchange, translation, interest rate, customer concentration, credit
and equity price and liquidity risks as discussed below.
Currency
exchange risk
The Company is subject to
currency exchange risk because it purchases inventories that it is required to
settle in other currencies, primarily the euro and U.S. dollar. The Company has
used forward contracts in order to limit its exposure in these transactions to
fluctuations in exchange rates between the South African rand (ZAR), 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 lending activities, the Companys operating results are exposed to
fluctuations in interest rates, which it manages primarily through regular
financing activities. The Company generally maintains limited investments in
cash equivalents and held to maturity investments and has occasionally invested
in marketable securities.
Credit
risk
Credit risk relates to the risk
of loss that the Company would incur as a result of non-performance by
counterparties. The Company maintains credit risk policies with regard to its
counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as the Companys management
deems appropriate.
Credit
risk (continued)
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 B (or its equivalent) or better, as determined by
credit rating agencies such as Standard & Poors, Moodys and Fitch Ratings.
Microlending
credit risk
The Company is exposed to credit
risk in its microlending activities, which provide unsecured short-term loans to
qualifying customers. The Company manages this risk by performing an
affordability test for each prospective customer and assigning a
creditworthiness score, which takes into account a variety of factors such as
other debts and total expenditures on normal household and lifestyle expenses.
Equity
price and liquidity risk
Equity price risk relates to the
risk of loss that the Company would incur as a result of the volatility in the
exchange-traded price of equity securities that it holds and the risk that it
may not be able to liquidate these securities. The market price of these
securities may fluctuate for a variety of reasons and, consequently, the amount
that the Company may obtain in a subsequent sale of these securities may
significantly differ from the reported market value.
Liquidity risk relates to the
risk of loss that the Company would incur as a result of the lack of liquidity
on the exchange on which these securities are listed. The Company may not be
able to sell some or all of these securities at one time, or over an extended
period of time without influencing the exchange traded price, or at all.
13
6
.
Fair value of financial instruments
(continued)
Financial instruments
The following section describes
the valuation methodologies the Company uses to measure its significant
financial assets and liabilities at fair value.
In general, and where applicable,
the Company uses quoted prices in active markets for identical assets or
liabilities to determine fair value. This pricing methodology would apply to
Level 1 investments. If quoted prices in active markets for identical assets or
liabilities are not available to determine fair value, then the Company uses
quoted prices for similar assets and liabilities or inputs other than the quoted
prices that are observable either directly or indirectly. These investments
would be included in Level 2 investments. In circumstances in which inputs are
generally unobservable, values typically reflect managements estimates of
assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models, and similar
techniques. Investments valued using such techniques are included in Level 3
investments.
Asset
measured at fair value using significant unobservable inputs investment in
Cell C
The Companys Level 3 asset
represents an investment of 75,000,000 class A shares in Cell C, a leading
mobile telecoms provider in South Africa. The Company has developed an adjusted
EV/EBITDA multiple valuation model in order to determine the fair value of the
Cell C shares. The primary inputs to the valuation model as of September 30,
2018, are unchanged from June 30, 2018. The primary inputs to the valuation
model are Cell Cs annualized adjusted EBITDA for the 11 months ended June 30,
2018, of ZAR 3.9 billion ($275.8 million, translated at exchange rates
applicable as of September 30, 2018), an EBITDA multiple of 6.75, Cell Cs net
external debt of ZAR 8.8 billion ($622.3 million, translated at exchange rates
applicable as of September 30, 2018) and a marketability discount of 10% as Cell
C is not currently listed, but has publicly stated its intention to list. The EBITDA multiple was determined based on an analysis of Cell Cs peer group,
which comprises various African and emerging market mobile telecommunications
operators. The fair value of Cell C utilizing the adjusted EV/EBITDA valuation
model developed by the Company is sensitive to the following inputs: (i) the
Companys determination of adjusted EBITDA (ii) the EBITDA multiple used and
(iii) the marketability discount used. Utilization of different inputs, or
changes to these inputs, may result in significantly higher or lower fair value
measurement.
The following table presents the
impact of a 0.50 increase and 0.50 decrease to the EBITDA multiple used in the
Cell C valuation on the September 30, 2018, carrying value of the Companys Cell
C investment (all amounts translated at exchange rates applicable as of
September 30, 2018):
|
|
Sensitivity for
|
|
|
|
fair value of
|
|
|
|
Cell C investment
|
|
EBITDA multiple of 6.25 times
|
$
|
149,179
|
|
EBITDA multiple of 6.75 times
|
$
|
167,835
|
|
EBITDA multiple of 7.25 times
|
$
|
186,490
|
|
The fair value of the Cell C
shares as of September 30, 2018, represented approximately 14% of the Companys
total assets, including these shares. The Company expects to hold these shares
for an extended period of time and it is not concerned with short-term equity
price volatility with respect to these shares provided that the underlying
business, economic and management characteristics of the company remain sound.
Liability
measured at fair value using significant unobservable inputs DNI contingent
consideration
The salient terms of the
Companys investment in DNI is described in Note 3 to the Companys audited
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended June 30, 2018. Under the terms of its subscription agreements
with DNI, the Company has agreed to pay to DNI an additional amount of up to ZAR
400.0 million ($28.3 million, translated at exchange rates applicable as of
September 30, 2018), in cash, subject to the achievement of certain performance
targets by DNI. The Company expects to pay the additional amount during the
first quarter of the year ended June 30, 2020, and has recorded an amount of ZAR
379.6 million ($26.8 million) and ZAR 373.6 million ($27.2 million), in other
payables in its unaudited condensed consolidated balance sheet as of September
30, 2018, and in long-term liabilities as of June 30, 2018, respectively, which
amount represents the present value of the ZAR 400.0 million to be paid (amounts
translated at exchange rates applicable as of September 30, 2018 and June 30,
2018, respectively).
14
6
.
Fair value of financial instruments
(continued)
Financial instruments
(continued)
Liability
measured at fair value using significant unobservable inputs DNI contingent
consideration (continued)
The present value of ZAR 379.6
million has been calculated using the following assumptions (a) the maximum
additional amount of ZAR 400.0 million will be paid on August 1, 2019 and (b) an
interest rate of 6.3 % (the rate used to calculate interest earned by the
Company on its surplus South African funds) has been used to discount the ZAR
400.0 million to its present value as of September 30, 2018. Utilization of
different inputs, or changes to these inputs, may result in significantly higher
or lower fair value measurement.
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 B (or equivalent) or better. The Company uses
quoted prices in active markets for similar assets and liabilities to determine
fair value (Level 2). The Company has no derivatives that require fair value
measurement under Level 1 or 3 of the fair value hierarchy.
The Companys outstanding foreign
exchange contracts are as follows as of September 30, 2018:
|
|
Fair market
|
|
Notional amount
|
Strike price
|
value price
|
Maturity
|
USD 269,800
|
ZAR 14.2023
|
ZAR 14.1489
|
October 2, 2018
|
USD 280,000
|
ZAR 15.2480
|
ZAR 14.2466
|
November 23, 2018
|
USD 420,000
|
ZAR 15.3071
|
ZAR 14.2993
|
December 21, 2018
|
USD 420,000
|
ZAR 15.3801
|
ZAR 14.3647
|
January 25, 2019
|
USD 140,000
|
ZAR 15.4386
|
ZAR 14.4168
|
February 22, 2019
|
USD 420,000
|
ZAR 15.4939
|
ZAR 14.4652
|
March 20, 2019
|
USD 420,000
|
ZAR 15.5704
|
ZAR 14.5334
|
April 26, 2019
|
The Company had no outstanding
foreign exchange contracts as of June 30, 2018.
The following table presents the
Companys assets and liabilities measured at fair value on a recurring basis as
of September 30, 2018, according to the fair value hierarchy:
|
|
|
Quoted price in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cell C
|
$
|
-
|
|
$
|
-
|
|
$
|
167,835
|
|
$
|
167,835
|
|
|
Related to insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
restricted cash
(included in other
long-term assets)
|
|
598
|
|
|
-
|
|
|
-
|
|
|
598
|
|
|
Fixed
maturity investments (included
in
cash and cash equivalents)
|
|
7,853
|
|
|
-
|
|
|
-
|
|
|
7,853
|
|
|
Other
|
|
-
|
|
|
18
|
|
|
-
|
|
|
18
|
|
|
Total assets at fair
value
|
$
|
8,451
|
|
$
|
18
|
|
$
|
167,835
|
|
$
|
176,304
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DNI contingent consideration
|
$
|
-
|
|
$
|
-
|
|
$
|
26,839
|
|
$
|
26,839
|
|
|
Foreign exchange contracts
|
|
-
|
|
|
152
|
|
|
-
|
|
|
152
|
|
|
Total liabilities at
fair value
|
$
|
-
|
|
$
|
152
|
|
$
|
26,839
|
|
$
|
26,991
|
|
15
6
.
Fair value of financial instruments
(continued)
Financial instruments
(continued)
The following table presents the
Companys assets and liabilities measured at fair value on a recurring basis as
of June 30, 2018, according to the fair value hierarchy:
|
|
Quoted price in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cell C
|
$
|
-
|
|
$
|
-
|
|
$
|
172,948
|
|
$
|
172,948
|
|
Related to insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents (included in
other
long-term assets)
|
|
610
|
|
|
-
|
|
|
-
|
|
|
610
|
|
Fixed maturity investments
(included in cash,
cash equivalents
and restricted cash)
|
|
8,304
|
|
|
-
|
|
|
-
|
|
|
8,304
|
|
Other
|
|
-
|
|
|
18
|
|
|
-
|
|
|
18
|
|
Total assets at fair value
|
$
|
8,914
|
|
$
|
18
|
|
$
|
172,948
|
|
$
|
181,880
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
DNI contingent consideration
|
$
|
-
|
|
$
|
-
|
|
$
|
27,222
|
|
$
|
27,222
|
|
Total liabilities at
fair value
|
$
|
-
|
|
$
|
-
|
|
$
|
27,222
|
|
$
|
27,222
|
|
There have been no transfers in
or out of Level 3 during the three months ended September 30 2018 and 2017,
respectively.
Summarized below is the movement
in the carrying value of assets and liabilities measured at fair value on a
recurring basis, and categorized within Level 3, during the three months ended
September 30, 2018:
Assets
|
|
Carrying value
|
|
Balance as at June 30, 2018
|
$
|
172,948
|
|
Foreign
currency adjustment
|
|
(5,113
|
)
|
Balance as of September 30, 2018
|
$
|
167,835
|
|
Liabilities
|
|
|
|
Balance as at June 30, 2018
|
$
|
27,222
|
|
Accretion
of interest
|
|
422
|
|
Foreign currency
adjustment
(1)
|
|
(805
|
)
|
Balance as of September 30, 2018
|
$
|
26,839
|
|
(1) The foreign currency adjustment represents the effects of
the fluctuations of the South African rand and the U.S. dollar on the carrying
value.
Summarized below is the movement
in the carrying value of assets and liabilities measured at fair value on a
recurring basis, and categorized within Level 3, during the three months ended
September 30, 2017:
|
|
Carrying value
|
|
Assets
|
|
|
|
Acquisition
of investment in Cell C
|
$
|
151,003
|
|
Foreign
currency adjustment
|
|
(3,530
|
)
|
Balance as of September 30, 2017
|
$
|
147,473
|
|
(1) The foreign currency
adjustment represents the effects of the fluctuations of the South African rand
and the U.S. dollar on the carrying value.
Assets
measured at fair value on a nonrecurring basis
We measure equity investments
without readily determinable fair values on a nonrecurring basis. The fair
values of these investments are determined based on valuation techniques using
the best information available, and may include quoted market prices, market
comparables, and discounted cash flow projections.
16
7. Equity-accounted investments and other long-term assets
Refer to Note 9 to the Companys
audited consolidated financial statements included in its Annual Report on Form
10-K for the year ended June 30, 2018, for additional information regarding its
equity-accounted investments and other long-term assets.
Equity-accounted
investments
The
Companys ownership percentage in its equity-accounted investments as of
September 30, 2018 and June 30, 2018, was as follows:
|
September
|
|
June 30,
|
|
30, 2018
|
|
2018
|
Bank Frick & Co AG (Bank
Frick)
|
35%
|
|
35%
|
Fanaka Holdings (Pty) Ltd (Fanaka)
|
40%
|
|
-
|
Finbond Group Limited
(Finbond)
|
29%
|
|
29%
|
OneFi Limited (formerly KZ One) (OneFi)
|
25%
|
|
25%
|
SmartSwitch Namibia (Pty) Ltd
(SmartSwitch Namibia)
|
50%
|
|
50%
|
Speckpack Field Services (Pty) Ltd
(Speckpack)
|
50%
|
|
50%
|
Walletdoc Proprietary Limited
(Walletdoc)
|
20%
|
|
20%
|
Finbond
As
of September 30, 2018, the Company owned 267,672,032 shares in Finbond. Finbond
is listed on the Johannesburg Stock Exchange and its closing price on September
28, 2018, the last trading day of the quarter, was R3.60 per share. The market
value of the Companys holding in Finbond on September 30, 2018 was ZAR 1.0
billion ($72 million translated at exchange rates applicable as of September 30,
2018). On July 11, 2018, the Company, pursuant to its election, received an
additional 6,602,551 shares in Finbond as a capitalization share issue in lieu
of a dividend.
V2
Limited
On
October 4, 2018, the Company acquired a 50% voting and economic interest in V2
Limited (V2) for $2.5 million. V2 is an Africa-focused technology provider
dedicated to providing financial inclusion to the roughly one billion
underbanked citizens on the continent. The Company has committed to provide V2
with a further equity contribution of $2.5 million and a working capital
facility of $5.0 million, which are both subject to the achievement of certain
pre-defined objectives. V2 will have access to license Zappers quick response
(QR) payment technology as well as the Companys various payment solutions
such as UEPS/EMV and mobile virtual card. Zappers QR technology and payment
platform is one of the most advanced and complete QR payment offerings, and it
has operations currently in South Africa, the United Kingdom and the United
States. V2 will partner with Zapper to launch ZappGroup Africa, a company
focused on deploying a universal white-label QR payment solution.
17
7. Equity-accounted investments and other long-term assets
(continued)
Equity-accounted
investments (continued)
Summarized below is the movement
in equity-accounted investments during the three months ended September 30,
2018:
|
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
Frick
|
|
|
Finbond
|
|
|
Other
(1)
|
|
|
Total
|
|
Investment in equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
$
|
48,129
|
|
$
|
30,958
|
|
$
|
6,092
|
|
$
|
85,179
|
|
Acquisition of shares
|
|
-
|
|
|
1,920
|
|
|
-
|
|
|
1,920
|
|
Stock-based
compensation
|
|
-
|
|
|
77
|
|
|
-
|
|
|
77
|
|
Comprehensive income (loss):
|
|
(588
|
)
|
|
7,305
|
|
|
86
|
|
|
6,803
|
|
Other comprehensive loss
|
|
-
|
|
|
5,430
|
|
|
-
|
|
|
5,430
|
|
Equity accounted earnings (loss)
|
|
(588
|
)
|
|
1,875
|
|
|
86
|
|
|
1,373
|
|
Share of net income
|
|
162
|
|
|
1,852
|
|
|
86
|
|
|
2,100
|
|
Amortization
of acquired intangible assets
|
|
(189
|
)
|
|
-
|
|
|
-
|
|
|
(189
|
)
|
Deferred taxes on acquired
intangible assets
|
|
45
|
|
|
-
|
|
|
-
|
|
|
45
|
|
Dilution
resulting from corporate transactions
|
|
-
|
|
|
23
|
|
|
-
|
|
|
23
|
|
Other
|
|
(606
|
)
|
|
-
|
|
|
-
|
|
|
(606
|
)
|
Dividends received
|
|
-
|
|
|
(1,920
|
)
|
|
-
|
|
|
(1,920
|
)
|
Return on
investment
|
|
-
|
|
|
-
|
|
|
(284
|
)
|
|
(284
|
)
|
Foreign currency adjustment
(2)
|
|
435
|
|
|
(1,059
|
)
|
|
(57
|
)
|
|
(681
|
)
|
Balance as of September 30, 2018
|
$
|
47,976
|
|
$
|
37,281
|
|
$
|
5,837
|
|
$
|
91,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2018
|
$
|
-
|
|
$
|
-
|
|
$
|
3,152
|
|
$
|
3,152
|
|
Foreign
currency adjustment
(2)
|
|
-
|
|
|
-
|
|
|
(5
|
)
|
|
(5
|
)
|
Balance as of September
30, 2018
|
$
|
-
|
|
$
|
-
|
|
$
|
3,147
|
|
$
|
3,147
|
|
|
|
Equity
|
|
|
|
Loans
|
|
|
|
|
Total
|
|
Carrying amount as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
$
|
85,179
|
|
|
$
|
3,152
|
|
|
|
$
|
88,331
|
|
September 30, 2018
|
$
|
91,094
|
|
|
$
|
3,147
|
|
|
|
$
|
94,241
|
|
(1) Includes OneFi, SmartSwitch
Namibia, Speckpack, Fanaka and Walletdoc;
(2) The foreign currency
adjustment represents the effects of the fluctuations of the South African rand,
Swiss franc, Nigerian naira and Namibian dollar, and the U.S. dollar on the
carrying value.
Other long-term assets
Summarized below is the breakdown
of other long-term assets as of September 30, 2018, and June 30, 2018:
|
|
|
September 30,
|
|
|
|
June 30,
|
|
|
|
|
2018
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Total equity investments
|
$
|
194,570
|
|
|
$
|
199,865
|
|
|
Investment in 15% of Cell
C, at fair value (Note 6)
|
|
167,835
|
|
|
|
172,948
|
|
|
Investment in 12% of MobiKwik, at fair value
(1)
|
|
26,735
|
|
|
|
26,917
|
|
|
Total held to maturity investments
|
|
10,551
|
|
|
|
10,395
|
|
|
Investment in 7.625% of Cedar Cellular Investment 1 (RF) (Pty) Ltd
8.625% notes
|
|
10,551
|
|
|
|
10,395
|
|
|
Long-term portion of payments to agents in South Korea
amortized over the contract period
|
|
15,946
|
|
|
|
17,582
|
|
|
Long-term portion of other finance loans
receivable
|
|
16,161
|
|
|
|
12,283
|
|
|
Contingent purchase consideration
|
|
-
|
|
|
|
9,064
|
|
|
Policy holder assets under investment
contracts (Note 9)
|
|
598
|
|
|
|
610
|
|
|
Reinsurance assets under insurance contracts (Note 9)
|
|
619
|
|
|
|
633
|
|
|
Other long-term assets
|
|
6,705
|
|
|
|
5,948
|
|
|
Total other long-term
assets
|
$
|
245,150
|
|
|
$
|
256,380
|
|
(1)
The Company has determined that MobiKwik does not have readily determinable fair
value and has therefore elected to recorded this investment at cost minus
impairment, if any, plus or minus changes resulting from observable price
changes in orderly transactions for the identical or a similar investment of the
same issuer. The Company accounted for its investment in MobiKwik at cost as of
June 30, 2018.
18
7. Equity-accounted investments and other long-term assets
(continued)
Other long-term assets
(continued)
Summarized below are the
components of the Companys held to maturity investments as of September 30,
2018:
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
holding
|
|
|
holding
|
|
|
Carrying
|
|
|
|
|
Cost basis
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cedar Cellular notes
|
$
|
9,000
|
|
$
|
1,551
|
|
$
|
-
|
|
$
|
10,551
|
|
|
Total
|
$
|
9,000
|
|
$
|
1,551
|
|
$
|
-
|
|
$
|
10,551
|
|
Summarized below are the
components of the Companys held to maturity investments as of June 30, 2018:
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
holding
|
|
|
holding
|
|
|
Carrying
|
|
|
|
|
Cost basis
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cedar Cellular notes
|
$
|
9,000
|
|
$
|
1,395
|
|
$
|
-
|
|
$
|
10,395
|
|
|
Total
|
$
|
9,000
|
|
$
|
1,395
|
|
$
|
-
|
|
$
|
10,395
|
|
The unrealized holding gains
related to the investment in Cedar Cellular notes were recorded in interest
income in the consolidated statement of operations. Interest on this investment
will only be paid, at Cedar Cellulars election, on maturity in August 2022. The
Companys effective interest rate on the Cedar Cellular note is 19.15% as of
September 30, 2018, and it has recognized unrealized holding gains of $0.2
million during the three months ended September 30, 2018, which includes
unrealized losses attributable to changes in the effective interest rate.
Contractual maturities of
held to maturity investments
Summarized below is the
contractual maturity of the Companys held to maturity investment as of
September 30, 2018:
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
fair
|
|
|
|
basis
|
|
|
value
(1)
|
|
Due in one year or less
|
$
|
-
|
|
$
|
-
|
|
Due in one year through five years
|
|
9,000
|
|
|
9,625
|
|
Due in five years through ten
years
|
|
-
|
|
|
-
|
|
Due after ten years
|
|
-
|
|
|
-
|
|
Total
|
$
|
9,000
|
|
$
|
9,625
|
|
(1) The estimated fair value of
the Cedar Cellular note has been calculated utilizing the Companys portion of
the security provided to the Company by Cedar Cellular, namely, Cedar Cellulars
investment in Cell C.
8. Goodwill and intangible assets, net
Goodwill
Summarized below is the movement
in the carrying value of goodwill for the three months ended September 30, 2018:
|
|
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Gross value
|
|
|
impairment
|
|
|
value
|
|
Balance as of June 30, 2018
|
$
|
304,013
|
|
$
|
(20,773
|
)
|
$
|
283,240
|
|
Foreign currency adjustment
(1)
|
|
(5,152
|
)
|
|
1,070
|
|
|
(4,082
|
)
|
Balance as of September 30, 2018
|
$
|
298,861
|
|
$
|
(19,703
|
)
|
$
|
279,158
|
|
(1) the foreign currency adjustment
represents the effects of the fluctuations between the South African rand, the
Euro and the Korean won, and the U.S. dollar on the carrying value.
19
8. Goodwill and intangible assets, net (continued) Goodwill
(continued)
Goodwill has been allocated to
the Companys reportable segments as follows:
|
|
South
|
|
|
|
|
|
Financial
|
|
|
|
|
|
|
African
|
|
|
International
|
|
|
inclusion and
|
|
|
|
|
|
|
transaction
|
|
|
transaction
|
|
|
applied
|
|
|
Carrying
|
|
|
|
processing
|
|
|
processing
|
|
|
technologies
|
|
|
value
|
|
Balance as of June 30, 2018
|
$
|
20,946
|
|
$
|
123,948
|
|
$
|
138,346
|
|
$
|
283,240
|
|
Foreign currency
adjustment
(1)
|
|
(618
|
)
|
|
456
|
|
|
(3,920
|
)
|
|
(4,082
|
)
|
Balance as of September 30, 2018
|
$
|
20,328
|
|
$
|
124,404
|
|
$
|
134,426
|
|
$
|
279,158
|
|
(1) the foreign currency adjustment
represents the effects of the fluctuations between the South African rand, the
Euro and the Korean won, and the U.S. dollar on the carrying value.
Intangible assets
Carrying
value and amortization of intangible assets
Summarized below is the carrying
value and accumulated amortization of the intangible assets as of September 30,
2018 and June 30, 2018:
|
|
As
of September 30, 2018
|
|
|
As
of June 30, 2018
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
193,995
|
|
$
|
(80,786
|
)
|
$
|
113,209
|
|
$
|
197,676
|
|
$
|
(76,237
|
)
|
$
|
121,439
|
|
Software and unpatented
technology
|
|
34,175
|
|
|
(32,546
|
)
|
|
1,629
|
|
|
35,730
|
|
|
(32,342
|
)
|
|
3,388
|
|
FTS patent
|
|
2,709
|
|
|
(2,709
|
)
|
|
-
|
|
|
2,792
|
|
|
(2,792
|
)
|
|
-
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
Trademarks and brands
|
|
12,345
|
|
|
(6,147
|
)
|
|
6,198
|
|
|
11,101
|
|
|
(5,589
|
)
|
|
5,512
|
|
Total finite-lived
intangible assets
|
|
247,730
|
|
|
(126,694
|
)
|
|
121,036
|
|
|
251,805
|
|
|
(121,466
|
)
|
|
130,339
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial institution
license
|
|
788
|
|
|
-
|
|
|
788
|
|
|
793
|
|
|
-
|
|
|
793
|
|
Total indefinite-lived intangible
assets
|
|
788
|
|
|
-
|
|
|
788
|
|
|
793
|
|
|
-
|
|
|
793
|
|
Total
intangible assets
|
$
|
248,518
|
|
$
|
(126,694
|
)
|
$
|
121,824
|
|
$
|
252,598
|
|
$
|
(121,466
|
)
|
$
|
131,132
|
|
Aggregate amortization expense on
the finite-lived intangible assets for the three months ended September 30, 2018
and 2017, was approximately $6.0 million and $2.8 million, respectively.
Future estimated annual
amortization expense for the next five fiscal years and thereafter, assuming
exchange rates that prevailed on September 30, 2018, is presented in the table
below. Actual amortization expense in future periods could differ from this
estimate as a result of acquisitions, changes in useful lives, exchange rate
fluctuations and other relevant factors.
Fiscal 2019
|
$
|
24,469
|
|
Fiscal 2020
|
|
19,285
|
|
Fiscal 2021
|
|
13,811
|
|
Fiscal 2022
|
|
10,604
|
|
Fiscal 2023
|
|
10,604
|
|
Thereafter
|
|
48,473
|
|
Total future estimated
annual amortization expense
|
$
|
127,246
|
|
20
9. Reinsurance assets and policyholder liabilities under
insurance and investment contracts
Reinsurance assets and
policyholder liabilities under insurance contracts
Summarized below is the movement
in reinsurance assets and policyholder liabilities under insurance contracts
during the three months ended September 30, 2018:
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
assets
(1)
|
|
|
contracts
(2)
|
|
Balance as of June 30, 2018
|
$
|
633
|
|
$
|
(2,032
|
)
|
Increase in policyholder benefits under
insurance contracts
|
|
169
|
|
|
(2,901
|
)
|
Claims and
policyholders benefits under insurance contracts .
|
|
(164
|
)
|
|
2,690
|
|
Foreign currency
adjustment
(3)
|
|
(19
|
)
|
|
61
|
|
Balance
as of September 30, 2018
|
$
|
619
|
|
$
|
(2,182
|
)
|
(1) Included in other long-term
assets.
(2) Included in other long-term
liabilities.
(3) Represents the effects
of the fluctuations between the ZAR and the U.S. dollar.
The Company has agreements with
reinsurance companies in order to limit its losses from certain insurance
contracts, however, if the reinsurer is unable to meet its obligations, the
Company retains the liability.
The Company determines its
reserves for policy benefits under its life insurance products using a model
which estimates claims incurred that have not been reported and total present
value of disability claims-in-payment at the balance sheet date. This model
allows for best estimate assumptions based on experience (where sufficient) plus
prescribed margins, as required in the markets in which these products are
offered, namely South Africa. The best estimate assumptions include (i)
mortality and morbidity assumptions reflecting the companys most recent
experience and (ii) claim reporting delays reflecting Company specific and
industry experience. Most of the disability claims-in-payment reserve is
reinsured and the reported values were based on the reserve held by the relevant
reinsurer.
Assets and policyholder
liabilities under investment contracts
Summarized below is the movement
in assets and policyholder liabilities under investment contracts during the
three months ended September 30, 2018:
|
|
|
|
|
Investment
|
|
|
|
Assets
(1)
|
|
|
contracts
(2)
|
|
Balance as of June 30, 2018
|
$
|
610
|
|
$
|
(610
|
)
|
Increase in policyholder benefits under
investment contracts
|
|
6
|
|
|
(6
|
)
|
Foreign currency
adjustment
(3)
|
|
(18
|
)
|
|
18
|
|
Balance as of September
30, 2018
|
$
|
598
|
|
$
|
(598
|
)
|
(1) Included in other long-term
assets.
(2) Included in other long-term
liabilities.
(3) Represents the effects
of the fluctuations between the ZAR and the U.S. dollar.
The Company does not offer any
investment products with guarantees related to capital or returns.
21
10. Borrowings
South Africa
The amounts below have been
translated at exchange rates applicable as of the dates specified.
July
2017 Facilities, as amended, comprising a short-term facility and long-term
borrowings
Long-term
borrowings Facilities A, B, C and D
The Companys South African
amended July 2017 Facilities agreement is described in Note 14 to the Companys
audited consolidated financial statements included in its Annual Report on Form
10-K for the year ended June 30, 2018. The carrying value of these long-term
borrowings as of September 30, 2018, was ZAR 529.9 million ($37.5 million), net
of deferred fees of ZAR 2.6 million ($0.2 million), and the carrying amount
approximated its fair value. Interest on these term loans is payable on the last
business day of March, June, September and December of each year and on the
final maturity date based on the Johannesburg Interbank Agreed Rate (JIBAR) in
effect from time to time plus a margin of 2.75% . The JIBAR has been set at
7.00% for the period to December 28, 2018, in respect of the loans provided
under the South African long-term facilities agreement. The next scheduled
principal repayment of ZAR 151.3 million ($10.7 million, translated at exchange
rates applicable as of September 30, 2018) is due on December 28, 2018.
Short-term
facility - Facility E
On September 26, 2018, Net1
Applied Technologies South Africa Proprietary Limited (Net1 SA) further
amended its amended July 2017 Facilities agreement with Rand Merchant Bank, a
division of FirstRand Bank Limited (RMB) to include an overdraft facility
(Facility E) of up to ZAR 1.5 billion ($106.1 million) to fund the Companys
ATMs. Interest on the overdraft facility is payable on the last day of each
month and on the final maturity date based on South African prime rate less a
margin of 1.00% . The overdraft facility matures on September 26, 2019. The
overdraft facility amount utilized must be repaid in full within one month of
utilization and at least 90% of the amount utilized must be repaid with 25 days.
The overdraft facility is secured by a pledge by Net1 SA of, among other things,
cash and certain bank accounts utilized in the Companys ATM funding process,
the cession of an insurance policy with Senate Transit Underwriters Managers
Proprietary Limited, and any rights and claims Net1 SA has against Grindrod Bank
Limited. The Company paid a non-refundable origination fee of approximately ZAR
3.6 million ($0.2 million) in October 2018. As at September 30, 2018, the
Company had utilized approximately ZAR 1.1 billion ($76.6 million translated at
exchange rates applicable as of September 30, 2018) of this overdraft facility.
This ZAR 1.5 billion overdraft facility may only be used to fund ATMs and
therefore the overdraft utilized and converted to cash to fund the Companys
ATMs is considered restricted cash. The prime rate on September 30, 2018, was
10.0% .
Nedbank
facility, comprising short-term facilities
As of September 30, 2018, the
aggregate amount of the Companys short-term South African credit facility with
Nedbank Limited was ZAR 700.0 million ($49.5 million) and consists of (i) a
primary amount of up to ZAR 450 million ($31.8 million), (ii) a temporary amount
of ZAR 250.0 million ($17.7 million), and (iii) a secondary amount, which has
been temporarily withdrawn as discussed below. The primary amount comprises an
overdraft facility of (i) up to ZAR 300 million ($21.2 million), which is
further split into (a) a ZAR 250.0 million ($17.7 million) overdraft facility
which may only be used to fund ATMs used at pay points and (b) a ZAR 50 million
($3.5 million) general banking facility and (ii) indirect and derivative
facilities of up to ZAR 150 million ($10.6 million), which include letters of
guarantees, letters of credit and forward exchange contracts. The temporary
amount has been made available until January 31, 2019, at which time any amount
utilized must be repaid in full and the secondary amount of ZAR 200.0 million
($14.1 million) will be made available again. The ZAR 250.0 million component of
the primary amount may only be used to fund ATMs and therefore this component of
the primary amount utilized and converted to cash to fund our ATMs is considered
restricted cash.
As of September 30, 2018, the
interest rate on the overdraft facility was 8.85% . The Company has ceded its
investment in Cash Paymaster Services Proprietary Limited (CPS), a South
African subsidiary, as well as all of its rights, title and interest in an
insurance policy issued by Fidelity Risk 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
short-term facility. The Company is required to comply with customary
non-financial covenants, including, without limitation, covenants that restrict
its ability to dispose of or encumber its assets, incur additional indebtedness
or engage in certain business combinations.
As of September 30, 2018, the
Company has utilized approximately ZAR 115.6 million ($8.2 million) of its ZAR
250 million overdraft facility to fund ATMs. As of September 30, 2018 and June
30, 2018, the Company had utilized approximately ZAR 132.2 million ($9.3
million) and ZAR 108.0 million ($7.9 million), respectively, of its indirect and
derivative facilities of ZAR 150 million to enable the bank to issue guarantee,
letters of credit and forward exchange contracts, in order for the Company to
honor its obligations to third parties requiring such guarantees (refer to Note
19).
22
10. Borrowings (continued)
South Africa (continued)
June
2018 Facility, a long-term borrowing
The Companys South African
long-term facility agreement is described in Note 14 to the Companys audited
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended June 30, 2018. The current carrying value as of September 30,
2018, was ZAR 115.0 million ($8.1 million). Interest on the revolving credit
facility is payable quarterly based on JIBAR in effect from time to time plus a
margin of 2.75% . The Company paid a non-refundable origination fee of
approximately ZAR 2.0 million ($0.1 million) during the three months ended
September 30, 2018.
United States, a
short-term facility
On September 14, 2018, the
Company renewed its $10.0 million overdraft facility from Bank Frick. The
interest rate on the facilities is 4.50% plus 3-month US dollar LIBOR and
interest is payable quarterly commencing on September 30, 2018. The 3-month US
dollar LIBOR rate was 2.39838% on September 28, 2018. The facility has no fixed
term, however, it may be terminated by either party with six weeks written
notice. The facility is secured by a pledge of the Companys investment in Bank
Frick. As of September 30, 2018, the Company had utilized approximately $3.3
million of this facility.
South Korea, comprising
long-term borrowings
The Companys South Korean senior
secured loan facility is described in Note 14 to its audited consolidated
financial statements included in its Annual Report on Form 10-K for the year
ended June 30, 2018. On July 29, 2017, the Company utilized approximately KRW
0.3 billion ($0.3 million) of its Facility C revolving credit facility to pay
interest due on the Companys South Korean senior secured loan facility. On
October 20, 2017, the Company made an unscheduled repayment of $16.6 million and
settled the full outstanding balance, including interest, related to these
borrowings.
Movement in short-term
credit facilities
Summarized below are the
Companys short-term facilities as of September 30, 2018, and the movement in
the Companys short-term facilities from as of June 30, 2018 to as of September
30, 2018:
|
|
South Africa
|
|
|
|
United States
|
|
|
|
|
|
|
|
Amended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2017
|
|
|
|
Nedbank
|
|
|
|
Bank Frick
|
|
|
|
Total
|
|
Short-term facilities as of September 30,
2018:
|
$
|
106,054
|
|
|
$
|
49,492
|
|
|
$
|
10,000
|
|
|
$
|
165,546
|
|
Overdraft
|
|
-
|
|
|
|
21,211
|
|
|
|
10,000
|
|
|
|
31,211
|
|
Overdraft restricted as
to use for ATM funding only
|
|
106,054
|
|
|
|
17,676
|
|
|
|
-
|
|
|
|
123,730
|
|
Indirect and derivative facilities
|
|
-
|
|
|
|
10,605
|
|
|
|
-
|
|
|
|
10,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in utilized overdraft facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2018
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Utilized
|
|
73,500
|
|
|
|
7,842
|
|
|
|
3,313
|
|
|
|
84,655
|
|
Foreign currency adjustment
(1)
|
|
3,105
|
|
|
|
331
|
|
|
|
-
|
|
|
|
3,436
|
|
Balance
as of September 30, 2018
|
|
76,605
|
|
|
|
8,173
|
|
|
|
3,313
|
|
|
|
88,091
|
|
Restricted
as to use for ATM funding only
|
|
76,605
|
|
|
|
8,173
|
|
|
|
-
|
|
|
|
84,778
|
|
No restrictions as to use
|
|
-
|
|
|
|
-
|
|
|
|
3,313
|
|
|
|
3,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in utilized indirect and derivative facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2018
|
|
-
|
|
|
|
7,871
|
|
|
|
-
|
|
|
|
7,871
|
|
Guarantees
cancelled
|
|
-
|
|
|
|
(848
|
)
|
|
|
-
|
|
|
|
(848
|
)
|
Utilized
|
|
-
|
|
|
|
2,436
|
|
|
|
-
|
|
|
|
2,436
|
|
Foreign
currency adjustment
(1)
|
|
-
|
|
|
|
(110
|
)
|
|
|
-
|
|
|
|
(110
|
)
|
Balance
as of September 30, 2018
|
$
|
-
|
|
|
$
|
9,349
|
|
|
$
|
-
|
|
|
$
|
9,349
|
|
(1) Represents the effects of the
fluctuations between the ZAR and the U.S. dollar.
23
10. Borrowings (continued)
Movement in long-term
borrowings
Summarized below is the movement
in the Companys long term borrowing from as of June 30, 2018 to as of September
30, 2018:
|
|
|
South Africa
|
|
|
|
|
|
|
|
|
Amended
|
|
|
|
June 2018
|
|
|
|
|
|
|
|
|
July 2017
|
|
|
|
Facility
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in current portion of long-term
borrowings
|
$
|
44,695
|
|
|
$
|
-
|
|
|
$
|
44,695
|
|
|
Included in long-term borrowings
|
|
5,469
|
|
|
|
-
|
|
|
|
5,469
|
|
|
Balance as of June 30, 2018
|
|
50,164
|
|
|
|
-
|
|
|
|
50,164
|
|
|
Utilized
|
|
-
|
|
|
|
7,801
|
|
|
|
7,801
|
|
|
Repaid
|
|
(10,260
|
)
|
|
|
-
|
|
|
|
(10,260
|
)
|
|
Foreign currency
adjustment
(1)
|
|
(2,438
|
)
|
|
|
330
|
|
|
|
(2,108
|
)
|
|
Balance as of September 30, 2018
|
|
37,466
|
|
|
|
8,131
|
|
|
|
45,597
|
|
|
Included in
current portion of long-term borrowings
|
|
33,937
|
|
|
|
-
|
|
|
|
33,937
|
|
|
Included in long-term borrowings
|
$
|
3,529
|
|
|
$
|
8,131
|
|
|
$
|
11,660
|
|
(1) Represents the effects of the
fluctuations between the ZAR and the U.S. dollar.
The Company paid a non-refundable
deal origination fee of approximately ZAR 6.3 million ($0.6 million) in August
2017. Interest expense incurred under the Companys South African long-term
borrowing during the three months ended September 30, 2018 and 2017, was $1.1
million and $1.7 million, respectively. The prepaid facility fees amortization
charged included in interest expense during each of the three months ended
September 30, 2018 and 2017, was $0.1 million, respectively.
Interest expense incurred under
the Company South Korean long-term borrowings during the three months ended
September 30, 2017, was $0.2 million and prepaid facility fees amortized were
$0.03 million.
11. Capital structure
The following table presents a
reconciliation between the number of shares, net of treasury, presented in the
unaudited condensed consolidated statement of changes in equity during the three
months ended September 30, 2018 and 2017, 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, 2018 and 2017, respectively:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Number of shares, net of treasury:
|
|
|
|
|
|
|
Statement of changes in
equity
|
|
56,833,925
|
|
|
56,927,696
|
|
Less: Non-vested equity shares that
have not vested (Note 13)
|
|
860,817
|
|
|
1,007,182
|
|
Number
of shares, net of treasury excluding
non-
vested
equity shares that have not vested
|
|
55,973,108
|
|
|
55,920,514
|
|
24
12. 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, 2018:
|
|
|
Three months ended
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
net
|
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
Accumulated
|
|
|
income on
|
|
|
|
|
|
|
|
foreign
|
|
|
asset
|
|
|
|
|
|
|
|
currency
|
|
|
available for
|
|
|
|
|
|
|
|
translation
|
|
|
sale, net of
|
|
|
|
|
|
|
|
reserve
|
|
|
tax
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018 (as reported,
refer to Note 1)
|
$
|
(184,436
|
)
|
$
|
25,199
|
|
$
|
(159,237
|
)
|
|
Correction of error (Note 1)
|
|
-
|
|
|
(25,199
|
)
|
|
(25,199
|
)
|
|
Balance as of June 30,
2018 (as restated, refer to Note 1)
|
$
|
(184,436
|
)
|
$
|
-
|
|
$
|
(184,436
|
)
|
|
Movement in foreign currency
translation reserve related to
equity-
accounted investment
|
|
5,430
|
|
|
-
|
|
|
5,430
|
|
|
Movement in foreign
currency translation reserve
|
|
(10,522
|
)
|
|
-
|
|
|
(10,522
|
)
|
|
Balance as
of September 30, 2018
|
$
|
(189,528
|
)
|
$
|
-
|
|
$
|
(189,528
|
)
|
There were no reclassifications
from accumulated other comprehensive loss to net (loss) income during the three
months ended September 30, 2018 or 2017.
13. Stock-based compensation
Stock option and
restricted stock activity
Options
The following table summarizes
stock option activity for the three months ended September 30, 2018 and 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
average
|
|
|
|
|
|
|
exercise
|
|
|
contractu
|
|
|
intrinsic
|
|
|
grant date
|
|
|
|
Number of
|
|
|
price
|
|
|
al term
|
|
|
value
|
|
|
fair value
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2018
|
|
809,274
|
|
|
13.99
|
|
|
2.67
|
|
|
370
|
|
|
4.20
|
|
Granted September 2018
|
|
600,000
|
|
|
6.20
|
|
|
10.00
|
|
|
1,212
|
|
|
2.02
|
|
Forfeitures
|
|
(200,000
|
)
|
|
24.46
|
|
|
|
|
|
|
|
|
7.17
|
|
Outstanding September
30, 2018
|
|
1,209,274
|
|
|
8.41
|
|
|
6.59
|
|
|
1,322
|
|
|
2.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2017
|
|
846,607
|
|
|
13.87
|
|
|
3.80
|
|
|
486
|
|
|
4.21
|
|
Forfeitures
|
|
(37,333
|
)
|
|
11.23
|
|
|
|
|
|
|
|
|
4.55
|
|
Outstanding September
30, 2017
|
|
809,274
|
|
|
13.99
|
|
|
3.40
|
|
|
468
|
|
|
4.20
|
|
During the three months ended
September 30, 2018, 600,000 stock options were awarded to executive officers and
employees. No stock options were awarded during the three months ended September
30, 2017. During the three months ended September 30, 2018, executive officers
forfeited 200,000 stock options granted in August 2008, with a strike price of
$24.46 per share, as these stock options expired unexercised. During the three
months ended September 30, 2017, employees forfeited 37,333 stock options.
The fair value of each option is
estimated on the date of grant using the Cox Ross Rubinstein binomial model that
uses the assumptions noted in the following table. The estimated expected
volatility is calculated based on the Companys 750 day volatility. The
estimated expected life of the option was determined based on historical
behavior of employees who were granted options with similar terms.
25
13. Stock-based compensation (continued)
Stock option and
restricted stock activity (continued)
Options
(continued)
The table below presents the
range of assumptions used to value options granted during the three months ended
September 30, 2018:
|
Three months
|
|
ended
|
|
September 30,
|
|
2018
|
Expected volatility
|
44%
|
Expected dividends
|
0%
|
Expected life (in years)
|
3
|
Risk-free rate
|
2.75%
|
The following table presents
stock options vested and expected to vest as of September 30, 2018:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest September 30,
2018
|
|
1,209,274
|
|
|
8.41
|
|
|
6.59
|
|
|
1,322
|
|
These options have an exercise
price range of $6.20 to $13.16.
The following table presents
stock options that are exercisable as of September 30, 2018:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
Exercisable September 30, 2018
|
|
609,274
|
|
|
10.56
|
|
|
3.22
|
|
|
242
|
|
During the three months ended
September 30, 2018, no stock options became exercisable. However, during the
three months ended September 30, 2017 105,982 stock options became exercisable.
The Company issues new shares to satisfy stock option exercises.
26
13. 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, 2018 and
2017:
|
|
Number of
|
|
|
Weighted
|
|
|
|
shares of
|
|
|
average grant
|
|
|
|
restricted
|
|
|
date fair value
|
|
|
|
stock
|
|
|
($000)
|
|
Non-vested June 30, 2018
|
|
765,411
|
|
|
6,162
|
|
Granted September 2018
|
|
148,000
|
|
|
114
|
|
Vested August 2018
|
|
(52,594
|
)
|
|
459
|
|
Non-vested September
30, 2018
|
|
860,817
|
|
|
5,785
|
|
|
|
|
|
|
|
|
Non-vested June 30, 2017
|
|
505,473
|
|
|
11,173
|
|
Granted August 2017
|
|
588,594
|
|
|
4,288
|
|
Vested August 2017
|
|
(56,250
|
)
|
|
527
|
|
Forfeitures
|
|
(30,635
|
)
|
|
358
|
|
Non-vested September
30, 2017
|
|
1,007,182
|
|
|
9,689
|
|
The September 2018 grants
comprise 148,000 shares of restricted stock awarded to executive officers that
are subject to market and time-based vesting. The August 2017 grants comprise
(i) 326,000 shares of restricted stock awarded to executive officers and
employees that are subject to time-based vesting, (ii) 210,000 shares of
restricted stock awarded to executive officers that are subject to market and
time-based vesting, and (iii) 52,594 shares of restricted stock awarded to
non-employee directors.
The 326,000 shares of restricted
stock will only vest if the recipient is employed by the Company on a full-time
basis on August 23, 2020. The 52,594 shares of restricted stock awarded to
non-employee directors in August 2017 vested on August 23, 2018. During the
three months ended September 30, 2017, 56,250 shares of restricted stock granted
to non-employee directors vested and employees forfeited 30,635 shares of
restricted stock with either market or performance conditions upon their
termination from the Company.
Market
Conditions - Restricted Stock Granted in September 2018
The 148,000 shares of restricted
stock awarded to executive officers in September 2018 are subject to time-based
and performance-based (a market condition) vesting conditions and vest in full
only on the date, if any, that the following conditions are satisfied: (1) the
price of the Companys common stock must equal or exceed certain agreed VWAP
levels (as described below) during a measurement period commencing on the date
that it files its Annual Report on Form 10-K for the fiscal year ended 2021 and
ending on December 31, 2021 and (2) the recipient is employed by the Company on
a full-time basis when the condition in (1) is met. If either of these
conditions is not satisfied, then none of the shares of restricted stock will
vest and they will be forfeited. The $23.00 price target represents an
approximate 55% increase, compounded annually, in the price of the Companys
common stock on Nasdaq over the $6.20 closing price on September 7, 2018.
The VWAP levels and vesting
percentages related to such levels are as follows:
-
Below $15.00 (threshold)0%
-
At or above $15.00 and below $19.0033%
-
At or above $19.00 and below $23.0066%
-
At or above $23.00100%
The fair value of these shares of
restricted stock was calculated using a Monte Carlo simulation of a stochastic
volatility process. The choice of a stochastic volatility process as an
extension to the standard Black Scholes process was driven by both observation
of larger than expected moves in the daily time series for the Companys VWAP
price, but also the observation of the strike structure of volatility (i.e. skew
and smile) for out-of-the money calls and out-of-the money puts versus
at-the-money options for both the Companys stock and NASDAQ futures.
27
13. Stock-based compensation (continued)
Stock option and
restricted stock activity (continued)
Restricted
stock (continued)
Market
Conditions - Restricted Stock Granted in September 2018 (continued)
In scenarios where the shares do
not vest, the final vested value at maturity is zero. In scenarios where vesting
occurs, the final vested value on maturity is the share price on vesting date.
In its calculation of the fair value of the restricted stock, the Company used
an average volatility of 37.4% for the VWAP price, a discounting based on USD
overnight indexed swap rates for the grant date, and no future dividends. The
average volatility was extracted from the time series for VWAP prices as the
standard deviation of log prices for the three years preceding the grant date.
The mean reversion of volatility and the volatility of volatility parameters of
the stochastic volatility process were extracted by regressing log differences
against log levels of volatility from the time series for at-the-money options
30 day volatility quotes, which were available from January 2, 2018 onwards.
Market
Conditions - Restricted Stock Granted in August 2017
The 210,000 shares of restricted
stock awarded to executive officers in August 2017 are subject to time-based and
performance-based (a market condition) vesting conditions and vest in full only
on the date, if any, that the following conditions are satisfied: (1) the price
of the Companys common stock must equal or exceed certain agreed VWAP levels
(as described below) during a measurement period commencing on the date that it
files its Annual Report on Form 10-K for the fiscal year ended 2020 and ending
on December 31, 2020 and (2) the recipient is employed by the Company on a
full-time basis when the condition in (1) is met. If either of these conditions
is not satisfied, then none of the shares of restricted stock will vest and they
will be forfeited. The $23.00 price target represents an approximate 35%
increase, compounded annually, in the price of the Companys common stock on
Nasdaq over the $9.38 closing price on August 23, 2017. The VWAP levels and
vesting percentages related to such levels are as follows:
-
Below $15.00 (threshold)0%
-
At or above $15.00 and below $19.0033%
-
At or above $19.00 and below $23.0066%
-
At or above $23.00100%
These 210,000 shares of
restricted stock are effectively forward starting knock-in barrier options with
multi-strike prices of zero. The fair value of these shares of restricted stock
was calculated utilizing a Monte Carlo simulation model which was developed for
the purpose of the valuation of these shares. For each simulated share price
path, the market share price condition was evaluated to determine whether or not
the shares would vest under that simulation. A standard Geometric Brownian
motion process was used in the forecasting of the share price instead of a jump
diffusion model, as the share price volatility was more stable compared to the
highly volatile regime of previous years. Therefore, the simulated share price
paths capture the idiosyncrasies of the observed Company share price
movements.
In scenarios where the shares do
not vest, the final vested value at maturity is zero. In scenarios where vesting
occurs, the final vested value on maturity is the share price on vesting date.
The value of the grant is the average of the discounted vested values. The
Company used an expected volatility of 44.0%, an expected life of approximately
three years, a risk-free rate ranging between 1.275% to 1.657% and no future
dividends in its calculation of the fair value of the restricted stock. The
estimated expected volatility was calculated based on the Companys 30 day VWAP
share price using the exponentially weighted moving average of returns.
Performance
Conditions - Restricted Stock Granted in August 2016
In August 2016 the Company
awarded 350,000 shares of restricted stock to executive officers. In May 2017,
the Company agreed to accelerate the vesting of 200,000 of these shares of
restricted stock granted to the Companys former Chief Executive Officer. The
remaining 150,000 shares continue to be subject to time-based and
performance-based vesting conditions. In order for any of the shares to vest,
the recipient must remain employed by the Company on a full-time basis on the
date that it files its Annual Report on Form 10-K for the fiscal year ended June
30, 2019. If that condition is satisfied, then the shares will vest based on the
level of Fundamental EPS the Company achieves for the fiscal year ended June 30,
2019 (2019 Fundamental EPS), as follows:
-
One-third of the shares will vest if the Company achieves 2019 Fundamental
EPS of $2.60;
-
Two-thirds of the shares will vest if the Company achieves 2019
Fundamental EPS of $2.80; and
-
All of the shares will vest if the Company achieves 2019 Fundamental EPS
of $3.00.
28
13. Stock-based compensation (continued)
Stock option and
restricted stock activity (continued)
Restricted
stock (continued)
Performance
Conditions - Restricted Stock Granted in August 2016 (continued)
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 fair value of restricted
stock vesting during the three months ended September 30, 2018 and 2017, was
$0.5 million.
Stock-based compensation
charge and unrecognized compensation cost
The Company recorded a
stock-based compensation charge during each of the three months ended September
30, 2018 and 2017 of $0.6 million and $0.8 million respectively, 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, 2018
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
587
|
|
|
-
|
|
$
|
587
|
|
|
Total three months ended September 30, 2018
|
$
|
587
|
|
$
|
-
|
|
$
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
869
|
|
$
|
-
|
|
$
|
869
|
|
|
Reversal of stock compensation charge
related to
restricted stock forfeited
|
|
(42
|
)
|
|
-
|
|
|
(42
|
)
|
|
Total three
months ended September 30, 2017
|
$
|
827
|
|
$
|
-
|
|
$
|
827
|
|
The stock-based compensation
charges have been allocated to selling, general and administration based on the
allocation of the cash compensation paid to the relevant employees.
As of September 30, 2018, the
total unrecognized compensation cost related to stock options was approximately
$1.2 million, which the Company expects to recognize over approximately three
years. As of September 30, 2018, the total unrecognized compensation cost
related to restricted stock awards was approximately $3.1 million, which the
Company expects to recognize over approximately two years.
As of each of September 30, 2018
and June 30, 2018, respectively, the Company recorded a deferred tax asset of
approximately $0.7 million, related to the stock-based compensation charge
recognized related to employees of Net1. As of each of September 30, 2018, and
June 30, 2018, respectively, the Company recorded a valuation allowance of
approximately $0.7 million related to the deferred tax asset because it does not
believe that the stock-based compensation deduction would be utilized as it does
not anticipate generating sufficient taxable income in the United States. The
Company deducts the difference between the market value on date of exercise by
the option recipient and the exercise price from income subject to taxation in
the United States.
14. Earnings per share
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, 2018 or 2017. Accordingly, the
two-class method presented below does not include the impact of any redemption.
The Companys redeemable common stock is described in Note 15 to the Companys
audited consolidated financial statements included in its Annual Report on Form
10-K for the year ended June 30, 2018.
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, 2018 and 2017, reflects only undistributed earnings.
The computation below of basic earnings per share excludes the net income
attributable to shares of unvested restricted stock (participating non-vested
restricted stock) from the numerator and excludes the dilutive impact of these
unvested shares of restricted stock from the denominator.
29
14. 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 2016, August 2017, March 2018, May 2018 and
September 2018 as these shares of restricted stock are considered contingently
returnable shares for the purposes of the diluted earnings per share calculation
and the vesting conditions in respect of a portion of the restricted stock had
been satisfied. The vesting conditions for awards made in September 2018, March
2018, August 2017 and August 2016 are discussed in Note 13 and the vesting
conditions for all other awards are discussed in Note 18 to the Companys
audited consolidated financial statements included in its Annual Report on Form
10-K for the year ended June 30, 2018.
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 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands except
|
|
|
|
percent and
|
|
|
|
per share data)
|
|
Numerator:
|
|
|
|
|
|
|
Net (loss) income
attributable to Net1
|
|
($5,199
|
)
|
$
|
19,483
|
|
Undistributed (loss) earnings
|
|
(5,199
|
)
|
|
19,483
|
|
Percent allocated to
common shareholders (Calculation 1)
|
|
99%
|
|
|
99%
|
|
Numerator
for earnings per share: basic and diluted
|
|
($5,128
|
)
|
$
|
19,267
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Denominator for
basic (loss) earnings per share: weighted-average
common
shares outstanding
|
|
55,951
|
|
|
56,562
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
Stock options
|
|
50
|
|
|
47
|
|
Denominator
for diluted (loss) earnings per share:
adjusted
weighted
average common shares outstanding and
assumed
conversion
|
|
56,001
|
|
|
56,609
|
|
|
|
|
|
|
|
|
(Loss) Earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$(0.09
|
)
|
$
|
0.34
|
|
Diluted
|
|
$(0.09
|
)
|
$
|
0.34
|
|
|
|
|
|
|
|
|
(Calculation 1)
|
|
|
|
|
|
|
Basic weighted-average
common shares outstanding (A)
|
|
55,951
|
|
|
56,562
|
|
Basic weighted-average common
shares outstanding and
unvested
restricted shares
expected to vest (B)
|
|
56,723
|
|
|
57,196
|
|
Percent allocated to
common shareholders (A) / (B)
|
|
99%
|
|
|
99%
|
|
Options to purchase 503,698
shares of the Companys common stock at prices ranging from $8.75 to $13.16 per
share were outstanding during the three months ended September 30, 2018, but
were not included in the computation of diluted earnings per share because the
options exercise price was greater than the average market price of the
Companys common stock. The options, which expire at various dates through
August 27, 2024, were still outstanding as of September 30, 2018.
30
15. Supplemental cash flow information
The following table presents
supplemental cash flow disclosures for the three months ended September 30, 2018
and 2017:
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cash received from interest
|
$
|
2,077
|
|
$
|
5,286
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
3,066
|
|
$
|
2,088
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
1,343
|
|
$
|
2,036
|
|
16. Revenue recognition
The Company is a leading provider
of transaction processing services, financial inclusion products and services
and secure payment technology. The Company operates market-leading payment
processors in South Africa and internationally. The Company offers debit, credit
and prepaid processing and issuing services for all major payment networks. In
South Africa, The Company provides innovative low-cost financial inclusion
products, including banking, lending and insurance, and is a leading distributor
of mobile subscriber starter packs for Cell C, a South African mobile network
operator.
Disaggregation of revenue
The following table represents
our revenue disaggregated by major revenue streams, including reconciliation to
operating segments for the three months ended September 30, 2018:
|
|
|
|
|
|
|
|
Rest of
|
|
|
|
|
|
|
South
|
|
|
|
|
|
the
|
|
|
|
|
|
|
Africa
|
|
|
Korea
|
|
|
world
|
|
|
Total
|
|
South African transaction processing
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing fees
|
$
|
30,229
|
|
$
|
-
|
|
$
|
-
|
|
$
|
30,229
|
|
Welfare benefit
distributions fees
|
|
3,086
|
|
|
-
|
|
|
-
|
|
|
3,086
|
|
Other
|
|
1,148
|
|
|
-
|
|
|
-
|
|
|
1,148
|
|
Sub-total
|
|
34,463
|
|
|
-
|
|
|
-
|
|
|
34,463
|
|
International transaction processing
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing fees
|
|
-
|
|
|
34,589
|
|
|
2,655
|
|
|
37,244
|
|
Other
|
|
-
|
|
|
1,962
|
|
|
181
|
|
|
2,143
|
|
Sub-total
|
|
-
|
|
|
36,551
|
|
|
2,836
|
|
|
39,387
|
|
Financial inclusion and applied technologies
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom products and
services
|
|
19,147
|
|
|
-
|
|
|
-
|
|
|
19,147
|
|
Account holder fees
|
|
10,605
|
|
|
-
|
|
|
-
|
|
|
10,605
|
|
Lending revenue
|
|
9,977
|
|
|
-
|
|
|
-
|
|
|
9,977
|
|
Technology products
|
|
4,268
|
|
|
-
|
|
|
-
|
|
|
4,268
|
|
Insurance revenue
|
|
2,515
|
|
|
-
|
|
|
-
|
|
|
2,515
|
|
Other
|
|
5,522
|
|
|
-
|
|
|
-
|
|
|
5,522
|
|
Sub-total
|
|
52,034
|
|
|
-
|
|
|
-
|
|
|
52,034
|
|
|
$
|
86,497
|
|
$
|
36,551
|
|
$
|
2,836
|
|
$
|
125,884
|
|
Nature of goods and
services
Processing
fees
The Company earns processing fees
from transactions processed for its customers. The Company provides its
customers with transaction processing services that involve the collection,
transmittal and retrieval of all transaction data in exchange for consideration
upon completion of the transaction. In certain instances, the Company also
provides a funds collection and settlement service for its customers. The
Company considers these services as a single performance obligation. The
Companys contracts specify a transaction price for services provided.
Processing revenue fluctuates based on the type and the volume of transactions
processed. Revenue is recognized on the completion of the processed transaction.
Customers that have a bank
account managed by the Company are issued cards that can be utilized to withdraw
funds at an ATM or to transact at a merchant point of sale device (POS). The
Company earns processing fees from transactions processed for these customers.
The Companys contracts specify a transaction price for each service provided
(for instance, ATM withdrawal, balance enquiry, etc.). Processing revenue
fluctuates based on the type and the volume of transactions performed by the
customer. Revenue is recognized on the completion of the processed transaction.
31
16. Revenue recognition (continued)
Nature of goods and
services (continued)
Welfare
benefit distribution fees
The Companys provided a welfare
benefits distribution service in South Africa to a customer under a contract
which expired on September 30, 2018. The Company was required to distribute
social welfare grants to identified recipients using an internally developed
payment platform at designated distribution points (pay points) which enabled
the recipients to access their grants. The contract specified a fixed fee per
account for one or more grants received by a recipient. The Company recognized
revenue for each grant recipient paid at the fixed fee.
Telecom
products and services
The Company has entered into
contracts with mobile networks in South Africa to distribute subscriber identity
modules (SIM) cards on their behalf. The Company is entitled to receive
consideration based on the activation of each SIM as well as from a percentage
of the value loaded onto each SIM. The Company recognizes revenue from these
services once the criteria specified for activation have been met as well as
when it is entitled to its consideration related to the value loaded onto the
SIM. Revenue from contracts with mobile networks fluctuates based on the number
of SIMs activated as well as on the value loaded onto the SIM.
The Company purchases airtime for
resale to customers. The Company recognizes revenue as the airtime is delivered
to the customer. Revenue from the resale of airtime to customers fluctuates
based on volume of airtime sold.
Account
holder fees
The Company provides bank
accounts to customers and this service is underwritten by a regulated banking
institution because the Company is not a bank. The Company charges its customers
a fixed monthly bank account administration fee for all active bank accounts
regardless of whether the account holder has transacted or not. The Company
recognizes account holder fees on a monthly basis on all active bank accounts.
Revenue from account holders fees fluctuates based on the number of active bank
accounts.
Lending
revenue
The Company provides short-term
loans to customers in South Africa and charges up-front initiation fees and
monthly service fees. Initiation fees are recognized using the effective
interest rate method, which requires the utilization of the rate of return
implicit in the loan, that is, the contractual interest rate adjusted for any
net deferred loan fees or costs, premium, or discount existing at the
origination or acquisition of the loan. Monthly service fee revenue is
recognized under the contractual terms of the loan. The monthly service fee
amount is fixed upon initiation and does not change over the term of the loan.
Technology
products
The Company supplies hardware and
licenses for its customers to use the Companys technology. Hardware includes
the sale of POS devices, SIM cards and other consumables which can occur on an
ad hoc basis. The Company recognizes revenue from hardware at the transaction
price specified in the contract as the hardware is delivered to the customer.
Licenses include right to use certain technology developed by the Company and is
recognized ratably over the license period.
Insurance
revenue
The Company writes life insurance
contracts, and policy holders pay the Company a monthly insurance premium at the
beginning of each month. Premium revenue is recognized on a monthly basis net of
policy lapses. Policy lapses are provided for on the basis of expected
non-payment of policy premiums.
Significant judgments and
estimates
The Company is subject to a court
process regarding determining the price to be charged for welfare benefit
distribution services provided from April 1, 2018 to September 30, 2018.
Management determined, under previous revenue guidance, that there was no
evidence of an arrangement at a fixed and determinable price other than that
noted in the court ordered extension and did not record any additional revenue
related to the services provided from April 1, 2018 to June 30, 2018, and
recorded revenue at the rate specified in the contract. Upon adoption of the new
revenue guidance, the Company has determined it is unable to estimate the amount
of revenue that it is entitled to receive because the court has not yet
confirmed the amount. Accordingly, the Company has not recorded any additional
revenue during the three months ended September 30, 2018, related to the price
to be charged for welfare benefit distribution services provided that is subject
to the courts confirmation. The Company continues to record revenue at the rate
specified in the contact. The Company expects to record any additional revenue
in the month that the court confirms the fee that the Company is entitled to
charge.
32
16. Revenue recognition (continued)
Accounts Receivable,
Contract Assets and Contract Liabilities
The Company recognizes accounts
receivable when its right to consideration under its contracts with customers
becomes unconditional. The Company has no contract assets or contract
liabilities.
17. Operating segments
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
22 to the Companys audited consolidated financial statements included in its
Annual Report on Form 10-K for the year ended June 30, 2018.
The reconciliation of the
reportable segments revenue to revenue from external customers for the three
months ended September 30, 2018 and 2017, is as follows:
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
From
|
|
|
|
Reportable
|
|
|
Inter-
|
|
|
external
|
|
|
|
Segment
|
|
|
segment
|
|
|
customers
|
|
South African transaction
processing
|
$
|
37,749
|
|
$
|
3,286
|
|
$
|
34,463
|
|
International transaction processing
|
|
39,387
|
|
|
-
|
|
|
39,387
|
|
Financial inclusion and
applied technologies
|
|
53,206
|
|
|
1,172
|
|
|
52,034
|
|
Total for the three months ended
September 30, 2018
|
$
|
130,342
|
|
$
|
4,458
|
|
$
|
125,884
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
$
|
66,437
|
|
$
|
6,145
|
|
$
|
60,292
|
|
International transaction
processing
|
|
46,022
|
|
|
-
|
|
|
46,022
|
|
Financial inclusion and applied technologies
|
|
54,313
|
|
|
8,069
|
|
|
46,244
|
|
Total for the three
months ended September 30, 2017
|
$
|
166,772
|
|
$
|
14,214
|
|
$
|
152,558
|
|
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, 2018 and 2017, is as follows:
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Reportable segments measure
of profit or loss
|
$
|
10,551
|
|
$
|
31,568
|
|
Operating (loss):
Corporate/Eliminations
|
|
(9,655
|
)
|
|
(6,562
|
)
|
Interest income
|
|
1,876
|
|
|
5,044
|
|
Interest expense
|
|
(2,759
|
)
|
|
(2,121
|
)
|
Income
before income taxes
|
$
|
13
|
|
$
|
27,929
|
|
The following tables summarize
segment information that is prepared in accordance with GAAP for the three
months ended September 30, 2018 and 2017:
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
South African transaction
processing
|
$
|
37,749
|
|
$
|
66,437
|
|
International transaction processing
|
|
39,387
|
|
|
46,022
|
|
Financial inclusion and
applied technologies
|
|
53,206
|
|
|
54,313
|
|
Total
|
$
|
130,342
|
|
$
|
166,772
|
|
33
17. Operating segments (continued)
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Operating (loss) income
|
|
|
|
|
|
|
South African transaction
processing
|
$
|
(3,513
|
)
|
$
|
12,332
|
|
International
transaction processing
|
|
2,762
|
|
|
5,316
|
|
Financial inclusion and applied
technologies
|
|
11,302
|
|
|
13,920
|
|
Subtotal: Operating segments
|
|
10,551
|
|
|
31,568
|
|
Corporate/Eliminations
|
|
(9,655
|
)
|
|
(6,562
|
)
|
Total
|
|
896
|
|
|
25,006
|
|
Depreciation and amortization
|
|
|
|
|
|
|
South African
transaction processing
|
|
941
|
|
|
1,153
|
|
International transaction
processing
|
|
3,059
|
|
|
4,632
|
|
Financial
inclusion and applied technologies
|
|
636
|
|
|
355
|
|
Subtotal:
Operating segments
|
|
4,636
|
|
|
6,140
|
|
Corporate/Eliminations
|
|
6,158
|
|
|
2,826
|
|
Total
|
|
10,794
|
|
|
8,966
|
|
Expenditures for long-lived
assets
|
|
|
|
|
|
|
South African transaction
processing
|
|
1,286
|
|
|
477
|
|
International
transaction processing
|
|
800
|
|
|
906
|
|
Financial inclusion and applied
technologies
|
|
1,032
|
|
|
90
|
|
Subtotal: Operating segments
|
|
3,118
|
|
|
1,473
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
Total
|
$
|
3,118
|
|
$
|
1,473
|
|
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.
18. Income tax
Income tax in interim
periods
For the purposes of interim
financial reporting, the Company determines the appropriate income tax provision
by first applying the effective tax rate expected to be applicable for the full
fiscal year to ordinary income. This amount is then adjusted for the tax effect
of significant unusual items, for instance, changes in tax law, valuation
allowances and non-deductible transaction-related expenses that are reported
separately, and have an impact on the tax charge. The cumulative effect of any
change in the enacted tax rate, if and when applicable, on the opening balance
of deferred tax assets and liabilities is also included in the tax charge as a
discrete event in the interim period in which the enactment date occurs.
For the three months ended
September 30, 2018, the Companys effective tax rate was significantly higher
than the South African statutory rate as a result of a valuation allowance
created related to net operating losses of approximately ZAR 223.4 million
($15.1 million translated at the average exchange rate for the three months
ended September 30, 2018) incurred by its South African subsidiary, CPS, and
non-deductible expenses, including transaction-related expenditure and
non-deductible interest on the Companys South African long-term debt
facility.
The Companys effective tax rate
for the three months ended September 30, 2017, was 36.8% and was higher than the
South African statutory rate as a result of non-deductible expenses, including
transaction-related expenditure and non-deductible interest on the Companys
South African long-term facility.
34
18. Income tax (continued)
Recent Tax
Legislation
On December 22, 2017, the Tax
Cuts and Jobs Act (the TCJA), was enacted into law, which significantly
changes existing U.S. tax law and includes numerous provisions that affect the
Companys business, such as imposing a one-time transition tax on deemed
repatriation of deferred foreign income, reducing the U.S. federal statutory tax
rate, and adopting a territorial tax system. During the year ended June 30,
2018, the TCJA required the Company to incur a transition tax on deferred
foreign income not previously subject to U.S. income tax at a rate of 15.5% for
foreign cash and certain other net current assets, and 8% on the remaining
income. The TCJA also reduced the U.S. federal statutory tax rate from 35% to
21% effective January 1, 2018. The TCJA includes a provision to tax global
intangible low taxed income (GILTI) of foreign subsidiaries which is effective
for the Company beginning July 1, 2018.
The TCJA was effective in the
second quarter of fiscal year 2018. As of September 30, 2018, the Company has
not completed its accounting for the estimated tax effects of the TCJA. Due to
the timing of the enactment and the complexity in applying the provisions of the
TCJA, the provisional net charge is subject to revisions as the Company
continues to complete its analysis of the TCJA, collect and prepare necessary
data, and interpret additional guidance issued by standard-setting and
regulatory bodies. Adjustments may materially impact the Companys provision for
income taxes and effective tax rate in the period in which the adjustments are
made. The Companys accounting for the estimated tax effects of the TCJA will be
completed during the measurement period, which should not extend beyond one year
from the enactment date. The impacts of the Companys estimates are described
further below.
The Company has made a reasonable
estimate of its Transition Tax liability as of June 30, 2018, and recorded a
provisional Transition Tax, before the application of any foreign tax credits,
of $55.8 million, and has no liability after the application of generated
foreign tax credits. In fact, the Company believes that it may generate excess
foreign tax credits based on its preliminary calculations. The Company continues
to gather additional information to more precisely compute the final amount of
the Transition Tax to be included in its income tax return filings with the U.S.
tax authorities.
The Company re-measured its
deferred taxes to reflect the reduced rate that will apply when these deferred
taxes are settled or realized in future periods. The TCJA subjects a U.S.
corporation to tax on its GILTI. Due to the complexity of the new GILTI tax
rules, the Company continues to evaluate this provision of the TCJA and the
application of GAAP. Under GAAP, the Company has the option to make an
accounting policy election of either (i) treating taxes due on future U.S.
inclusions in taxable income related to GILTI as a current-period expense when
incurred (the period cost method) or (ii) factoring such amounts into a
companys measurement of its deferred taxes (the deferred method). The Company
is not yet able to reasonably estimate the effect of this provision of the TCJA
on it because whether it expects to have future U.S. inclusions in taxable
income related to GILTI depends on a number of different aspects of the
Companys estimated future results of global operations. Therefore, the Company
has not made any adjustments related to potential GILTI tax in its financial
statements.
Uncertain tax positions
There were no significant changes
in the Companys uncertain tax positions during the three months ended September
30, 2018. As of September 30, 2018, the Company had accrued interest related to
uncertain tax positions of approximately $0.1 million on its balance sheet.
The Company does not expect
changes related to its unrecognized tax benefits will have a significant impact
on its results of operations or financial position in the next 12 months.
As of September 30, 2018 and June
30, 2018, the Company had unrecognized tax benefits of $0.9 million and $0.8
million, respectively, all of which would impact the Companys effective tax
rate. The Company files income tax returns mainly in South Africa, South Korea,
Germany, Hong Kong, India, the United Kingdom, Botswana and in the U.S. federal
jurisdiction. As of September 30, 2018, the Companys South African subsidiaries
are no longer subject to income tax examination by the South African Revenue
Service for periods before June 30, 2014. The Company is subject to income tax
in other jurisdictions outside South Africa, none of which are individually
material to its financial position, statement of cash flows, or results of
operations.
19. 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.
35
19. Commitments and contingencies (continued)
Guarantees (continued)
Nedbank has issued guarantees to
these third parties amounting to ZAR 96.0 million ($6.8 million, translated at
exchange rates applicable as of September 30, 2018) and thereby utilizing part
of the Companys short-term facility. The Company in turn has provided
nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 96.0 million ($6.8
million, translated at exchange rates applicable as of September 30, 2018). The
Company pays commission of between 0.4% per annum to 1.94% 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, 2018. The maximum potential amount that the Company
could pay under these guarantees is ZAR 96.0 million ($6.8 million, translated
at exchange rates applicable as of September 30, 2018). The guarantees have
reduced the amount available for borrowings under the Companys short-term
credit facility described in Note 10.
Contingencies
Challenge
to Payment by SASSA of Additional Implementation Costs
On March 23, 2018, the High Court
ordered that the June 15, 2012 variation agreement between SASSA and CPS be
reviewed and set aside. CPS was ordered to refund ZAR 317.0 million to SASSA,
plus interest from June 2014 to date of payment. On April 4, 2018, CPS filed an
application seeking leave to appeal the whole order and judgment of the High
Court with the High Court because its believes that the High Court erred in its
application of the law and/or in fact in its findings. On April 25, 2018, the
High Court refused the application seeking leave to appeal.
In May 2018, CPS delivered its
petition seeking leave to appeal the whole order and judgment of the High Court
with the Supreme Court of Appeal. In September 2018, CPS received notification
from the Supreme Court that its petition seeking leave to appeal had been
granted. The matter is expected to be heard during the first half of calendar
2019. The Company cannot predict how the Supreme Court will rule on the matter.
The Company is subject to a
variety of other insignificant claims and suits that arise from time to time in
the ordinary course of business. Management currently believes that the
resolution of these other matters, individually or in the aggregate, will not
have a material adverse impact on the Companys financial position, results of
operations or cash flows.
20. Related party transactions
Other payables, as of September
30, 2018, include a loan of approximately $0.1 million obtained from JAA
Holdings Proprietary Limited, a South African private company partly owned by
Mr. A.J. Dunn, an executive officer of the Company. The loan is payable on
demand and interest is payable at the South African prime rate, which was 10.0%
as of September 30, 2018. The loan was repaid in full on October 31, 2018.
DNI leases a building that is
owned by a company in which Mr. A.J. Dunn has a direct shareholding of 16%.
During the three months ended September 30, 2018, DNI paid rental of
approximately $1.0 million.
36