(1) Cash, cash equivalents and restricted cash
as of December 31, 2018, includes restricted cash of approximately $63.1 million related to cash withdrawn from the Company’s
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 Company’s facilities.
Notes to the Unaudited Condensed Consolidated
Financial Statements
for the three and six months ended December
31, 2018 and 2017
(All amounts in tables stated in thousands
or thousands of U.S. dollars, unless otherwise stated)
1. Basis of Presentation
and Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying unaudited
condensed consolidated financial statements include all majority-owned subsidiaries over which the Company exercises control and
have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations
of the United States Securities and Exchange Commission for Quarterly Reports on Form 10-Q and include all of the information and
disclosures required for interim financial reporting. The results of operations for the three and six months ended December 31,
2018 and 2017, are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate
to make the information presented not misleading.
These financial statements
should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s
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.
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 Company’s 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 Company’s 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. 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 Company’s financial statements.
Equity securities are
measured at fair value. The Company may elect to measure equity securities without readily determinable fair values at its 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. 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 December 31, 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 Company’s financial statements and the Company was not required to make any retrospective adjustments.
1. Basis
of Presentation and Summary of Significant Accounting Policies (continued)
Recent accounting pronouncements
adopted (continued)
In January 2017, the FASB
issued guidance regarding
Clarifying the Definition of a Business
. This guidance provides a more robust framework to use
in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly
and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition
does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs
of application, and make the definition of a business more operable. The guidance became effective for the Company beginning July 1,
2018. The adoption of this guidance did not have a material impact on the Company’s 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 Company’s financial
statements.
In May 2017, the FASB
issued guidance regarding
Compensation—Stock 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 Company’s
financial statements.
In June 2018, the FASB
issued guidance regarding
Improvements to Non-employee 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 Company’s financial statements.
Recent accounting pronouncements
not yet adopted as of December 31, 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.
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 and related disclosures.
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 Company’s 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 Company’s
accounts receivable, net, as of December 31, 2018, and June 30, 2018, is presented in the table below:
|
|
|
|
|
|
June 30,
2018
|
|
Accounts receivable, trade, net
|
|
$33,282
|
|
|
|
$49,365
|
|
Accounts receivable, trade, gross
|
|
34,613
|
|
|
|
50,466
|
|
Allowance for doubtful accounts receivable, end of period
|
|
1,331
|
|
|
|
1,101
|
|
Beginning of year
|
|
1,101
|
|
|
|
1,255
|
|
Reversed to statement of operations
|
|
(2)
|
|
|
|
(47)
|
|
Charged to statement of operations
|
|
2,985
|
|
|
|
642
|
|
Utilized
|
|
(2,763)
|
|
|
|
(776)
|
|
Foreign currency adjustment
|
|
10
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
Current portion of payments to agents in South Korea amortized over the contract period
|
|
19,480
|
|
|
|
21,971
|
|
Payments to agents in South Korea amortized over the contract period
|
|
33,822
|
|
|
|
39,554
|
|
Less: Payments to agents in South Korea amortized over the contract period included in other long-term assets (Note 7)
|
|
14,341
|
|
|
|
17,582
|
|
Loans provided to Finbond
|
|
1,042
|
|
|
|
1,107
|
|
Contingent purchase consideration
|
|
6,362
|
|
|
|
-
|
|
Other receivables
|
|
44,841
|
|
|
|
37,240
|
|
Total accounts receivable, net
|
|
$105,007
|
|
|
|
$109,683
|
|
Finance loans receivable, net
The Company’s
finance loans receivable, net, as of December 31, 2018, and June 30, 2018, is presented in the table below:
|
|
December
31, 2018
|
|
|
|
June 30,
2018
|
|
Microlending finance loans receivable, net
|
|
$15,609
|
|
|
|
$57,504
|
|
Microlending finance loans receivable, gross
|
|
42,829
|
|
|
|
61,743
|
|
Allowance for doubtful microlending finance loans receivable, end of period
|
|
27,220
|
|
|
|
4,239
|
|
Beginning of year
|
|
4,239
|
|
|
|
3,717
|
|
Charged to statement of operations
|
|
27,798
|
|
|
|
4,348
|
|
Utilized
|
|
(4,522)
|
|
|
|
(3,588)
|
|
Foreign currency adjustment
|
|
(295)
|
|
|
|
(238)
|
|
|
|
|
|
|
|
|
|
Working capital finance receivable, net
|
|
3,936
|
|
|
|
3,959
|
|
Working capital finance receivable, gross
|
|
16,566
|
|
|
|
16,123
|
|
Allowance for doubtful working capital finance receivable, end of period
|
|
12,630
|
|
|
|
12,164
|
|
Beginning of year
|
|
12,164
|
|
|
|
3,752
|
|
Charged to statement of operations
|
|
465
|
|
|
|
8,415
|
|
Foreign currency adjustment
|
|
1
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
Current portion of other finance loans receivable
|
|
5,577
|
|
|
|
742
|
|
Total other finance loans receivable
|
|
17,822
|
|
|
|
13,025
|
|
Less included in other long-term assets
|
|
12,245
|
|
|
|
12,283
|
|
|
|
|
|
|
|
|
|
Total finance loans receivable, net
|
|
$25,122
|
|
|
|
$62,205
|
|
During the three and six months ended December
31, 2018, the Company recorded an increase in its allowance for doubtful microlending finance loans receivable of approximately
$23.4 million and $27.8 million, respectively, related to the non-funding of accounts for a portion of the EPE customer base as
a result of the auto-migration of the customer base to the South Africa Post Office account offering.
4. Inventory
The Company’s inventory comprised the
following category as of December 31, 2018, and June 30, 2018.
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$10,272
|
|
$12,887
|
|
|
$10,272
|
|
$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.
6. Fair
value of financial instruments
Initial recognition and measurement
Financial instruments
are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction
costs.
Risk management
The Company 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 Company’s 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 Company’s control, there can be no assurance that future fluctuations
will not adversely affect the Company’s results of operations and financial condition.
Interest rate risk
As a result of its normal
borrowing and lending activities, the Company’s 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
counterparty’s financial condition, credit rating, and other credit criteria and risk mitigation tools as the Company’s
management deems appropriate.
6. Fair
value of financial instruments (continued)
Risk management (continued)
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 & Poor’s, Moody’s and Fitch Ratings.
Microlending credit
risk
The Company is exposed
to credit risk in its microlending activities, which provide unsecured short-term loans to qualifying customers. The Company manages
this risk by performing an affordability test for each prospective customer and assigning a “creditworthiness score”,
which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses.
Equity price and liquidity
risk
Equity price risk relates
to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities
that it holds and the risk that it may not be able to liquidate these securities. The market price of these securities may fluctuate
for a variety of reasons and, consequently, the amount that the Company may obtain in a subsequent sale of these securities may
significantly differ from the reported market value.
Liquidity risk relates
to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which these securities
are listed. The Company may not be able to sell some or all of these securities at one time, or over an extended period of time
without influencing the exchange traded price, or at all.
Financial instruments
The following section
describes the valuation methodologies the Company uses to measure its significant financial assets and liabilities at fair value.
In general, and where
applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This
pricing methodology would apply to Level 1 investments. If quoted prices in active markets for identical assets or liabilities
are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or
inputs other than the quoted prices that are observable either directly or indirectly. These investments would be included
in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect management’s
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 Company’s 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 its investment
in the Cell C shares. The primary inputs to the valuation model as of December 31, 2018, are unchanged from June 30, 2018, except
for the EBITDA multiple. The primary inputs to the valuation model are Cell C’s annualized adjusted EBITDA for the 11 months
ended June 30, 2018, of ZAR 3.9 billion ($270.9 million, translated at exchange rates applicable as of December 31, 2018), an EBITDA
multiple of 6.32; Cell C’s net external debt of ZAR 8.8 billion ($611.4 million, translated at exchange rates applicable
as of December 31, 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 C’s peer group, which comprises eight 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 Company’s 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.
Fair value of financial instruments (continued)
Financial instruments (continued)
Asset measured at fair value using significant
unobservable inputs – investment in Cell C (continued)
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 December 31, 2018, carrying
value of the Company’s Cell C investment (all amounts translated at exchange rates applicable as of December 31, 2018):
|
Sensitivity for
fair value of
Cell C investment
|
EBITDA multiple of 5.82 times
|
130,729
|
EBITDA multiple of 6.32 times
|
149,058
|
EBITDA multiple of 6.82 times
|
167,386
|
The fair value of the
Cell C shares as of December 31, 2018, represented approximately 14% of the Company’s 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
Company’s investment in DNI is described in Note 3 to the Company’s 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 ($27.8 million, translated at exchange rates applicable
as of December 31, 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 385.7 million
($26.8 million) and ZAR 373.6 million ($27.2 million), in other payables in its unaudited condensed consolidated balance sheet
as of December 31, 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 December 31, 2018, and June 30, 2018,
respectively).
The present value of ZAR 385.7
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 December 31, 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 Company’s
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 Company’s 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 Company’s outstanding
foreign exchange contracts are as follows as of December 31, 2018:
Notional amount
|
Strike price
|
Fair market
value price
|
Maturity
|
USD 420,000
|
ZAR 15.3801
|
ZAR 14.4210
|
January 25, 2019
|
USD 140,000
|
ZAR 15.4386
|
ZAR 14.4704
|
February 22, 2019
|
USD 420,000
|
ZAR 15.4939
|
ZAR 14.5165
|
March 20, 2019
|
USD 420,000
|
ZAR 15.5704
|
ZAR 14.5842
|
April 26, 2019
|
The Company had no outstanding
foreign exchange contracts as of June 30, 2018.
Fair value of financial instruments (continued)
Financial instruments
(continued)
The following table presents
the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2018, according to the
fair value hierarchy:
|
Quoted price in active markets for identical
assets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Investment in Cell C
|
$-
|
|
$-
|
|
$149,058
|
|
$149,058
|
Related to insurance business:
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash (included in other long-term assets)
|
593
|
|
-
|
|
-
|
|
593
|
Fixed maturity investments (included in cash and cash equivalents)
|
8,319
|
|
-
|
|
-
|
|
8,319
|
Other
|
-
|
|
18
|
|
-
|
|
18
|
Total assets at fair value
|
$8,912
|
|
$18
|
|
$149,058
|
|
$157,988
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
DNI contingent consideration
|
$-
|
|
$-
|
|
$26,790
|
|
$26,790
|
Foreign exchange contracts
|
-
|
|
95
|
|
-
|
|
95
|
Total liabilities at fair value
|
$-
|
|
$95
|
|
$26,790
|
|
$26,885
|
The following table presents
the Company’s 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 active markets for identical
assets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(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 and cash equivalents)
|
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 and six months ended December 31 2018 and 2017, respectively.
Fair value of financial instruments (continued)
Financial instruments
(continued)
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 six months ended December 31, 2018:
|
Carrying
value
|
Assets
|
|
Balance as at June 30, 2018
|
$172,948
|
Loss on fair value re-measurements
|
(15,836)
|
Foreign currency adjustment
(1)
|
(8,054)
|
Balance as of December 31, 2018
|
$149,058
|
|
|
Liabilities
|
|
Balance as at June 30, 2018
|
$27,222
|
Accretion of interest
|
835
|
Foreign currency adjustment
(1)
|
(1,267)
|
Balance as of December 31, 2018
|
$26,790
|
(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 six months ended December 31, 2017:
|
Carrying
value
|
Assets
|
|
Acquisition of investment in Cell C
|
$151,003
|
Foreign currency adjustment
(1)
|
10,692
|
Balance as of December 31, 2017
|
$161,695
|
(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.
7. Equity-accounted
investments and other long-term assets
Refer to Note 9 to the
Company’s 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 Company’s ownership
percentage in its equity-accounted investments as of December 31, 2018 and June 30, 2018, was as follows:
|
December
31, 2018
|
|
June 30,
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%
|
V2 Limited (“V2”)
|
50%
|
|
-
|
Walletdoc Proprietary Limited (“Walletdoc”)
|
20%
|
|
20%
|
7. Equity-accounted
investments and other long-term assets (continued)
Equity-accounted investments
(continued)
Finbond
As of December 31, 2018,
the Company owned 267,672,032 shares in Finbond. Finbond is listed on the Johannesburg Stock Exchange and its closing price on
December 31, 2018, the last trading day of the quarter, was R5.35 per share. The market value of the Company’s holding in
Finbond on December 31, 2018, was ZAR 1.4 billion ($99.5 million translated at exchange rates applicable as of December 31, 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 has licenses for Zapper’s quick
response (“QR”) payment technology as well as the Company’s various payment solutions such as UEPS/EMV and mobile
virtual card. Zapper’s 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 across the African continent.
Summarized below is the
movement in equity-accounted investments during the six months ended December 31, 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
|
2,500
|
4,420
|
Stock-based compensation
|
-
|
77
|
-
|
77
|
Comprehensive income (loss):
|
(1,805)
|
7,305
|
56
|
5,556
|
Other comprehensive income
|
-
|
5,430
|
-
|
5,430
|
Equity accounted earnings (loss)
|
(1,805)
|
1,875
|
56
|
126
|
Share of net income
|
564
|
1,852
|
56
|
2,472
|
Amortization of acquired intangible assets
|
(375)
|
-
|
-
|
(375)
|
Deferred taxes on acquired intangible assets
|
90
|
-
|
-
|
90
|
Dilution resulting from corporate transactions
|
-
|
23
|
-
|
23
|
Other
|
(2,084)
|
-
|
-
|
(2,084)
|
Dividends received
|
-
|
(1,920)
|
(454)
|
(2,374)
|
Return on investment
|
-
|
-
|
(284)
|
(284)
|
Foreign currency adjustment
(2)
|
(341)
|
(1,712)
|
(104)
|
(2,157)
|
Balance as of December 31, 2018
|
$45,983
|
$36,628
|
$7,806
|
$90,417
|
|
|
|
|
|
Investment in loans:
|
|
|
|
|
Balance as of June 30, 2018
|
$-
|
$-
|
$3,152
|
$3,152
|
Foreign currency adjustment
(2)
|
-
|
-
|
(8)
|
(8)
|
Balance as of December 31, 2018
|
$-
|
$-
|
$3,144
|
$3,144
|
|
|
|
|
|
|
|
Equity
|
Loans
|
Total
|
Carrying amount as of:
|
|
|
|
|
June 30, 2018
|
|
$85,179
|
$3,152
|
$88,331
|
December 31, 2018
|
|
$90,417
|
$3,144
|
$93,561
|
(1) Includes Fanaka, OneFi, SmartSwitch
Namibia, Speckpack, V2 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.
7. Equity-accounted
investments and other long-term assets (continued)
Other long-term assets
Summarized below is the
breakdown of other long-term assets as of December 31, 2018, and June 30, 2018:
|
December
31, 2018
|
|
June 30,
2018
|
|
|
|
|
Total equity investments
|
$176,051
|
|
$199,865
|
Investment in 15% of Cell C, at fair value (Note 6)
|
149,058
|
|
172,948
|
Investment in 12% of MobiKwik
(1)
|
26,993
|
|
26,917
|
Total held to maturity investments
|
9,036
|
|
10,395
|
Investment in 7.625% of Cedar Cellular Investment 1 (RF) (Pty) Ltd 8.625% notes
|
9,036
|
|
10,395
|
Long-term portion of payments to agents in South Korea amortized over the contract period
|
14,341
|
|
17,582
|
Long-term portion of other finance loans receivable
|
12,245
|
|
12,283
|
Contingent purchase consideration
|
-
|
|
9,064
|
Policy holder assets under investment contracts (Note 9)
|
593
|
|
610
|
Reinsurance assets under insurance contracts (Note 9)
|
688
|
|
633
|
Other long-term assets
|
6,623
|
|
5,948
|
Total other long-term assets
|
$219,577
|
|
$256,380
|
|
$194,570
|
|
|
(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.
During the three and six
months ended December 31, 2018, the Company paid $1.1 million to subscribe for additional shares in MobiKwik. The Company owned
approximately 12% of MobiKwik’ issued share capital before and after the subscription.
Summarized below are the
components of the Company’s equity securities without readily determinable fair value and held to maturity investments as
of December 31, 2018:
|
Cost basis
|
|
|
|
Unrealized holding
losses
|
|
Carrying
value
|
Equity securities:
|
|
|
|
|
|
|
|
Investment in MobiKwik
|
$26,993
|
|
$-
|
|
$-
|
|
$26,993
|
Held to maturity:
|
|
|
|
|
|
|
|
Investment in Cedar Cellular notes
|
9,036
|
|
-
|
|
-
|
|
9,036
|
Total
|
$35,993
|
|
$-
|
|
$-
|
|
$37,591
|
Summarized below are the
components of the Company’s held to maturity investments as of June 30, 2018:
|
Cost basis
(1)
|
|
Unrealized holding
gains
(1)
|
|
Unrealized holding
losses
|
|
Carrying
value
|
Held to maturity:
|
|
|
|
|
|
|
|
Investment in Cedar Cellular notes
|
$10,395
|
|
$-
|
|
$-
|
|
$10,395
|
Total
|
$10,395
|
|
$-
|
|
$-
|
|
$10,395
|
(1) An amount of $1.4
million attributed to interest recognized under the Cedar Cellular note was incorrectly included in the unrealized holding gains
column as of June 30, 2018, and has been reclassified to the cost basis column.
The Company recognized
interest income of $1.2 million and $0.2 million, related to the Cedar Cellular notes during the three months ended December 31,
2018 and 2017, respectively. The Company recognized interest income of $1.4 million and $0.2 million, related to the Cedar Cellular
notes during the six months ended December 31, 2018 and 2017, respectively. Interest on this investment will only be paid, at Cedar
Cellular’s election, on maturity in August 2022. The Company’s effective interest rate on the Cedar Cellular note is
24.82% as of December 31, 2018.
7. Equity-accounted
investments and other long-term assets (continued)
Other long-term assets
(continued)
The Company does not expect
to recover the entire amortized cost basis of the Cedar Cellular notes due to a reduction in the amount of future cash flows expected
to be collected from the debt security. The Company does not expect to generate any cash flows from the debt security prior to
the maturity date in August 2022, and expects to recover approximately $22.0 million at maturity. The Company has calculated the
present value of the expected cash flows to be collected from the debt security by discounting these cash flows at the interest
rate implicit in the security upon acquisition (at a rate of 24.82%). The present value of the expected cash flows of $9.0 million
is less than the amortized cost basis recorded of $11.8 million (before the impairment). Accordingly, the Company recorded an other-than-temporary
impairment related to a credit loss of $2.7 million during the three and six months ended December 31, 2018. The impairment of
$2.7 million is included in interest income, net of impairment in the condensed consolidated statement of operations for the three
and six months ended December 31, 2018.
Contractual maturities of held to maturity investments
Summarized below is the
contractual maturity of the Company’s held to maturity investment as of December 31, 2018:
|
Cost basis
|
|
Estimated
fair value
(1)
|
Due in one year or less
|
$-
|
|
$-
|
Due in one year through five years
|
9,036
|
|
8,546
|
Due in five years through ten years
|
-
|
|
-
|
Due after ten years
|
-
|
|
-
|
Total
|
$9,036
|
|
$8,546
|
(1) The estimated fair
value of the Cedar Cellular note has been calculated utilizing the Company’s portion of the security provided to the Company
by Cedar Cellular, namely, Cedar Cellular’s investment in Cell C.
8. Goodwill
and intangible assets, net
Goodwill
Impairment loss
The Company assesses the
carrying value of goodwill for impairment annually, or more frequently, whenever events occur and circumstances change indicating
potential impairment. The Company performs its annual impairment test as of June 30 of each year. During the three and six months
ended December 31, 2018, the Company recognized an impairment loss of approximately $8.2 million, of which approximately $7.0 related
to goodwill allocated to its International Payment Group (“IPG”) business within its international transaction processing
operating segment and $1.2 million related to goodwill within its South African transaction processing operating segment.
Given the consolidation
and restructuring of IPG over the past year, several business lines were terminated or meaningfully reduced, resulting in lower
than expected revenues, profits and cash flows. IPG’s new business initiatives are still in their infancy, and it is expected
to generate lower cash flows than initially forecast.
In order to determine
the amount of goodwill impairment, the estimated fair value of the Company’s IPG business assets and liabilities were compared
to the carrying value of the IPG’s assets and liabilities. The Company used a discounted cash flow model in order to determine
the fair value of IPG. The allocation of the fair value of IPG required the Company to make a number of assumptions and estimates
about the fair value of assets and liabilities where the fair values were not readily available or observable. Based on this analysis,
the Company determined that the carrying value of IPG’s assets and liabilities exceeded their fair value at the reporting
date.
In the event that there
is a deterioration in the South African transaction processing and the international transaction processing operating segment,
or in any other of the Company’s businesses, may lead to additional impairments in future periods.
8. Goodwill
and intangible assets, net (continued)
Goodwill (continued)
Summarized below is the
movement in the carrying value of goodwill for the six months ended December 31, 2018:
|
Gross value
|
|
Accumulated
impairment
|
|
Carrying
value
|
Balance as of June 30, 2018
|
$304,013
|
|
$(20,773)
|
|
$283,240
|
Impairment of goodwill
|
-
|
|
(8,191)
|
|
(8,191)
|
Foreign currency adjustment
(1)
|
(7,187)
|
|
102
|
|
(7,085)
|
Balance as of December 31, 2018
|
$296,826
|
|
$(28,862)
|
|
$267,964
|
(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.
Goodwill has been allocated
to the Company’s reportable segments as follows:
|
South
African transaction processing
|
|
International
transaction processing
|
|
Financial
inclusion and applied technologies
|
|
Carrying
value
|
Balance as of June 30, 2018
|
$20,946
|
|
$123,948
|
|
$138,346
|
|
$283,240
|
Impairment of goodwill
|
(1,180)
|
|
(7,011)
|
|
-
|
|
(8,191)
|
Foreign currency adjustment
(1)
|
(974)
|
|
64
|
|
(6,175)
|
|
(7,085)
|
Balance as of December 31, 2018
|
$18,792
|
|
$117,001
|
|
$132,171
|
|
$267,964
|
(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 December 31, 2018 and June 30, 2018:
|
As of December
31, 2018
|
As of June
30, 2018
|
|
Gross
carrying value
|
Accumulated
amortization
|
Net carrying
value
|
Gross carrying
value
|
Accumulated
amortization
|
Net carrying
value
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
Customer relationships
|
$193,225
|
$(85,689)
|
$107,536
|
$197,676
|
$(76,237)
|
$121,439
|
Software and unpatented technology
|
33,956
|
(32,630)
|
1,326
|
35,730
|
(32,342)
|
3,388
|
FTS patent
|
2,662
|
(2,662)
|
-
|
2,792
|
(2,792)
|
-
|
Exclusive licenses
|
4,506
|
(4,506)
|
-
|
4,506
|
(4,506)
|
-
|
Trademarks and brands
|
12,185
|
(6,574)
|
5,611
|
11,101
|
(5,589)
|
5,512
|
Total finite-lived intangible assets
|
246,534
|
(132,061)
|
114,473
|
251,805
|
(121,466)
|
130,339
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
Financial institution license
|
777
|
-
|
777
|
793
|
-
|
793
|
Total indefinite-lived intangible assets
|
777
|
-
|
777
|
793
|
-
|
793
|
Total intangible assets
|
$247,311
|
$(132,061)
|
$115,250
|
$252,598
|
$(121,466)
|
$131,132
|
Aggregate amortization
expense on the finite-lived intangible assets for the three months ended December 31, 2018 and 2017, was approximately $6.1 million
and $2.9 million, respectively. Aggregate amortization expense on the finite-lived intangible assets for the six months ended December
31, 2018 and 2017, was approximately $12.2 million and $5.8 million, respectively.
8. Goodwill
and intangible assets, net (continued)
Intangible assets (continued)
Carrying value
and amortization of intangible assets (continued)
Future estimated annual
amortization expense for the next five fiscal years and thereafter, assuming exchange rates that prevailed on December 31, 2018,
is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a result of acquisitions,
changes in useful lives, exchange rate fluctuations and other relevant factors.
Fiscal 2019
|
$24,393
|
Fiscal 2020
|
19,342
|
Fiscal 2021
|
13,885
|
Fiscal 2022
|
10,693
|
Fiscal 2023
|
10,693
|
Thereafter
|
47,730
|
Total future estimated annual amortization expense
|
$126,736
|
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 six months ended December 31,
2018:
|
Reinsurance
assets
(1)
|
|
|
Balance as of June 30, 2018
|
$633
|
|
$(2,032)
|
Increase in policyholder benefits under insurance contracts
|
406
|
|
(4,519)
|
Claims and policyholders’ benefits under insurance contracts
|
(321)
|
|
4,627
|
Foreign currency adjustment
(3)
|
(30)
|
|
95
|
Balance as of December 31, 2018
|
$688
|
|
$(1,829)
|
(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 company’s 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 six months ended December 31, 2018:
|
Assets
(1)
|
|
Investment
contracts
(2)
|
Balance as of June 30, 2018
|
$610
|
|
$(610)
|
Increase in policyholder benefits under investment contracts
|
12
|
|
(12)
|
Foreign currency adjustment
(3)
|
(29)
|
|
29
|
Balance as of December 31, 2018
|
$593
|
|
$(593)
|
(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.
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 Company’s South
African amended July 2017 Facilities agreement is described in Note 14 to the Company’s 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 December 31, 2018, was ZAR 379.7 million ($26.4 million), net of deferred fees of ZAR 1.6 million ($0.1 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 7.15% for the period to March 29, 2019, in respect
of the loans provided under the South African long-term facilities agreement. The next scheduled principal repayment of ZAR 151.3
million ($10.5 million, translated at exchange rates applicable as of December 31, 2018) is due on March 29, 2019.
July
2017 Facilities, as amended, comprising a short-term facility and long-term borrowings (continued)
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 ($101.4 million) to fund the Company’s 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 expires 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 Company’s 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 3.8 million ($0.3 million) in October 2018. As
at December 31, 2018, the Company had utilized approximately ZAR 0.7 billion ($51.1 million translated at exchange rates applicable
as of December 31, 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 Company’s ATMs is considered restricted cash. The prime
rate on December 31, 2018, was 10.25%.
Nedbank
facility, comprising short-term facilities
As of December 31, 2018,
the aggregate amount of the Company’s short-term South African credit facility with Nedbank Limited was ZAR 700.0 million
($48.6 million) and consists of (i) a primary amount of up to ZAR 450 million ($31.3 million), (ii) a temporary amount of ZAR 250.0
million ($17.3 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 ($20.8 million), which is further split into (a) a ZAR 250.0
million ($17.3 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 ($10.4 million),
which include letters of guarantees, letters of credit and forward exchange contracts. The temporary amount has been made available
until February 28, 2019, at which time any amount utilized must be repaid in full and the secondary amount of ZAR 200.0 million
($13.9 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.
The short-term facility provides Nedbank with the right to set off funds held in certain identified Company bank accounts with
Nedbank against any amounts owed to Nedbank under the facility. As of December 31, 2018, the Company had total funds of $4.8 million
in bank accounts with Nedbank which have been set off against $16.8 million drawn under the Nedbank facility, for a net amount
drawn under the facility of $12.0 million.
As of December 31, 2018,
the interest rate on the overdraft facility was 9.10%. 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.
10. Borrowings (continued)
Nedbank
facility, comprising short-term facilities (continued)
As of December 31, 2018,
the Company has utilized approximately ZAR 173 million ($12.0 million) of its ZAR 250 million overdraft facility to fund ATMs and
utilized none of its ZAR 50 million general banking facility and temporary facility. As of December 31, 2018 and June 30, 2018,
the Company had utilized approximately ZAR 98 million ($6.8 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).
June
2018 Facility, a long-term borrowing
The Company’s South
African long-term facility agreement is described in Note 14 to the Company’s 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 December 31, 2018, was ZAR
125.0 million ($8.6 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 and six months ended December 31, 2018.
United States, a short-term
facility
On September 14, 2018,
the Company renewed its $10.0 million overdraft facility from Bank Frick and on February 4, 2019, the Company increased the overdraft
facility to $20.0 million. The interest rate on the facilities is 4.50% plus 3-month US dollar LIBOR and interest is payable on
a quarterly basis. The 3-month US dollar LIBOR rate was 2.80763% on December 31, 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 Company’s
investment in Bank Frick. As of December 31, 2018, the Company had not utilized this facility.
South Korea, comprising
long-term borrowings
The Company’s 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 Company’s 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. This facility is no longer available.
South Korea, a short-term
facility
The Company obtained a
one year KRW 10 billion ($10.0 million) short-term overdraft facility from Hana Bank, a South Korean bank, in January 2019.
The interest rate on the facilities is 1.984% plus 3-month CD rate. The CD rate as of December 31, 2018 was 3.844%. The facility
expires in January 2020, however can be renewed. The facility is unsecured with no fixed repayment terms. As of December 31, 2018,
the Company had not utilized this facility.
10. Borrowings (continued)
Movement in short-term credit facilities
Summarized below are the
Company’s short-term facilities as of December 31, 2018, and the movement in the Company’s short-term facilities from
as of June 30, 2018 to as of December 31, 2018:
|
South Africa
|
|
United
States
|
|
|
|
Amended
July 2017
|
|
Nedbank
|
|
Bank Frick
|
|
Total
|
Short-term facilities as of December 31, 2018:
|
$104,196
|
|
$48,625
|
|
$10,000
|
|
$162,821
|
Overdraft
|
-
|
|
20,839
|
|
10,000
|
|
30,839
|
Overdraft restricted as to use for ATM funding only
|
104,196
|
|
17,366
|
|
-
|
|
121,562
|
Indirect and derivative facilities
|
-
|
|
10,420
|
|
-
|
|
10,420
|
|
|
|
|
|
|
|
|
Movement in utilized overdraft facilities:
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
-
|
|
-
|
|
-
|
|
-
|
Utilized
|
260,942
|
|
40,303
|
|
4,992
|
|
306,237
|
Repaid
|
(212,265)
|
|
(28,469)
|
|
(4,992)
|
|
(245,726)
|
Foreign currency adjustment
(1)
|
2,436
|
|
184
|
|
-
|
|
2,620
|
Balance as of December 31, 2018
(2)
|
51,113
|
|
12,018
|
|
-
|
|
63,131
|
Restricted as to use for ATM funding only
|
51,113
|
|
12,018
|
|
-
|
|
63,131
|
No restrictions as to use
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
Movement in utilized
indirect and derivative
facilities:
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
-
|
|
7,871
|
|
-
|
|
7,871
|
Guarantees cancelled
|
-
|
|
(834)
|
|
-
|
|
(834)
|
Utilized
|
-
|
|
151
|
|
-
|
|
151
|
Foreign currency adjustment
(1)
|
-
|
|
(366)
|
|
-
|
|
(366)
|
Balance as of December 31, 2018
|
$-
|
|
$6,822
|
|
$-
|
|
$6,822
|
(1) Represents the effects of the
fluctuations between the ZAR and the U.S. dollar.
(2) Nedbank as of December 31, 2018,
of $12.0 million comprises the net of total overdraft facilities withdrawn of $16.8 million offset against funds in bank accounts
with Nedbank of $4.8 million.
Movement in long-term borrowings
Summarized below is the
movement in the Company’s long term borrowing from as of June 30, 2018 to as of December 31, 2018:
|
South Africa
|
|
|
|
Amended
July 2017
|
|
|
|
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
|
-
|
|
11,004
|
|
11,004
|
Repaid
|
(20,855)
|
|
(2,956)
|
|
(23,811)
|
Foreign currency adjustment
(1)
|
(2,937)
|
|
635
|
|
(2,302)
|
Balance as of December 31, 2018
|
26,372
|
|
8,683
|
|
35,055
|
Included in current portion of long-term borrowings
|
24,660
|
|
-
|
|
24,660
|
Included in long-term borrowings
|
$1,712
|
|
$8,683
|
|
$10,395
|
|
(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 Company’s
South African long-term borrowing during the three months ended December 31, 2018 and 2017, was $0.9 million and $1.9 million,
respectively. Interest expense incurred during the six months ended December 31, 2018 and 2017, was $2.1 million and $3.6 million,
respectively. Prepaid facility fees amortized during the three months ended December 31, 2018 and 2017, was $0.1 million
and $0.1 million respectively. Prepaid facility fees amortized during the six months ended December 31, 2018 and 2017, was $0.2
million and $0.1 million, respectively.
Interest expense incurred
the Company’s South Korean debt facilities during the three and six months ended December 31, 2017, was $0.1 and $0.4 million,
respectively. Prepaid facility fees amortized during each of the three and six months ended December 31, 2017, was $0.1
million, respectively.
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 six months ended December 31, 2018 and 2017, respectively, and the number of shares, net of treasury,
excluding non-vested equity shares that have not vested during the six months ended December 31, 2018 and 2017, respectively:
|
|
|
|
|
|
|
|
Number of shares, net of treasury:
|
|
|
|
Statement of changes in equity
|
56,833,925
|
|
56,832,370
|
Less: Non-vested equity shares that have not vested (Note 13)
|
860,817
|
|
(911,856)
|
Number of shares, net of treasury excluding non-vested equity shares that have not vested
|
55,973,108
|
|
55,920,514
|
12. Accumulated
other comprehensive loss
The table below presents
the change in accumulated other comprehensive (loss) income per component during the six months ended December 31, 2018:
|
Six months ended
December 31, 2018
|
|
Accumulated
foreign currency translation reserve
|
|
Accumulated
net unrealized income on asset available for sale, net of tax
|
|
Total
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
$(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
|
(19,266)
|
|
-
|
|
(19,266)
|
Balance as of December 31, 2018
|
$(198,272)
|
|
$-
|
|
$(198,272)
|
There were no reclassifications
from accumulated other comprehensive loss to net (loss) income during the six months ended December 31, 2018 or 2017.
13. Stock-based
compensation
Stock option and restricted
stock activity
Options
The following table summarizes
stock option activity for the six months ended December 31, 2018 and 2017:
|
Number
of shares
|
|
Weighted average exercise price
($)
|
|
Weighted average remaining contractual term
(in years)
|
|
Aggregate
intrinsic value ($’000)
|
|
Weighted average grant date fair value
($)
|
|
|
|
|
|
|
|
|
|
|
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 – December 31, 2018
|
1,209,274
|
|
8.41
|
|
6.15
|
|
72
|
|
2.62
|
|
|
|
|
|
|
|
|
|
|
Outstanding – June 30, 2017
|
846,607
|
|
13.87
|
|
3.80
|
|
486
|
|
4.21
|
Forfeitures
|
(37,333)
|
|
11.23
|
|
|
|
|
|
4.55
|
Outstanding – December 31, 2017
|
809,274
|
|
13.99
|
|
3.40
|
|
468
|
|
4.20
|
|
|
|
|
|
|
|
|
|
|
During the six months
ended December 31, 2018, 600,000 stock options were awarded to executive officers and employees. No stock options were awarded
during the three months ended December 31, 2018, or during the three and six months ended December 31, 2017, respectively. During
the six months ended December 31, 2018, executive officers forfeited 200,000 stock options granted in August 2008, with a strike
price of $24.46 per share, as these stock options expired unexercised. During the six months ended December 31, 2017, employees
forfeited 37,333 stock options.
The fair value of each
option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the assumptions noted in the
following table. The estimated expected volatility is calculated based on the Company’s 750 day volatility. The estimated
expected life of the option was determined based on historical behavior of employees who were granted options with similar terms.
The table below presents
the range of assumptions used to value options granted during the six months ended December 31, 2018:
|
Six months ended
December 31,
|
|
2018
|
Expected volatility
|
44%
|
Expected dividends
|
0%
|
Expected life (in years)
|
3
|
Risk-free rate
|
2.75%
|
The following table presents
stock options vested and expected to vest as of December 31, 2018:
|
Number
of shares
|
|
Weighted average exercise price
($)
|
|
Weighted average remaining contractual
term
(in years)
|
|
Aggregate
intrinsic value ($’000)
|
Vested and expected to vest – December 31, 2018
|
1,209,274
|
|
8.41
|
|
6.15
|
|
72
|
These options have an
exercise price range of $6.20 to $13.16.
13. Stock-based
compensation (continued)
Stock option and restricted
stock activity (continued)
Options (continued)
The following table presents
stock options that are exercisable as of December 31, 2018:
|
Number
of shares
|
|
Weighted average exercise price
($)
|
|
Weighted average remaining contractual
term
(in years)
|
|
Aggregate
intrinsic value ($’000)
|
Exercisable – December 31, 2018
|
609,274
|
|
10.56
|
|
2.84
|
|
72
|
No stock options became
exercisable during the three and six months ended December 31, 2018, or during the three months ended December 31, 2017, respectively.
However, during the six months ended December 31, 2017, 105,982 stock options became exercisable. The Company issues new shares
to satisfy stock option exercises.
Restricted stock
The following table summarizes
restricted stock activity for the six months ended December 31, 2018 and 2017:
|
Number
of shares of restricted stock
|
|
Weighted average grant date fair value
($’000)
|
Non-vested – June 30, 2018
|
765,411
|
|
6,162
|
Granted – September 2018
|
148,000
|
|
114
|
Vested – August 2018
|
(52,594)
|
|
459
|
Non-vested – December 31, 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
|
Forfeitures – August and November 2014 awards with market conditions
|
(95,326)
|
|
1,133
|
Non-vested – December 31, 2017
|
911,856
|
|
9,365
|
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 December 31, 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
Company’s 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 Company’s common stock on Nasdaq over the $6.20 closing
price on September 7, 2018.
13. Stock-based
compensation (continued)
Stock option and restricted
stock activity (continued)
Restricted stock
(continued)
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 $19.00—33%
|
|
·
|
At or above $19.00 and below $23.00—66%
|
|
·
|
At or above $23.00—100%
|
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 observations of larger than expected
moves in the daily time series for the Company’s 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 Company’s
stock and NASDAQ futures.
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
Company’s 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 Company’s 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 $19.00—33%
|
|
·
|
At or above $19.00 and below $23.00—66%
|
|
·
|
At or above $23.00—100%
|
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 Company’s 30 day VWAP share price using the exponentially weighted moving average of returns.
13. Stock-based
compensation (continued)
Stock option and restricted
stock activity (continued)
Restricted stock
(continued)
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 Company’s 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.
|
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 Company’s common stock quoted
on The Nasdaq Global Select Market on the date of grant.
Forfeiture of restricted
stock awarded in August and November 2014 that did not achieve targeted market conditions
During the three and six
months ended December 31, 2017, restricted stock with market conditions awarded in August and November 2014, were forfeited, because
the target market conditions were not achieved. The stock-based compensation charge related to these awards was not reversed upon
forfeiture because these awards contained market conditions.
The fair value of restricted
stock vesting during each of the six months ended December 31, 2018 and 2017, respectively, 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 December 31, 2018 and 2017 of $0.6 million respectively,
which comprised:
|
Total charge
|
|
Allocated
to cost of goods sold, IT processing, servicing and support
|
|
Allocated
to selling, general and administration
|
Three months ended December 31, 2018
|
|
|
|
|
|
Stock-based compensation charge
|
$598
|
|
$-
|
|
$598
|
Total – three months ended December 31, 2018
|
$598
|
|
$-
|
|
$598
|
|
|
|
|
|
|
Three months ended December 31, 2017
|
|
|
|
|
|
Stock-based compensation charge
|
$608
|
|
$-
|
|
$608
|
Total – three months ended December 31, 2017
|
$608
|
|
$-
|
|
$608
|
13. Stock-based
compensation (continued)
Stock option and restricted
stock activity (continued)
Restricted stock
(continued)
The Company recorded a
stock-based compensation charge during the six months ended December 31, 2018 and 2017 of $1.2 million and $1.4 million respectively,
which comprised:
|
Total charge
|
|
Allocated
to cost of goods sold, IT processing, servicing and support
|
|
Allocated
to selling, general and administration
|
Six months ended December 31, 2018
|
|
|
|
|
|
Stock-based compensation charge
|
$1,185
|
|
$-
|
|
$1,185
|
Total – six months ended December 31, 2018
|
$1,185
|
|
$-
|
|
$1,185
|
|
|
|
|
|
|
Six months ended December 31, 2017
|
|
|
|
|
|
Stock-based compensation charge
|
$1,477
|
|
$-
|
|
$1,477
|
Reversal of stock compensation charge related to stock options forfeited
|
(42)
|
|
-
|
|
(42)
|
Total – six months ended December 31, 2017
|
$1,435
|
|
$-
|
|
$1,435
|
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 December 31, 2018,
the total unrecognized compensation cost related to stock options was approximately $1.1 million, which the Company expects to
recognize over approximately three years. As of December 31, 2018, the total unrecognized compensation cost related to restricted
stock awards was approximately $2.6 million, which the Company expects to recognize over approximately two years.
As of December 31, 2018
and June 30, 2018, respectively, the Company recorded a deferred tax asset of approximately $0.8 million and $0.7 million, related
to the stock-based compensation charge recognized related to employees of Net1. As of December 31, 2018, and June 30, 2018, respectively,
the Company recorded a valuation allowance of approximately $0.8 million and $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 and six months ended December 31, 2018 or 2017. Accordingly, the two-class method presented below
does not include the impact of any redemption. The Company’s redeemable common stock is described in Note 15 to the Company’s
audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2018.
Basic (loss) 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 (loss) earnings per share have been calculated
using the two-class method and basic (loss) earnings per share for the three and six months ended December 31, 2018 and 2017, reflects
only undistributed earnings.
The computation below of basic (loss) earnings
per share excludes the net (loss) income attributable to shares of unvested restricted stock (participating non-vested restricted
stock) from the numerator and excludes the dilutive impact of these unvested shares of restricted stock from the denominator.
Diluted (loss) 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
(loss) 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.
14. Earnings per share
(continued)
The calculation of diluted
(loss) 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 Company’s 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 (loss) income attributable to Net1 ((loss) income from continuing operations) and the share data used in the basic and diluted
(loss) earnings per share computations using the two-class method:
|
Three months ended
December 31,
|
|
Six months ended
December 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in thousands except percent and
per share data)
|
|
(in thousands except percent and
per share data)
|
Numerator:
|
|
|
|
|
|
|
|
Net (loss) income attributable to Net1
|
(63,941)
|
|
$9,622
|
|
(69,140)
|
|
$29,105
|
Undistributed (loss) earnings
|
(63,941)
|
|
9,622
|
|
(69,140)
|
|
29,105
|
Percent allocated to common shareholders (Calculation 1)
|
98%
|
|
99%
|
|
99%
|
|
98%
|
Numerator for (loss) earnings per share: basic and diluted
|
(62,972)
|
|
$9,481
|
|
(68,146)
|
|
$28,664
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic (loss) earnings per share: weighted-average common shares outstanding
|
55,973
|
|
55,923
|
|
55,962
|
|
55,902
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
21
|
|
52
|
|
36
|
|
50
|
Denominator for diluted (loss) earnings per share: adjusted weighted average common shares outstanding and assumed conversion
|
55,994
|
|
55,975
|
|
55,998
|
|
55,952
|
|
|
|
|
|
|
|
|
(Loss) Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$(1.13)
|
|
$0.17
|
|
$(1.22)
|
|
$0.51
|
Diluted
|
$(1.12)
|
|
$0.17
|
|
$(1.22)
|
|
$0.51
|
|
|
|
|
|
|
|
|
(Calculation 1)
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding (A)
|
55,973
|
|
55,923
|
|
55,962
|
|
55,902
|
Basic weighted-average common shares outstanding and unvested restricted shares expected to vest (B)
|
56,834
|
|
56,755
|
|
56,778
|
|
56,762
|
Percent allocated to common shareholders (A) / (B)
|
98%
|
|
99%
|
|
99%
|
|
98%
|
Options to purchase 1,166,554
and 503,698 shares of the Company’s common stock at prices ranging from $6.20 to $13.16 per share and $8.75 to $13.16 per
share were outstanding during the three and six months ended December 31, 2018, respectively, but were not included in the computation
of diluted (loss) earnings per share because the options’ exercise price was greater than the average market price of the
Company’s common stock. The options, which expire at various dates through August 27, 2024, were still outstanding as of
December 31, 2018.
15. Supplemental
cash flow information
The following table presents
supplemental cash flow disclosures for the three and six months ended December 31, 2018, and 2017:
|
Three months ended
December 31,
|
|
Six months ended
December 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cash received from interest
|
$1,285
|
|
$4,562
|
|
$3,362
|
|
$9,848
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
$2,588
|
|
$2,330
|
|
$5,654
|
|
$4,418
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
$8,779
|
|
$18,613
|
|
$10,122
|
|
$20,649
|
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 December
31, 2018:
|
South Africa
|
|
Korea
|
|
Rest of
the world
|
|
Total
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
|
|
|
|
|
|
Processing fees
|
$19,031
|
|
$-
|
|
$-
|
|
$19,031
|
Welfare benefit distributions fees
|
-
|
|
-
|
|
-
|
|
-
|
Other
|
1,772
|
|
-
|
|
-
|
|
1,772
|
Sub-total
|
20,803
|
|
-
|
|
-
|
|
20,803
|
International transaction processing
|
|
|
|
|
|
|
|
Processing fees
|
-
|
|
34,382
|
|
2,543
|
|
36,925
|
Other
|
-
|
|
1,018
|
|
181
|
|
1,199
|
Sub-total
|
-
|
|
35,400
|
|
2,724
|
|
38,124
|
Financial inclusion and applied technologies
|
|
|
|
|
|
|
|
Telecom products and services
|
18,020
|
|
-
|
|
-
|
|
18,020
|
Account holder fees
|
3,140
|
|
-
|
|
-
|
|
3,140
|
Lending revenue
|
5,969
|
|
-
|
|
-
|
|
5,969
|
Technology products
|
5,771
|
|
-
|
|
-
|
|
5,771
|
Insurance revenue
|
1,310
|
|
-
|
|
-
|
|
1,310
|
Other
|
4,013
|
|
-
|
|
-
|
|
4,013
|
Sub-total
|
38,223
|
|
-
|
|
-
|
|
38,223
|
|
|
|
|
|
|
|
|
|
$59,026
|
|
$35,400
|
|
$2,724
|
|
$97,150
|
|
|
|
|
|
|
|
|
|
The following table represents our revenue
disaggregated by major revenue streams, including reconciliation to operating segments for the six months ended December 31, 2018:
|
South Africa
|
|
Korea
|
|
Rest of
the world
|
|
Total
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
|
|
|
|
|
|
Processing fees
|
$49,260
|
|
$-
|
|
$-
|
|
$49,260
|
Welfare benefit distributions fees
|
3,086
|
|
-
|
|
-
|
|
3,086
|
Other
|
2,920
|
|
-
|
|
-
|
|
2,920
|
Sub-total
|
55,266
|
|
-
|
|
-
|
|
55,266
|
International transaction processing
|
|
|
|
|
|
|
|
Processing fees
|
-
|
|
68,971
|
|
5,198
|
|
74,169
|
Other
|
-
|
|
2,980
|
|
362
|
|
3,342
|
Sub-total
|
-
|
|
71,951
|
|
5,560
|
|
77,511
|
Financial inclusion and applied technologies
|
|
|
|
|
|
|
|
Telecom products and services
|
37,167
|
|
-
|
|
-
|
|
37,167
|
Account holder fees
|
13,745
|
|
-
|
|
-
|
|
13,745
|
Lending revenue
|
15,946
|
|
-
|
|
-
|
|
15,946
|
Technology products
|
10,039
|
|
-
|
|
-
|
|
10,039
|
Insurance revenue
|
3,825
|
|
-
|
|
-
|
|
3,825
|
Other
|
9,535
|
|
-
|
|
-
|
|
9,535
|
Sub-total
|
90,257
|
|
-
|
|
-
|
|
90,257
|
|
|
|
|
|
|
|
|
|
$145,523
|
|
$71,951
|
|
$5,560
|
|
$223,034
|
16. Revenue recognition
(continued)
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 Company’s 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
Company’s 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.
Welfare benefit distribution
fees
The Company’s 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 holder’s 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 Company’s 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.
16. Revenue recognition
(continued)
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 was subject
to a court process regarding the determination of the price to be charged for welfare benefit distribution services provided from
April 1, 2018 to September 30, 2018. In December 2018, the Constitutional Court of South Africa clarified that it was not required
to ratify the price and stated that parties should reach an agreement on the price, failing which they should approach the lower
courts in South Africa. The Company has initiated discussions with SASSA, but the parties had not reached an agreement as of December
31, 2018, regarding the pricing for services provided through 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 provided in March 2018 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 on July
1, 2018, the Company determined that it was unable to estimate the amount of revenue that it is entitled to receive because the
court had not yet confirmed the amount at that date. Accordingly, the Company has not recorded any additional revenue during the
six months ended December 31, 2018, related to the price to be charged for welfare benefit distribution services provided through
September 30, 2018. The Company recorded revenue at the rate specified in the contract. The Company expects to record any additional
revenue once there is agreement between the Company and SASSA on the fee.
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 Company’s operating segments
is contained in Note 22 to the Company’s 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 segment’s revenue to revenue from external customers for the three months ended December 31, 2018 and 2017,
is as follows:
|
Revenue
|
|
Reportable
Segment
|
|
Inter-segment
|
|
From external
customers
|
|
|
|
|
|
|
South African transaction processing
|
$21,970
|
|
$1,167
|
|
$20,803
|
International transaction processing
|
38,124
|
|
-
|
|
38,124
|
Financial inclusion and applied technologies
|
38,755
|
|
532
|
|
38,223
|
Total for the three months ended December 31, 2018
|
$98,849
|
|
$1,699
|
|
$97,150
|
|
|
|
|
|
|
South African transaction processing
|
$64,148
|
|
$6,181
|
|
$57,967
|
International transaction processing
|
44,185
|
|
-
|
|
44,185
|
Financial inclusion and applied technologies
|
54,131
|
|
7,867
|
|
46,264
|
Total for the three months ended December 31, 2017
|
$162,464
|
|
$14,048
|
|
$148,416
|
17. Operating segments
(continued)
The reconciliation of
the reportable segment’s revenue to revenue from external customers for the six months ended December 31, 2018 and 2017,
is as follows:
|
Revenue
|
|
Reportable
Segment
|
|
Inter-segment
|
|
From external
customers
|
|
|
|
|
|
|
South African transaction processing
|
$59,719
|
|
$4,453
|
|
$55,266
|
International transaction processing
|
77,511
|
|
-
|
|
77,511
|
Financial inclusion and applied technologies
|
91,961
|
|
1,704
|
|
90,257
|
Total for the six months ended December 31, 2018
|
$229,191
|
|
$6,157
|
|
$223,034
|
|
|
|
|
|
|
South African transaction processing
|
$130,585
|
|
$12,326
|
|
$118,259
|
International transaction processing
|
90,207
|
|
-
|
|
90,207
|
Financial inclusion and applied technologies
|
108,444
|
|
15,936
|
|
92,508
|
Total for the six months ended December 31, 2017
|
$329,236
|
|
$28,262
|
|
$300,974
|
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 measures of profit or loss to income before income taxes for the three and six months ended December 31,
2018 and 2017, is as follows:
|
Three months
ended December 31,
|
|
Six months
ended December 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
Reportable segments measure of profit or loss
|
($34,411)
|
|
$21,216
|
|
($23,860)
|
|
$52,784
|
Operating income: Corporate/Eliminations
|
(8,664)
|
|
(4,909)
|
|
(18,319)
|
|
(11,471)
|
Change in value of equity securities
|
(15,836)
|
|
-
|
|
(15,836)
|
|
-
|
Interest income, net of impairment
|
(331)
|
|
4,705
|
|
1,545
|
|
9,749
|
Interest expense
|
(2,778)
|
|
(2,325)
|
|
(5,537)
|
|
(4,446)
|
(Loss) Income before income taxes
|
($62,020)
|
|
$18,687
|
|
($62,007)
|
|
$46,616
|
The following tables summarize
segment information that is prepared in accordance with GAAP for the three and six months ended December 31, 2018 and 2017:
|
Three months
ended December 31,
|
|
Six months
ended December 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
South African transaction processing
|
$21,970
|
|
$64,148
|
|
$59,719
|
|
130,585
|
International transaction processing
|
38,124
|
|
44,185
|
|
77,511
|
|
90,207
|
Financial inclusion and applied technologies
|
38,755
|
|
54,131
|
|
91,961
|
|
108,444
|
Total
|
98,849
|
|
162,464
|
|
229,191
|
|
329,236
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
South African transaction processing
|
(11,830)
|
|
13,470
|
|
(15,343)
|
|
25,802
|
International transaction processing
|
(4,043)
|
|
(4,991)
|
|
(1,281)
|
|
325
|
Financial inclusion and applied technologies
|
(18,538)
|
|
12,737
|
|
(7,236)
|
|
26,657
|
Subtotal: Operating segments
|
(34,411)
|
|
21,216
|
|
(23,860)
|
|
52,784
|
Corporate/Eliminations
|
(8,664)
|
|
(4,909)
|
|
(18,319)
|
|
(11,471)
|
Total
|
$(43,075)
|
|
$16,307
|
|
$(42,179)
|
|
$41,313
|
17. Operating segments
(continued)
The following tables summarize
segment information that is prepared in accordance with GAAP for the three and six months ended December 31, 2018 and 2017:
|
Three months
ended December 31,
|
|
Six months
ended December 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
South African transaction processing
|
$921
|
|
$1,087
|
|
$1,862
|
|
$2,240
|
International transaction processing
|
2,511
|
|
4,381
|
|
5,570
|
|
9,013
|
Financial inclusion and applied technologies
|
405
|
|
309
|
|
1,041
|
|
664
|
Subtotal: Operating segments
|
3,837
|
|
5,777
|
|
8,473
|
|
11,917
|
Corporate/Eliminations
|
6,016
|
|
2,946
|
|
12,174
|
|
5,772
|
Total
|
9,853
|
|
8,723
|
|
20,647
|
|
17,689
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
South African transaction processing
|
1,047
|
|
900
|
|
2,333
|
|
1,377
|
International transaction processing
|
841
|
|
892
|
|
1,641
|
|
1,798
|
Financial inclusion and applied technologies
|
659
|
|
311
|
|
1,691
|
|
401
|
Subtotal: Operating segments
|
2,547
|
|
2,103
|
|
5,665
|
|
3,576
|
Corporate/Eliminations
|
-
|
|
-
|
|
-
|
|
-
|
Total
|
$2,547
|
|
$2,103
|
|
$5,665
|
|
$3,576
|
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 and six
months ended December 31, 2018, the Company’s effective tax rate was adversely impacted by the valuation allowances created
related to the deferred tax assets recognized regarding net operating losses incurred by the Company’s South African businesses,
the non-deductible goodwill impairment losses, and non-deductible expenses, including transaction-related expenditure and non-deductible
interest on its South African long-term debt facility, which was partially offset by tax expense recorded by the Company’s
profitable businesses in South Africa and South Korea. The deferred tax impact of the change in the fair value of the Company’s
equity security also impacted the Company’s effective rate for fiscal 2019, as this amount is recorded at a lower rate (at
a capital gains rate) than the South African statutory rate.
The Company’s effective
tax rate for the three and six months ended December 31, 2017, 53.8% and 43.6%, respectively, was higher than the South African
statutory rate as a result of a valuation allowance provided related to an allowance for doubtful working capital finance receivables
created, non-deductible expenses (including transaction-related expenditure and non-deductible interest on our South African long-term
facility) and the impact of the changes in U.S. federal statutory tax rates described below.
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 Company’s 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 December 31, 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
Company’s provision for income taxes and effective tax rate in the period in which the adjustments are made. The Company’s
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 Company’s 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 company’s 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 Company’s 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 Company’s uncertain tax positions during the three and six months ended December 31, 2018. As of December
31, 2018, the Company had accrued interest related to uncertain tax positions of approximately $0.1 million on its balance sheet.
The Company does not expect
changes related to its unrecognized tax benefits will have a significant impact on its results of operations or financial position
in the next 12 months.
As of December 31, 2018
and June 30, 2018, the Company had unrecognized tax benefits of $1.0 million and $0.8 million, respectively, all of which
would impact the Company’s 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 December 31, 2018, the Company’s
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 Company’s 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.
19. Commitments
and contingencies (continued)
Guarantees (continued)
Nedbank has issued guarantees
to these third parties amounting to ZAR 96.0 million ($6.7 million, translated at exchange rates applicable as of December 31,
2018) and thereby utilizing part of the Company’s short-term facility. The Company in turn has provided nonrecourse, unsecured
counter-guarantees to Nedbank for ZAR 96.0 million ($6.7 million, translated at exchange rates applicable as of December 31, 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 December 31, 2018. The maximum potential
amount that the Company could pay under these guarantees is ZAR 96.0 million ($6.7 million, translated at exchange rates applicable
as of December 31, 2018). The guarantees have reduced the amount available for borrowings under the Company’s 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 Company’s financial position, results of operations or cash flows.
20. Related
party transactions
DNI leased a building
that was owned by a company in which Mr. A.J. Dunn has a direct shareholding of 16%. The property was sold in November 2018. During
the three and six months ended December 31, 2018, DNI paid rental of approximately $1.0 million.