Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Balance Sheets
|
|
|
Unaudited
|
|
|
(A)
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
64,896
|
|
$
|
258,457
|
|
Pre-funded social welfare grants
receivable (Note 2)
|
|
3,300
|
|
|
2,322
|
|
Accounts receivable,
net of allowances of December: $1,251; June: $1,255
|
|
128,543
|
|
|
111,429
|
|
Finance loans receivable, net of
allowances of December: $17,213; June: $7,469
|
|
105,697
|
|
|
80,177
|
|
Inventory (Note 3)
|
|
12,482
|
|
|
8,020
|
|
Deferred income taxes (Note 1)
|
|
-
|
|
|
5,330
|
|
Total current assets before settlement assets
|
|
314,918
|
|
|
465,735
|
|
Settlement assets (Note 4)
|
|
412,177
|
|
|
640,455
|
|
Total current assets
|
|
727,095
|
|
|
1,106,190
|
|
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of December: $136,996; June: $120,212
|
|
32,852
|
|
|
39,411
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 6)
|
|
147,392
|
|
|
27,862
|
|
GOODWILL (Note 7)
|
|
199,495
|
|
|
188,833
|
|
INTANGIBLE ASSETS, net (Note 7)
|
|
34,604
|
|
|
38,764
|
|
DEFERRED INCOME TAXES (Note 1)
|
|
3,342
|
|
|
-
|
|
OTHER LONG-TERM ASSETS, including
reinsurance assets (Note 6 and Note 8)
|
|
225,463
|
|
|
49,696
|
|
TOTAL ASSETS
|
|
1,370,243
|
|
|
1,450,756
|
|
LIABILITIES
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Short-term credit
facilities (Note 9)
|
|
35,553
|
|
|
16,579
|
|
Accounts payable
|
|
16,971
|
|
|
15,136
|
|
Other payables
|
|
39,168
|
|
|
34,799
|
|
Current portion of long-term borrowings
(Note 10)
|
|
50,530
|
|
|
8,738
|
|
Income taxes payable
|
|
5,311
|
|
|
5,607
|
|
Total
current liabilities before settlement obligations
|
|
147,533
|
|
|
80,859
|
|
Settlement obligations (Note 4)
|
|
412,177
|
|
|
640,455
|
|
Total current liabilities
|
|
559,710
|
|
|
721,314
|
|
DEFERRED INCOME TAXES (Note 1)
|
|
9,866
|
|
|
11,139
|
|
LONG-TERM BORROWINGS (Note 10)
|
|
19,867
|
|
|
7,501
|
|
OTHER LONG-TERM LIABILITIES, including
insurance policy liabilities (Note 8)
|
|
2,449
|
|
|
2,795
|
|
TOTAL LIABILITIES
|
|
591,892
|
|
|
742,749
|
|
COMMITMENTS AND CONTINGENCIES (Note 18)
|
|
|
|
|
|
|
REDEEMABLE COMMON STOCK (Note 1)
|
|
107,672
|
|
|
107,672
|
|
EQUITY
|
|
COMMON STOCK (Note 11)
|
|
|
|
|
|
|
Authorized: 200,000,000
with $0.001 par value;
|
|
|
|
|
|
|
Issued and outstanding shares, net of
treasury - December: 56,832,370; June: 56,369,737
|
|
80
|
|
|
80
|
|
PREFERRED STOCK
|
|
|
|
|
|
|
Authorized shares: 50,000,000 with
$0.001 par value;
|
|
|
|
|
|
|
Issued and outstanding
shares, net of treasury: December: -; June: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
274,961
|
|
|
273,733
|
|
TREASURY SHARES, AT COST: December:
24,891,292; June: 24,891,292
|
|
(286,951
|
)
|
|
(286,951
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 12)
|
|
(123,359
|
)
|
|
(162,569
|
)
|
RETAINED EARNINGS
|
|
802,381
|
|
|
773,276
|
|
TOTAL NET1 EQUITY
|
|
667,112
|
|
|
597,569
|
|
NON-CONTROLLING
INTEREST
|
|
3,567
|
|
|
2,766
|
|
TOTAL EQUITY (Note 1)
|
|
670,679
|
|
|
600,335
|
|
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND
SHAREHOLDERS
EQUITY
|
$
|
1,370,243
|
|
$
|
1,450,756
|
|
(A) Derived from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial
Statements
2
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Statements of
Operations
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands, except per share
data)
|
|
|
(In thousands, except per share
data)
|
|
REVENUE
|
$
|
148,416
|
|
$
|
151,433
|
|
$
|
300,974
|
|
$
|
307,066
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
goods sold, IT processing, servicing and support
|
|
73,994
|
|
|
73,518
|
|
|
148,646
|
|
|
148,298
|
|
Selling, general and
administration
|
|
49,392
|
|
|
41,703
|
|
|
93,326
|
|
|
80,171
|
|
Depreciation and amortization
|
|
8,723
|
|
|
10,623
|
|
|
17,689
|
|
|
20,827
|
|
OPERATING INCOME
|
|
16,307
|
|
|
25,589
|
|
|
41,313
|
|
|
57,770
|
|
INTEREST INCOME
|
|
4,705
|
|
|
5,061
|
|
|
9,749
|
|
|
9,365
|
|
INTEREST EXPENSE
|
|
2,325
|
|
|
510
|
|
|
4,446
|
|
|
1,306
|
|
INCOME BEFORE INCOME TAX EXPENSE
|
|
18,687
|
|
|
30,140
|
|
|
46,616
|
|
|
65,829
|
|
INCOME TAX EXPENSE (Note 17)
|
|
10,062
|
|
|
10,984
|
|
|
20,339
|
|
|
22,087
|
|
NET INCOME BEFORE EARNINGS FROM EQUITY-
ACCOUNTED INVESTMENTS
|
|
8,625
|
|
|
19,156
|
|
|
26,277
|
|
|
43,742
|
|
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
|
|
1,354
|
|
|
74
|
|
|
3,429
|
|
|
733
|
|
NET INCOME
|
|
9,979
|
|
|
19,230
|
|
|
29,706
|
|
|
44,475
|
|
LESS NET INCOME ATTRIBUTABLE TO NON-
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTROLLING INTEREST
|
|
357
|
|
|
589
|
|
|
601
|
|
|
1,202
|
|
NET INCOME ATTRIBUTABLE TO NET1
|
$
|
9,622
|
|
$
|
18,641
|
|
$
|
29,105
|
|
$
|
43,273
|
|
Net income per share, in U.S. dollars
(Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
attributable to Net1 shareholders
|
$
|
0.17
|
|
$
|
0.35
|
|
$
|
0.51
|
|
$
|
0.81
|
|
Diluted
earnings attributable to Net1 shareholders
|
$
|
0.17
|
|
$
|
0.35
|
|
$
|
0.51
|
|
$
|
0.81
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Statements of
Comprehensive Income
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
9,979
|
|
$
|
19,230
|
|
$
|
29,706
|
|
$
|
44,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in foreign
currency translation reserve
|
|
53,517
|
|
|
(20,766
|
)
|
|
39,637
|
|
|
1,536
|
|
Movement
in foreign currency translation reserve related to equity-accounted
investments
|
|
-
|
|
|
-
|
|
|
(227
|
)
|
|
-
|
|
Total other comprehensive income (loss), net of taxes
|
|
53,517
|
|
|
(20,766
|
)
|
|
39,410
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
63,496
|
|
|
(1,536
|
)
|
|
69,116
|
|
|
46,011
|
|
Less comprehensive income attributable to non- controlling interest
|
|
(668
|
)
|
|
(624
|
)
|
|
(801
|
)
|
|
(1,681
|
)
|
Comprehensive income (loss) attributable to Net1
|
$
|
62,828
|
|
$
|
(2,160
|
)
|
$
|
68,315
|
|
$
|
44,330
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
4
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Statement of Changes
in Equity for the six months ended December 31, 2017 (dollar amounts in
thousands)
|
|
|
Net 1 UEPS Technologies, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
Number
|
|
|
|
|
|
of
|
|
|
|
|
|
Number of
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Non-
|
|
|
|
|
|
Common
|
|
|
|
of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Shares, Net
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Net1
|
|
|
Controlling
|
|
|
|
|
|
Stock
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
of Treasury
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Total
|
|
|
(Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2017
|
|
81,261,029
|
|
$
|
80
|
|
|
(24,891,292
|
)
|
$
|
(286,951
|
)
|
|
56,369,737
|
|
$
|
273,733
|
|
$
|
773,276
|
|
$
|
(162,569
|
)
|
$
|
597,569
|
|
$
|
2,766
|
|
$
|
600,335
|
|
$
|
107,672
|
|
Restricted stock granted (Note 13)
|
|
588,594
|
|
|
|
|
|
|
|
|
|
|
|
588,594
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Stock-based compensation charge (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,477
|
|
|
|
|
|
|
|
|
1,477
|
|
|
|
|
|
1,477
|
|
|
|
|
Reversal of stock compensation charge (Note 13)
|
|
(125,961
|
)
|
|
|
|
|
|
|
|
|
|
|
(125,961
|
)
|
|
(42
|
)
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock based- compensation charge related to
equity-accounted investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
(207
|
)
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,105
|
|
|
|
|
|
29,105
|
|
|
601
|
|
|
29,706
|
|
|
|
|
Other comprehensive income (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,210
|
|
|
39,210
|
|
|
200
|
|
|
39,410
|
|
|
|
|
Balance December 31, 2017
|
|
81,723,662
|
|
$
|
80
|
|
|
(24,891,292
|
)
|
$
|
(286,951
|
)
|
|
56,832,370
|
|
$
|
274,961
|
|
$
|
802,381
|
|
$
|
(123,359
|
)
|
$
|
667,112
|
|
$
|
3,567
|
|
$
|
670,679
|
|
$
|
107,672
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
5
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Statements of Cash
Flows
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
9,979
|
|
$
|
19,230
|
|
$
|
29,706
|
|
$
|
44,475
|
|
Depreciation and amortization
|
|
8,723
|
|
|
10,623
|
|
|
17,689
|
|
|
20,827
|
|
Earnings from equity-accounted investments
|
|
(1,354
|
)
|
|
(74
|
)
|
|
(3,429
|
)
|
|
(733
|
)
|
Fair value adjustments
|
|
(372
|
)
|
|
72
|
|
|
(281
|
)
|
|
(11
|
)
|
Interest payable
|
|
(159
|
)
|
|
(23
|
)
|
|
(247
|
)
|
|
9
|
|
Facility fee amortized
|
|
214
|
|
|
31
|
|
|
347
|
|
|
67
|
|
Loss (Profit) on disposal of property, plant and equipment
|
|
16
|
|
|
(539
|
)
|
|
121
|
|
|
(473
|
)
|
Profit on disposal of business
|
|
(463
|
)
|
|
-
|
|
|
(463
|
)
|
|
-
|
|
Stock-based compensation charge (reversal), net (Note 13)
|
|
608
|
|
|
635
|
|
|
1,435
|
|
|
(689
|
)
|
Dividends received from equity accounted
investments
|
|
1,253
|
|
|
-
|
|
|
2,165
|
|
|
370
|
|
(Increase) Decrease in accounts receivable, pre-funded
social
|
|
|
|
|
|
|
|
|
|
|
|
|
welfare grants receivable and finance loans
receivable
|
|
6,005
|
|
|
6,585
|
|
|
(33,136
|
)
|
|
14,351
|
|
Increase in inventory
|
|
(2,322
|
)
|
|
(3,481
|
)
|
|
(3,848
|
)
|
|
(3,585
|
)
|
(Decrease) Increase in accounts payable and
other payables
|
|
(481
|
)
|
|
(5,940
|
)
|
|
2,948
|
|
|
(2,900
|
)
|
Decrease in taxes payable
|
|
(9,754
|
)
|
|
(11,815
|
)
|
|
(916
|
)
|
|
(859
|
)
|
Increase (Decrease) in deferred taxes
|
|
1,419
|
|
|
386
|
|
|
428
|
|
|
(1,246
|
)
|
Net cash provided by operating
activities
|
|
13,312
|
|
|
15,690
|
|
|
12,519
|
|
|
69,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(2,103
|
)
|
|
(3,126
|
)
|
|
(3,576
|
)
|
|
(6,549
|
)
|
Proceeds from disposal of property, plant
and equipment
|
|
99
|
|
|
945
|
|
|
415
|
|
|
1,014
|
|
Investment in Cell C (Note 6)
|
|
-
|
|
|
-
|
|
|
(151,003
|
)
|
|
-
|
|
Investment in equity of equity-accounted
investments (Note 6)
|
|
(40,892
|
)
|
|
-
|
|
|
(113,738
|
)
|
|
-
|
|
Acquisition of held to maturity investment (Note 6)
|
|
(9,000
|
)
|
|
-
|
|
|
(9,000
|
)
|
|
-
|
|
Investment in MobiKwik
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(15,347
|
)
|
Loans to equity accounted investments (Note 6)
|
|
|
|
|
(10,044
|
)
|
|
|
|
|
(10,044
|
)
|
Acquisitions, net of cash acquired
|
|
-
|
|
|
(4,651
|
)
|
|
-
|
|
|
(4,651
|
)
|
Other investing activities
|
|
(154
|
)
|
|
-
|
|
|
(154
|
)
|
|
-
|
|
Net change in settlement assets (Note 4)
|
|
24,519
|
|
|
258,166
|
|
|
237,168
|
|
|
220,772
|
|
Net cash (used in) provided by
investing activities
|
|
(27,531
|
)
|
|
241,290
|
|
|
(39,888
|
)
|
|
185,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings utilized (Note 10)
|
|
-
|
|
|
-
|
|
|
95,431
|
|
|
247
|
|
Repayment of long-term borrowings (Note 10)
|
|
(30,881
|
)
|
|
(1,824
|
)
|
|
(45,141
|
)
|
|
(28,493
|
)
|
Proceeds from bank overdraft (Note 9)
|
|
690
|
|
|
-
|
|
|
32,570
|
|
|
-
|
|
Repayment of bank overdraft (Note 9)
|
|
(11,391
|
)
|
|
-
|
|
|
(14,343
|
)
|
|
-
|
|
Guarantee fee paid (Note 10)
|
|
-
|
|
|
(1,145
|
)
|
|
(552
|
)
|
|
(1,145
|
)
|
Acquisition of treasury stock (Note 11)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(32,081
|
)
|
Dividends paid to non-controlling interest
|
|
-
|
|
|
(58
|
)
|
|
-
|
|
|
(613
|
)
|
Net change in settlement obligations (Note
4)
|
|
(24,519
|
)
|
|
(258,166
|
)
|
|
(237,168
|
)
|
|
(220,772
|
)
|
Net cash used in financing activities
|
|
(66,101
|
)
|
|
(261,193
|
)
|
|
(169,203
|
)
|
|
(282,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
6,857
|
|
|
(2,225
|
)
|
|
3,011
|
|
|
3,306
|
|
Net decrease in cash, cash equivalents and restricted
cash
|
|
(73,463
|
)
|
|
(6,438
|
)
|
|
(193,561
|
)
|
|
(24,753
|
)
|
Cash, cash equivalents and restricted
cash beginning of
period
|
|
138,359
|
|
|
205,329
|
|
|
258,457
|
|
|
223,644
|
|
Cash, cash equivalents and restricted cash end of
period (1)
|
$
|
64,896
|
|
$
|
198,891
|
|
$
|
64,896
|
|
$
|
198,891
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
(1) Cash, cash equivalents and restricted cash as of December
31, 2016, includes restricted cash of approximately $43.7 million related to the
guarantee issued by FirstRand Bank Limited (acting through its Rand Merchant
Bank division). This cash was placed into an escrow account and was considered
restricted as to use and therefore was classified as restricted cash. The
restriction lapsed upon expiry of the guarantee.
6
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the Unaudited Condensed Consolidated
Financial Statements
|
for the three and six months ended December 31, 2017
and 2016
|
(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, 2017 and 2016, are not
necessarily indicative of the results for the full year. The Company believes
that the disclosures are adequate to make the information presented not
misleading.
These financial statements should
be read in conjunction with the financial statements, accounting policies and
financial notes thereto included in the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 2017. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments), which are
necessary for a fair representation of financial results for the interim periods
presented. During the three months ended December 31, 2017, the Company
reclassified redeemable common stock out of total equity because redeemable
common stock is required to be presented outside of permanent equity. The
Company has restated these amounts in its unaudited condensed consolidated
balance sheet as at June 30, 2017 and unaudited condensed consolidated statement
of changes in equity for the six months ended December 31, 2017. The
reclassification resulted in a decrease in total equity by approximately $107.7
million and an increase in redeemable common stock, presented outside of
permanent equity, of approximately $107.7 million. This reclassification had no
impact on the Companys previously reported consolidated income, comprehensive
income or cash flows.
References to the Company refer
to Net1 and its consolidated subsidiaries, collectively, unless the context
otherwise requires. References to Net1 are references solely to Net 1 UEPS
Technologies, Inc.
Recent accounting
pronouncements adopted
In August 2014, the FASB issued
guidance regarding
Disclosure of Uncertainties about an Entitys Ability to
Continue as a Going Concern
. This guidance requires an entity to perform
interim and annual assessments of its ability to continue as a going concern
within one year of the date that its financial statements are issued. An entity
must provide certain disclosures if conditions or events raise substantial doubt
about the entitys ability to continue as a going concern. The guidance is
effective for the Company beginning July 1, 2017. The adoption of this guidance
did not have a material impact on the Companys financial statements
disclosures.
In July 2015, the FASB issued
guidance regarding
Simplifying the Measurement of Inventory
. This
guidance requires entities to measure most inventory at the lower of cost and
net realizable value, thereby simplifying the current guidance under which an
entity must measure inventory at the lower of cost or market (market in this
context is defined as one of three different measures). The guidance will not
apply to inventories that are measured by using either the last-in, first-out
(LIFO) method or the retail inventory method (RIM). The guidance is
effective for the Company beginning July 1, 2017. The adoption of this guidance
did not have a material impact on the Companys financial statements.
In November 2015, the FASB issued
guidance regarding
Balance Sheet Classification of Deferred Taxes
. This
guidance requires that deferred tax liabilities and assets are to be classified
as non-current in a classified statement of financial position. The current
requirement that deferred tax liabilities and assets of a tax-paying component
of an entity be offset and presented as a single amount is not affected by the
amendments in this update. This guidance is effective for the Company beginning
July 1, 2017, and has been applied on a prospective basis. The adoption of this
guidance has resulted in the reclassification of current deferred tax assets and
liabilities as non-current deferred tax assets and liabilities in the unaudited
condensed consolidated balance sheet as of December 31, 2017. Prior period
current deferred tax assets have not been reclassified as non-current in the
unaudited condensed consolidated balance sheet as of June 30, 2017.
In March 2016, the FASB issued
guidance regarding
Improvements to Employee Share-Based Payment
Accounting
. The guidance simplifies several aspects of the accounting for
employee share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures, and statutory
tax withholding requirements, as well as classification in the statement of cash
flows. This guidance is effective for the Company beginning July 1, 2017. The
adoption of this guidance did not have a material impact on the Companys
financial statements. The Company has elected to continue to estimate the number
of forfeitures when an award is made.
7
1. Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Recent accounting
pronouncements not yet adopted as of December 31, 2017
In May 2014, the FASB issued
guidance regarding
Revenue from Contracts with Customers
. This guidance
requires an entity to recognize revenue when a customer obtains control of
promised goods or services in an amount that reflects the consideration to which
the entity expects to receive in exchange for those goods or services. In
addition, the standard requires disclosure of the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with customers. The
guidance was originally set to be effective for the Company beginning July 1,
2017, however in August 2015, the FASB issued guidance regarding
Revenue from
Contracts with Customers, Deferral of the Effective Date
. This guidance
defers the required implementation date specified in
Revenue from Contracts
with Customers
to December 2017. Public companies may elect to adopt the
standard along the original timeline.
The guidance is effective for the
Company beginning July 1, 2018. The Company expects that this guidance may have
a material impact on its financial statements and is currently evaluating the
impact of this guidance on its financial statements on adoption.
In January 2016, the FASB issued
guidance regarding
Recognition and Measurement of Financial Assets and
Financial Liabilities
. The guidance primarily affects the accounting for
equity investments, financial liabilities under the fair value option and the
presentation and disclosure requirements for financial instruments. The guidance
requires changes in the fair value of the Companys equity investments, with
certain exceptions, to be recognized through net income rather than other
comprehensive income. In addition, the guidance clarifies the valuation
allowance assessment when recognizing deferred tax assets resulting from
unrealized losses on available-for-sale debt securities. This guidance is
effective for the Company beginning July 1, 2018, and early adoption is not
permitted, with certain exceptions. The amendments are required to be applied by
means of a cumulative-effect adjustment on the balance sheet as of the beginning
of the fiscal year of adoption. The Company is currently assessing the impact of
this guidance on its financial statements disclosure.
In February 2016, the FASB issued
guidance regarding
Leases
. The guidance increases transparency and
comparability among organizations by requiring the recognition of lease assets
and lease liabilities on the balance sheet. The amendments to current lease
guidance include the recognition of assets and liabilities by lessees for those
leases currently classified as operating leases. The guidance also requires
disclosures to meet the objective of enabling users of financial statements to
assess the amount, timing, and uncertainty of cash flows arising from leases.
This guidance is effective for the Company beginning July 1, 2019. Early
adoption is permitted. The Company expects that this guidance may have a
material impact on its financial statements and is currently evaluating the
impact of this guidance on its financial statements on adoption.
In June 2016, the FASB issued
guidance regarding
Measurement of Credit Losses on Financial Instruments
.
The guidance replaces the incurred loss impairment methodology in current GAAP
with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. For trade and other receivables, loans, and other
financial instruments, an entity is required to use a forward-looking expected
loss model rather than the incurred loss model for recognizing credit losses,
which reflects losses that are probable. Credit losses relating to
available-for-sale debt securities will also be recorded through an allowance
for credit losses rather than as a reduction in the amortized cost basis of the
securities. This guidance is effective for the Company beginning July 1, 2020.
Early adoption is permitted beginning July 1, 2019. The Company is currently
assessing the impact of this guidance on its financial statements disclosure.
In June 2016, the FASB issued
guidance regarding
Classification of Certain Cash Receipts and Cash
Payments
. The guidance is intended to reduce diversity in practice and
explains how certain cash receipts and payments are presented and classified in
the statement of cash flows, including beneficial interests in securitization,
which would impact the presentation of the deferred purchase price from sales of
receivables. This guidance is effective for the Company beginning July 1, 2018,
and must be applied retrospectively. Early adoption is permitted. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
In January 2017, the FASB issued
guidance regarding
Clarifying the Definition of a Business.
This guidance
provides a more robust framework to use in determining when a set of assets and
activities is a business. Because the current definition of a business is
interpreted broadly and can be difficult to apply, stakeholders indicated that
analyzing transactions is inefficient and costly and that the definition does
not permit the use of reasonable judgment. The amendments provide more
consistency in applying the guidance, reduce the costs of application, and make
the definition of a business more operable. The guidance is effective for the
Company beginning July 1, 2018. Early adoption is permitted. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
In January 2017, the FASB issued
guidance regarding
Simplifying the Test for Goodwill Impairment.
This
guidance removes the requirement for an entity to calculate the implied fair
value of goodwill (as part of step 2 of the current goodwill impairment test) in
measuring a goodwill impairment loss. The guidance is effective for the Company
beginning July 1, 2020. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The
Company is currently assessing the impact of this guidance.
8
1. Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Recent accounting
pronouncements not yet adopted as of December 31, 2017 (continued)
In May 2017, the FASB issued
guidance regarding
CompensationStock Compensation (Topic 718): Scope of
Modification Accounting.
The guidance amends the scope of modification
accounting for share-based payment arrangements and provides guidance on the
types of changes to the terms or conditions of share-based payment awards to
which an entity would be required to apply modification accounting under
Accounting Standards Codification 718. Specifically, an entity would not apply
modification accounting if the fair value, vesting conditions, and
classification of the awards are the same immediately before and after the
modification. The guidance is effective for the Company beginning July 1, 2018.
Early adoption is permitted. The Company is currently assessing the impact of
this guidance on its financial statements disclosure.
2. Pre-funded social welfare grants receivable
Pre-funded social welfare grants
receivable represents primarily amounts pre-funded by the Company to certain
merchants participating in the merchant acquiring system. The January 2018
payment service commenced on January 2, 2018, but the Company pre-funded certain
merchants participating in the merchant acquiring systems on December 30, 2017.
The July 2017 payment service commenced on July 1, 2017, but the Company
pre-funded certain merchants participating in the merchant acquiring systems on
the last day of June 2017.
3. Inventory
The Companys inventory comprised
the following category as of December 31, 2017 and June 30, 2017.
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Finished goods
|
$
|
12,482
|
|
$
|
8,020
|
|
|
$
|
12,482
|
|
$
|
8,020
|
|
4. Settlement assets and settlement obligations
Settlement assets comprise (1)
cash received from the South African government that the Company holds pending
disbursement to recipient cardholders of social welfare grants and (2) cash
received from customers on whose behalf the Company processes payroll payments
that the Company will disburse to customer employees, payroll-related payees and
other payees designated by the customer.
Settlement obligations comprise
(1) amounts that the Company is obligated to disburse to recipient cardholders
of social welfare grants, and (2) amounts that the Company is obligated to pay
to customer employees, payroll-related payees and other payees designated by the
customer.
The balances at each reporting
date may vary widely depending on the timing of the receipts and payments of
these assets and obligations.
5. Fair value of financial instruments
Fair value of financial
instruments
Initial
recognition and measurement
Financial instruments are
recognized when the Company becomes a party to the transaction. Initial
measurements are at cost, which includes transaction costs.
Risk
management
The Company seeks to reduce its
exposure to currencies other than the South African rand through a policy of
matching, to the extent possible, assets and liabilities denominated in those
currencies. In addition, the Company utilized financial instruments in order to
economically hedge its exposure to exchange rate and interest rate fluctuations
arising from its operations. The Company is also exposed to translation,
interest rate, customer concentration, credit, and equity price and liquidity
risks.
Currency
exchange risk
The Company is subject to
currency exchange risk because it purchases inventories that it is required to
settle in other currencies, primarily the euro and U.S. dollar. The Company has
used forward contracts in order to limit its exposure in these transactions to
fluctuations in exchange rates between the South African rand, on the one hand,
and the U.S. dollar and the euro, on the other hand.
9
5. Fair value of financial instruments (continued)
Fair value of financial
instruments (continued)
Risk
management (continued)
Translation
risk
Translation risk relates to the
risk that the Companys results of operations will vary significantly as the
U.S. dollar is its reporting currency, but it earns most of its revenues and
incurs most of its expenses in ZAR. The U.S. dollar to ZAR exchange rate has
fluctuated significantly over the past three years. As exchange rates are
outside the Companys control, there can be no assurance that future
fluctuations will not adversely affect the Companys results of operations and
financial condition.
Interest
rate risk
As a result of its normal
borrowing and lending activities, the Companys operating results are exposed to
fluctuations in interest rates, which it manages primarily through regular
financing activities. The Company generally maintains limited investments in
cash equivalents and held to maturity investments and has occasionally invested
in marketable securities.
Working
capital finance customer concentration risk
Working capital finance customer
concentration risk relates to the risk of loss that the Company would incur as a
result of its concentration of working capital financing receivables. During the
year ended June 30, 2017, the Company commenced marketing activities to develop
and expand its working capital financing receivables base. The Company manages
the risk through on-going marketing efforts to further expand its customer base
as well as through regular contact with its customer to assess their need for
the Companys product.
Credit
risk
Credit risk relates to the risk
of loss that the Company would incur as a result of non-performance by
counterparties. The Company maintains credit risk policies with regard to its
counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as the Companys management
deems appropriate.
With respect to credit risk on
financial instruments, the Company maintains a policy of entering into such
transactions only with South African and European financial institutions that
have a credit rating of BB+ (or its equivalent) or better, as determined by
credit rating agencies such as Standard & Poors, Moodys and Fitch Ratings.
Microlending
credit risk
The Company is exposed to credit
risk in its microlending activities, which provides unsecured short-term loans
to qualifying customers. The Company manages this risk by performing an
affordability test for each prospective customer and assigns a creditworthiness
score, which takes into account a variety of factors such as other debts and
total expenditures on normal household and lifestyle expenses.
Equity
price and liquidity risk
Equity price risk relates to the
risk of loss that the Company would incur as a result of the volatility in the
exchange-traded price of equity securities that it holds and the risk that it
may not be able to liquidate these securities. The market price of these
securities may fluctuate for a variety of reasons 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.
10
5. Fair value of financial instruments (continued)
Financial instruments
(continued)
In general, and where applicable,
the Company uses quoted prices in active markets for identical assets or
liabilities to determine fair value. This pricing methodology would apply to
Level 1 investments. If quoted prices in active markets for identical assets or
liabilities are not available to determine fair value, then the Company uses
quoted prices for similar assets and liabilities or inputs other than the quoted
prices that are observable either directly or indirectly. These investments
would be included in Level 2 investments. In circumstances in which inputs are
generally unobservable, values typically reflect managements estimates of
assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models, and similar
techniques. Investments valued using such techniques are included in Level 3
investments.
Asset
measured at fair value using significant unobservable inputs investment in
Cell C
The Company's Level 3 asset
represents an investment of 75,000,000 class A shares in Cell C (Pty) Limited
(Cell C), a leading mobile provider in South Africa (refer to Note 6). The
Company has designated such shares as available for sale investments. Cell C
shares are not listed and there is no readily determinable market value for the
shares. The Company has developed an adjusted EBITDA multiple valuation model in
order to determine the fair value of the Cell C shares. The primary inputs to
the valuation model are Cell Cs adjusted EBITDA, an EBITDA multiple and Cell
Cs external debt. The EBITDA multiple was determined based on an analysis of
Cell Cs peer group, which comprises the primary mobile operators (Vodacom, MTN
and Telkom) in the South African marketplace.
The fair value of the Cell C
shares as of December 31, 2017, represented approximately 12% of the Companys
total assets, including these shares. The Company expects to hold these shares
for an extended period of time and it is not concerned with short-term equity
price volatility with respect to these shares provided that the underlying
business, economic and management characteristics of the company remain sound.
Derivative
transactions - Foreign exchange contracts
As part of the Companys risk
management strategy, the Company enters into derivative transactions to mitigate
exposures to foreign currencies using foreign exchange contracts. These foreign
exchange contracts are over-the-counter derivative transactions. Substantially
all of the Companys derivative exposures are with counterparties that have
long-term credit ratings of BB+ (or equivalent) or better. The Company uses
quoted prices in active markets for similar assets and liabilities to determine
fair value (Level 2). The Company has no derivatives that require fair value
measurement under Level 1 or 3 of the fair value hierarchy.
The Company had no outstanding
foreign exchange contracts as of December 31, 2017 and June 30, 2017,
respectively.
The following table presents the
Companys assets measured at fair value on a recurring basis as of December 31,
2017, according to the fair value hierarchy:
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
price in
|
|
|
|
|
|
|
|
|
|
|
|
|
active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cell C
|
$
|
-
|
|
$
|
-
|
|
$
|
161,695
|
|
$
|
161,695
|
|
Related to insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(included in other long-term assets)
|
|
664
|
|
|
-
|
|
|
-
|
|
$
|
664
|
|
Fixed maturity
investments (included in cash and cash equivalents)
|
|
7,458
|
|
|
-
|
|
|
-
|
|
|
7,458
|
|
Other
|
|
-
|
|
|
40
|
|
|
-
|
|
|
40
|
|
Total assets at fair
value
|
$
|
8,122
|
|
$
|
40
|
|
$
|
161,695
|
|
$
|
169,857
|
|
11
5. Fair value of financial instruments (continued)
Financial instruments
(continued)
The following table presents the
Companys assets measured at fair value on a recurring basis as of June 30,
2017, according to the fair value hierarchy:
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents (included in other long-term assets)
|
$
|
627
|
|
$
|
-
|
|
$
|
-
|
|
$
|
627
|
|
Fixed maturity investments
(included in cash and cash equivalents)
|
|
5,160
|
|
|
-
|
|
|
-
|
|
|
5,160
|
|
Other
|
|
-
|
|
|
37
|
|
|
-
|
|
|
37
|
|
Total assets at fair value
|
$
|
5,787
|
|
$
|
37
|
|
$
|
-
|
|
$
|
5,824
|
|
There have been no transfers in
or out of Level 3 during the three and six months ended December 31, 2017 and
2016, respectively.
Assets
and liabilities measured at fair value on a nonrecurring basis
The Company measures its assets
at fair value on a nonrecurring basis when they are deemed to be
other-than-temporarily impaired. The Company has no liabilities that are
measured at fair value on a nonrecurring basis. The Company reviews the carrying
values of its assets when events and circumstances warrant and considers all
available evidence in evaluating when declines in fair value are
other-than-temporary. The fair values of the Companys assets are determined
using the best information available, and may include quoted market prices,
market comparables, and discounted cash flow projections. An impairment charge
is recorded when the cost of the assets exceeds its fair value and the excess is
determined to be other-than-temporary. The Company has not recorded any
impairment charges during the reporting periods presented herein.
6. Equity-accounted investments and other long-term assets
Equity-accounted
investments
The Companys ownership
percentage in its equity-accounted investments as of December 31, 2017 and June
30, 2017, was as follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
DNI-4PL (Pty) Ltd (DNI)
|
|
45%
|
|
|
-
|
|
Bank Frick & Co AG (Bank Frick)
|
|
30%
|
|
|
-
|
|
Finbond Group Limited (Finbond)
|
|
27%
|
|
|
26%
|
|
KZ One Limited (formerly One Credit Limited) (KZ One)
|
|
25%
|
|
|
25%
|
|
SmartSwitch Namibia (Pty) Ltd (SmartSwitch
Namibia)
|
|
50%
|
|
|
50%
|
|
Walletdoc Proprietary Limited (Walletdoc)
|
|
20%
|
|
|
20%
|
|
On July 27, 2017, the Company
subscribed for 44,999,999 ordinary A shares in DNI, representing a 45% voting
and economic interest in DNI, for a subscription price of ZAR 945.0 million
($72.0 million) in cash. Under the terms of the Companys agreements with DNI,
the Company is required to pay to DNI an additional amount of up to ZAR 360
million ($29.1 million, translated at the foreign exchange rates applicable as
of December 31, 2017), in cash, subject to the achievement of certain
performance targets by DNI. The Company has not accrued for this contingent
consideration as of December 31, 2017. Net1 SA has pledged, among other things,
its entire equity interest in DNI as security for the South African facilities
described in Note 10 used to partially fund the acquisition of Cell C.
12
6. Equity-accounted investments and other long-term assets
(continued)
Equity-accounted
investments (continued)
On October 2, 2017, the Company
acquired a 30% interest in Bank Frick, a fully licensed bank based in Balzers,
Liechtenstein, from the Kuno Frick Family Foundation (Frick Foundation) for
approximately CHF 39.8 million ($40.9 million) in cash. On January 26, 2018, the
parties entered into an addendum to the Bank Frick shareholders agreement
pursuant to which the Company agreed to purchase an additional 5% in Bank Frick
from the Frick Foundation for CHF 10.4 million ($10.7 million) and the Frick
Foundation agreed to contribute approximately CHF 3.8 million ($3.9 million) to
Bank Frick to facilitate the development of Bank Fricks Fintech and blockchain
businesses. The Company has an option, exercisable until October 2, 2019, to
acquire an additional 35% interest in Bank Frick.
Bank Frick provides a complete
suite of banking services, with one of its key strategic pillars being the
provision of payment services and funding of financial technology opportunities.
Bank Frick holds acquiring licenses from both Visa and MasterCard and operates a
branch in London. The Company and Bank Frick have jointly identified several
funding opportunities, including for the Companys card issuing and acquiring
and transaction processing activities as well new opportunities in
cryptocurrency and blockchain. The investment in Bank Frick has the potential to
provide the Company with a stable, long-term and strategic relationship with a
fully-licensed bank.
As of December 31, 2017, the
Company owned 205,483,967 shares in Finbond. Finbond is listed on the
Johannesburg Stock Exchange and its closing price on December 29, 2017, the last
trading day of the quarter, was R3.39 per share. The aggregate value of the
Companys holding in Finbond on December 31, 2017 was R696.6 million ($56.3
million translated at exchange rates applicable as of December 31, 2017). On
July 13, 2017, the Company acquired an additional 3.6 million shares in Finbond
for approximately ZAR 11.2 million ($0.8 million). On July 17, 2017, the
Company, pursuant to its election, received an additional 4,361,532 shares in
Finbond as a capitalization share issue in lieu of a dividend.
On October 7, 2016, the Company
provided a loan of ZAR 139.2 million ($10.0 million, translated at the foreign
exchange rates applicable on the date of the loan) to Finbond in order to
partially finance Finbonds expansion strategy in the United States. The loan is
included in accounts receivable, net, on the Companys unaudited condensed
consolidated balance sheet as of December 31, 2017 and June 30, 2017. Interest
on the loan is payable quarterly in arrears and is based on the London Interbank
Offered Rate (LIBOR) in effect from time to time plus a margin of 12.00%. The
LIBOR rate was 1.4874% on December 31, 2017. The loan was initially set to
mature at the earlier of Finbond concluding a rights offer or February 28, 2017,
but the agreement was subsequently amended to extend the repayment date to on or
before February 28, 2018, or such later date as may be mutually agreed by the
parties in writing. The Company has the right to elect for the loan to be repaid
in either Finbond ordinary shares, including through a rights offering, (in
accordance with an agreed mechanism) or in cash. The Company must make a
repayment election within 180 days after the repayment date otherwise the
repayment election will automatically default to repayment in ordinary shares.
Finbond has undertaken to perform all necessary steps reasonably required to
effect the issuance of shares to settle the repayment of the loan if that option
is elected by the Company.
The Company has provided a credit
facility of up to $10 million in the form of convertible debt to KZ One, of
which $2 million had been drawn as of December 31, 2017 and June 30, 2017.
Summarized below is the movement
in equity-accounted investments during the six months ended December 31, 2017:
|
|
DNI
|
|
|
Bank Frick
|
|
|
Finbond
|
|
|
Other
(1)
|
|
|
Total
|
|
Investment in equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
$
|
-
|
|
$
|
-
|
|
$
|
18,961
|
|
$
|
6,742
|
|
$
|
25,703
|
|
Acquisition of shares
|
|
72,001
|
|
|
40,892
|
|
|
1,941
|
|
|
-
|
|
|
114,834
|
|
Stock-based
compensation
|
|
-
|
|
|
-
|
|
|
(207
|
)
|
|
-
|
|
|
(207
|
)
|
Comprehensive income (loss):
|
|
1,911
|
|
|
322
|
|
|
874
|
|
|
95
|
|
|
3,202
|
|
Other comprehensive loss
|
|
-
|
|
|
-
|
|
|
(227
|
)
|
|
-
|
|
|
(227
|
)
|
Equity accounted earnings (loss)
|
|
1,911
|
|
|
322
|
|
|
1,101
|
|
|
95
|
|
|
3,429
|
|
Share of net income (loss)
|
|
3,240
|
|
|
487
|
|
|
1,931
|
|
|
95
|
|
|
5,753
|
|
Amortization
of acquired intangible assets
|
|
(1,845
|
)
|
|
(219
|
)
|
|
-
|
|
|
-
|
|
|
(2,064
|
)
|
Deferred taxes on acquired
intangible assets
|
|
516
|
|
|
54
|
|
|
-
|
|
|
-
|
|
|
570
|
|
Dilution
resulting from corporate transactions
|
|
-
|
|
|
-
|
|
|
(830
|
)
|
|
-
|
|
|
(830
|
)
|
Dividends
received
|
|
(1,765
|
)
|
|
-
|
|
|
(1,096
|
)
|
|
(400
|
)
|
|
(3,261
|
)
|
Foreign currency adjustment
(2)
|
|
4,369
|
|
|
(169
|
)
|
|
1,134
|
|
|
(381
|
)
|
|
4,953
|
|
Balance as of December 31, 2017
|
$
|
76,516
|
|
$
|
41,045
|
|
$
|
21,607
|
|
$
|
6,056
|
|
$
|
145,224
|
|
13
6. Equity-accounted investments and other long-term assets
(continued)
Equity-accounted
investments (continued)
|
|
DNI
|
|
|
Bank Frick
|
|
|
Finbond
|
|
|
Other
(1)
|
|
|
Total
|
|
Investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,159
|
|
$
|
2,159
|
|
Foreign currency adjustment
(2)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9
|
|
|
9
|
|
Balance as of December 31, 2017
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,168
|
|
$
|
2,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
Total
|
|
Carrying amount as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
$
|
25,703
|
|
$
|
2,159
|
|
$
|
27,862
|
|
December
31, 2017
|
|
|
|
|
|
|
$
|
145,224
|
|
$
|
2,168
|
|
$
|
147,392
|
|
(1) Includes KZ One, SmartSwitch
Namibia and Walletdoc;
(2) The foreign
currency adjustment represents the effects of the fluctuations South African
rand, Nigerian naira and the Namibian dollar, and the U.S. dollar on the
carrying value.
Other long-term assets
Summarized below is the breakdown
of other long-term assets as of December 31, 2017, and June 30, 2017:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
Investment in 15% of Cell C (Pty) Limited
(Cell C), at fair value
(1)
|
$
|
161,695
|
|
$
|
-
|
|
Investment in 12% of One MobiKwik Systems Private Limited
(MobiKwik), at cost
|
|
27,598
|
|
|
26,317
|
|
Total equity
investments
|
|
189,293
|
|
|
26,317
|
|
Investment in 7.625% of Cedar Cellular Investment 1 (RF)
(Pty) Ltd 8.625% notes due in 2022
|
|
9,182
|
|
|
-
|
|
Total held to maturity
investments
|
|
9,182
|
|
|
-
|
|
Long-term portion of payments to agents
in South Korea amortized over the contract period
|
|
20,512
|
|
|
17,290
|
|
Policy holder assets
under investment contracts (Note 8)
|
|
664
|
|
|
627
|
|
Reinsurance assets under insurance
contracts Note 8)
|
|
212
|
|
|
191
|
|
Other long-term assets
|
|
5,600
|
|
|
5,271
|
|
Total other long-term assets
|
$
|
225,463
|
|
$
|
49,696
|
|
(1) The notes to the unaudited
condensed consolidated financial statements included in the Companys Form 10-Q
for the three months ended September 30, 2017, stated that the Cell C investment
was carried at cost rather than at fair value. As of September 30, 2017, the
fair value of the investment in Cell C approximated its cost.
On August 2, 2017, the Company,
through its subsidiary, Net1 Applied Technologies South Africa Proprietary
Limited (Net1 SA), purchased 75,000,000 class A shares of Cell C for an
aggregate purchase price of ZAR 2.0 billion ($151.0 million) in cash. The
Company funded the transaction through a combination of cash and the facilities
described in Note 14 to the Companys audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2017.
Net1 SA has pledged, among other things, its entire equity interest in Cell C as
security for the South African facilities described in Note 10 used to partially
fund the acquisition of Cell C.
The Company has signed a
subscription agreement with MobiKwik, which is Indias largest independent
mobile payments network, with over 65 million users and 2.0 million merchants.
Pursuant to the subscription agreement, the Company agreed to make an equity
investment of up to $40.0 million in MobiKwik over a 24 month period. The
Company made an initial $15.0 million investment in August 2016 and a further
$10.6 million investment in June 2017, under this subscription agreement. As of
June 30, 2017, the Company owned approximately 13.5% of MobiKwik. In August
2017, MobiKwik raised additional funding through the issuance of additional
shares to a new shareholder at a 90% premium to the Companys investments and
the Companys percentage ownership was diluted to 12.0%. In addition, through a
technology agreement, the Companys Virtual Card technology will be integrated
across all MobiKwik wallets in order to provide ubiquity across all merchants in
India, and as part of the Companys continued strategic relationship, a number
of our other products including our digital banking platform, are expected to be
deployed by MobiKwik over the next year.
In December 2017, the Company purchased, for cash, $9.0 million of notes, with a face value of $20.5 million, issued by Cedar Cellular Investment 1 (RF) (Pty) Ltd (“Cedar Cellular”), a Cell C shareholder, representing 7.625% of the issuance. The investment in the notes was made in connection with the Cell C investment discussed above. The notes bear interest semi-annually at 8.625% per annum on the face value and interest is payable in cash or deferred, at Cedar Cellular’s election, for payment on the maturity date. The notes mature on August 2, 2022. The notes are secured by all of Cedar Cellular’s investment in Cell C (59,000,000 class “A” shares) and the fair value of the Cell C shares pledged exceeds the carrying value of the notes as of December 31, 2017. The notes are listed on The International Stock Exchange. The Company has elected to treat the investment in the notes as held to maturity securities.
14
6. Equity-accounted investments and other long-term assets
(continued)
Available for sale and
held to maturity investments (continued)
Other long-term assets
(continued)
Summarized below are the
components of the Companys available for sale and held to maturity investments
as of December 31, 2017:
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
holding
|
|
|
holding
|
|
|
Carrying
|
|
|
|
Cost basis
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cell C
|
$
|
161,695
|
|
$
|
-
|
|
$
|
-
|
|
$
|
161,695
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cedar Cellular notes
|
|
9,000
|
|
|
182
|
|
|
-
|
|
|
9,182
|
|
Total
|
|
170,695
|
|
$
|
-
|
|
$
|
-
|
|
$
|
170,695
|
|
The Company had no available for
sale or held to maturity investments as of June 30, 2017.
Contractual maturities of
held to maturity investments
Summarized below are the
contractual maturities of the Companys held to maturity investment as of
December 31, 2017:
|
|
Cost
|
|
|
Estimated
|
|
|
|
basis
|
|
|
fair value
|
|
Due in one year or less
|
$
|
-
|
|
$
|
-
|
|
Due in one year through five years
|
|
9,000
|
|
|
9,182
|
|
Due in five years through ten years
|
|
-
|
|
|
-
|
|
Due after ten years
|
|
-
|
|
|
-
|
|
Total
|
$
|
9,000
|
|
$
|
9,182
|
|
7. Goodwill and intangible assets, net
Goodwill
Summarized below is the movement
in the carrying value of goodwill for the six months ended December 31, 2017:
|
|
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Gross value
|
|
|
impairment
|
|
|
value
|
|
Balance as of June 30, 2017
|
$
|
188,833
|
|
$
|
-
|
|
$
|
188,833
|
|
Foreign currency adjustment
(1)
|
|
10,662
|
|
|
-
|
|
|
10,662
|
|
Balance as of December 31, 2017
|
$
|
199,495
|
|
$
|
-
|
|
$
|
199,495
|
|
(1) Represents the effects of
the fluctuations between the South African rand, euro and the Korean won, and
the U.S. dollar on the carrying value.
Goodwill has been allocated to
the Companys reportable segments as follows:
|
|
South
|
|
|
|
|
|
Financial
|
|
|
|
|
|
|
African
|
|
|
International
|
|
|
inclusion and
|
|
|
|
|
|
|
transaction
|
|
|
transaction
|
|
|
applied
|
|
|
Carrying
|
|
|
|
processing
|
|
|
processing
|
|
|
technologies
|
|
|
value
|
|
Balance as of June 30, 2017
|
$
|
23,131
|
|
$
|
140,570
|
|
$
|
25,132
|
|
$
|
188,833
|
|
Foreign currency adjustment
(1)
|
|
1,282
|
|
|
8,310
|
|
|
1,070
|
|
|
10,662
|
|
Balance as of December 31, 2017
|
$
|
24,413
|
|
$
|
148,880
|
|
$
|
26,202
|
|
$
|
199,495
|
|
(1) Represents the effects of
the fluctuations between the South African rand, euro and the Korean won, and
the U.S. dollar on the carrying value.
15
7. Goodwill and intangible assets, net (continued)
Intangible assets, net
Carrying
value and amortization of intangible assets
Summarized below is the carrying
value and accumulated amortization of the intangible assets as of December 31,
2017 and June 30, 2017:
|
|
As of December 31, 2017
|
|
|
As of June 30, 2017
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
c
arrying
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
105,365
|
|
$
|
(75,089
|
)
|
$
|
30,276
|
|
$
|
99,209
|
|
$
|
(65,595
|
)
|
$
|
33,614
|
|
Software and
unpatented technology
|
|
35,227
|
|
|
(33,587
|
)
|
|
1,640
|
|
|
33,273
|
|
|
(31,112
|
)
|
|
2,161
|
|
FTS patent
|
|
3,098
|
|
|
(3,098
|
)
|
|
-
|
|
|
2,935
|
|
|
(2,935
|
)
|
|
-
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
Trademarks
|
|
7,361
|
|
|
(5,486
|
)
|
|
1,875
|
|
|
6,972
|
|
|
(4,759
|
)
|
|
2,213
|
|
Total
finite-lived intangible assets
|
|
155,557
|
|
|
(121,766
|
)
|
|
33,791
|
|
|
146,895
|
|
|
(108,907
|
)
|
|
37,988
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial institution
license
|
|
813
|
|
|
-
|
|
|
813
|
|
|
776
|
|
|
-
|
|
|
776
|
|
Total indefinite-lived intangible
assets
|
|
813
|
|
|
-
|
|
|
813
|
|
|
776
|
|
|
-
|
|
|
776
|
|
Total intangible assets
|
$
|
156,370
|
|
$
|
(121,766
|
)
|
$
|
34,604
|
|
$
|
147,671
|
|
$
|
(108,907
|
)
|
$
|
38,764
|
|
Aggregate amortization expense on
the finite-lived intangible assets for the three months ended December 31, 2017
and 2016, was approximately $2.9 million and $3.6 million, respectively.
Aggregate amortization expense on the finite-lived intangible assets for the six
months ended December 31, 2017 and 2016, was approximately $5.8 million and $6.5
million, respectively.
Future estimated annual
amortization expense for the next five fiscal years and thereafter, assuming
exchange rates that prevailed on December 31, 2017, is presented in the table
below. Actual amortization expense in future periods could differ from this
estimate as a result of acquisitions, changes in useful lives, exchange rate
fluctuations and other relevant factors.
Fiscal 2018
|
$
|
12,838
|
|
Fiscal 2019
|
|
11,369
|
|
Fiscal 2020
|
|
10,653
|
|
Fiscal 2021
|
|
4,582
|
|
Fiscal 2022
|
|
81
|
|
Thereafter
|
|
330
|
|
Total future estimated
annual amortization expense
|
$
|
39,853
|
|
8. Reinsurance assets and policyholder liabilities under
insurance and investment contracts
Reinsurance assets and
policyholder liabilities under insurance contracts
Summarized below is the movement
in reinsurance assets and policyholder liabilities under insurance contracts
during the six months ended December 31, 2017:
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
assets
(1)
|
|
|
contracts
(2)
|
|
Balance as of June 30, 2017
|
$
|
191
|
|
$
|
(1,611
|
)
|
Increase in policyholder benefits under
insurance contracts
|
|
(355
|
)
|
|
(4,932
|
)
|
Claims and
policyholders benefits under insurance contracts
|
|
366
|
|
|
4,884
|
|
Foreign currency
adjustment
(3)
|
|
10
|
|
|
(89
|
)
|
Balance
as of December 31, 2017
|
$
|
212
|
|
$
|
(1,748
|
)
|
|
(1)
|
Included in other long-term assets.
|
|
(2)
|
Included in other long-term liabilities.
|
|
(3)
|
Represents the effects of the fluctuations between the
ZAR against the U.S. dollar.
|
16
8. Reinsurance assets and policyholder liabilities under
insurance and investment contracts (continued)
Reinsurance assets and
policyholder liabilities under insurance contracts (continued)
The Company has agreements with
reinsurance companies in order to limit its losses from large insurance
contracts, however, if the reinsurer is unable to meet its obligations, the
Company retains the liability.
The Company determines its
reserves for policy benefits under its life insurance products using a model
which estimates claims incurred that have not been reported at the balance sheet
date. This model includes best estimate assumptions of experience plus
prescribed margins, as required in the markets in which these products are
offered, namely South Africa. The best estimate assumptions include those
assumptions related to mortality, morbidity and claim reporting delays, and the
main assumptions used to calculate the reserve for policy benefits include (i)
mortality and morbidity assumptions reflecting the companys most recent
experience and (ii) claim reporting delays reflecting Company specific and
industry experience. The values of matured guaranteed endowments were increased
by late payment interest (net of the asset management fee and allowance for tax
on investment income).
Assets and policyholder
liabilities under investment contracts
Summarized below is the movement
in assets and policyholder liabilities under investment contracts during the six
months ended December 31, 2017:
|
|
|
|
|
Investment
|
|
|
|
Assets
(1)
|
|
|
contracts
(2)
|
|
Balance as of June 30, 2017
|
$
|
627
|
|
$
|
(627
|
)
|
Increase in policyholder benefits under
investment contracts
|
|
2
|
|
|
(2
|
)
|
Foreign currency
adjustment
(3)
|
|
35
|
|
|
(35
|
)
|
Balance as of December
31, 2017
|
$
|
664
|
|
$
|
(664
|
)
|
|
(1)
|
Included in other long-term assets.
|
|
(2)
|
Included in other long-term liabilities.
|
|
(3)
|
Represents the effects of the fluctuations between the
ZAR against the U.S. dollar.
|
The Company does not offer any
investment products with guarantees related to capital or returns.
9. Short-term credit facilities
Summarized below are the
Companys available short-term facilities and the amounts utilized as of
December 31, 2017 and June 30, 2017, all amounts below were translated at the
exchange rates applicable as of the date presented:
|
|
December 31, 2017
|
|
|
June 30, 2017
|
|
|
|
Available
|
|
|
Utilized
|
|
|
Available
|
|
|
Utilized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Frick
(1)
|
$
|
68,405
|
|
$
|
35,553
|
|
$
|
66,579
|
|
$
|
16,579
|
|
South Africa:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nedbank Limited
|
|
32,400
|
|
|
10,190
|
|
|
30,600
|
|
|
10,000
|
|
Overdraft facility
(1)
|
|
20,200
|
|
|
-
|
|
|
19,109
|
|
|
-
|
|
Indirect
and derivative facilities (Note 18)
|
$
|
12,200
|
|
$
|
10,190
|
|
$
|
11,491
|
|
$
|
10,000
|
|
(1) Utilized amount included in
short-term facilities on the unaudited condensed consolidated balance sheets.
Europe
The Company has obtained EUR 40.0
million ($47.9 million) and CHF 20 million ($20.5 million) revolving overdraft
facilities from Bank Frick. As of December 31, 2017, the Company had utilized
approximately CHF 4.7 million ($4.8 million) of the CHF 20 million facility and
approximately EUR 25.7 million ($30.7 million) of the EUR 40 million facility.
All amounts have been translated at exchange rates applicable as of December 31,
2017. As of June 30, 2017, the Company had utilized approximately CHF 15.9
million ($16.6 million) of the CHF 20 million facility and had not utilized any
of the EUR 40 million facility. All amounts have been translated at exchange
rates applicable as of June 30, 2017.
As of December 31, 2017, the
interest rate on these facilities was 5.00%. The Company assigned all claims
against amounts due from Masterpayment customers, which have been financed from
the CHF 20 million facility, plus all secondary rights and preferential rights
as collateral for this facility to Bank Frick. Masterpayment was required to
open a primary business account with Bank Frick and this account has been
pledged to Bank Frick as collateral for the EUR 40 million facility. Net1 also
stands as guarantor for both of these facilities.
17
9. Short-term credit facilities (continued)
Europe (continued)
The initial term of the EUR 40
million facility ends on December 31, 2019 and will automatically be extended
for one additional year if not terminated with 12 months written notice. The CHF
20 million facility does not have a fixed term; however, it may be terminated by
either party at the end of a calendar month with six months written notice. In
January 2018, the Company settled the EUR 40 million and CHF 20 million
revolving overdraft facilities in full and these facilities will be cancelled
and Net1 will be released from the guarantees.
United States
On January 29, 2018, the Company
obtained a $10 million overdraft facility from Bank Frick. The interest rate on
the facilities is 4.50% plus 3 month US Dollar LIBOR and interest is payable
quarterly commencing on March 31, 2018. The facility has no fixed term, however,
it may be terminated by either party with six weeks written notice. The facility
is secured by a pledge of the Companys investment in Bank Frick.
South Africa
The aggregate amount of the
Companys short-term South African credit facility with Nedbank Limited was ZAR
400 million ($32.4 million) and consists of (i) a primary amount of up to ZAR
200 million ($16.2 million, and (ii) a secondary amount of up to ZAR 200 million
($16.2 million) (all amounts denominated in ZAR and translated at exchange rates
applicable as of December 31, 2017). The primary amount comprises an overdraft
facility of up to ZAR 50 million ($4.0 million) and indirect and derivative
facilities of up to ZAR 150 million ($12.2 million), which include letters of
guarantee, letters of credit and forward exchange contracts (all amounts
denominated in ZAR and translated at exchange rates applicable as of December
31, 2017).
As of December 31, 2017, 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 security for its repayment obligations under the
facility. A commitment fee of 0.35% per annum is payable on the monthly
unutilized amount of the overdraft portion of the short-term facility. The
Company is required to comply with customary non-financial covenants, including,
without limitation, covenants that restrict its ability to dispose of or
encumber its assets, incur additional indebtedness or engage in certain business
combinations.
As of each of December 31, 2017
and June 30, 2017, respectively, the Company had not utilized any of its
overdraft facility. As of December 31, 2017, the Company had utilized
approximately ZAR 126.0 million ($10.2 million, translated at exchange rates
applicable as of December 31, 2017) of its ZAR 150 million indirect and
derivative facilities to obtain foreign exchange contracts from the bank and to
enable the bank to issue guarantees, including stand-by letters of credit, in
order for the Company to honor its obligations to third parties requiring such
guarantees (refer to Note 18). As of June 30, 2017, the Company had utilized
approximately ZAR 130.5 million ($10.0 million, translated at exchange rates
applicable as of June 30, 2017) of its ZAR 150 million indirect and derivative
facilities.
10. Long-term borrowings
South Africa
The Companys South African
long-term facility agreement is described in Note 14 to the Companys audited
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended June 30, 2017. As of December 31, 2017, $70.4 million was
outstanding under the Companys South African long-term facility agreement, and
the carrying amount of the long-term borrowings approximated fair value. The
Johannesburg Interbank Agreed Rate (JIBAR) has been set at 7.158% for the
period to March 29, 2018.
On July 26, 2017, the Company
utilized ZAR 1.25 billion (approximately $92.2 million) of its South African
long-term facility to partially fund the acquisition of 15% of Cell C. Principal
repayments on the facilities are due in eight quarterly installments commencing
on September 29, 2017 and the Company has made scheduled repayments of ZAR 375.0
million ($28.5 million) during the six months ended December 31, 2017. The next
scheduled principal payment of ZAR 187.5 million ($15.2 million, translated at
exchange rates applicable as of December 31, 2017) will be made on March 31,
2018.
The Company paid a non-refundable
deal origination fee of approximately ZAR 6.3 million ($0.6 million) in August
2017. Interest expense incurred during the three and six months ended December
31, 2017, was $1.9 million and $3.6 million, respectively. During the three and
six months ended December 31, 2017, $0.1 million and $0.2 million, respectively,
of prepaid facility fees were amortized. All amounts are translated at exchange
rates applicable as of December 31, 2017.
18
10. Long-term borrowings (continued)
South Korea
The South Korean senior secured
loan facility is described in Note 14 to the Companys audited consolidated
financial statements included in its Annual Report on Form 10-K for the year
ended June 30, 2017. On 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.
On July 29, 2017, the Company
utilized approximately KRW 0.3 billion ($0.3 million) of its Facility C
revolving credit facility under the Companys South Korean long-term facility
agreement to pay interest due on the Companys South Korean senior secured loan
facility.
Interest expense incurred during
the three months ended December 31, 2017 and 2016, was $0.1 million and $0.2
million, respectively. Interest expense incurred during the six months ended
December 31, 2017 and 2016, was $0.4 million and $0.7 million, respectively.
Prepaid facility fees amortized during the three months ended December 31, 2017
and 2016, was $0.1 million and $0.03 million respectively. Prepaid facility fees
amortized during the six months ended December 31, 2017 and 2016, was $0.1
million and $0.07 million, respectively.
11. Capital structure
The following table presents
reconciliation between the number of shares, net of treasury, presented in the
unaudited condensed consolidated statement of changes in equity during the six
months ended December 31, 2017 and 2016, 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, 2017 and 2016, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Number of shares, net of treasury:
|
|
|
|
|
|
|
Statement of changes in equity
|
|
56,832,370
|
|
|
52,521,345
|
|
Less: Non-vested equity
shares that have not vested (Note 13)
|
|
(911,856
|
)
|
|
(904,356
|
)
|
Number
of shares, net of treasury excluding non-vested equity shares that have
not vested
|
|
55,920,514
|
|
|
51,616,989
|
|
Common stock repurchases
Executed
under share repurchase authorizations
The Company did not repurchase
any of its shares during the three and six months ended December 31, 2017, or
during the three months ended December 31, 2016.
In February 2016, the Companys
board of directors approved the replenishment of its share repurchase
authorization to repurchase up to an aggregate of $100 million of common stock.
The authorization has no expiration date. On June 29, 2016, the Company adopted
a Rule 10b5-1 trading plan for the purpose of repurchasing approximately $50
million of its common stock, which was included within the original share
repurchase authorization. During the six months ended December 31, 2016, the
Company repurchased 1,328,699 shares for approximately $12.7 million under its
share repurchase authorization.
19
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, 2017:
|
|
Six months ended
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
net
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
Accumulated
|
|
|
income on
|
|
|
|
|
|
|
foreign
|
|
|
asset
|
|
|
|
|
|
|
currency
|
|
|
available for
|
|
|
|
|
|
|
translation
|
|
|
sale, net of
|
|
|
|
|
|
|
reserve
|
|
|
tax
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
$
|
(162,569
|
)
|
$
|
-
|
|
$
|
(162,569
|
)
|
Movement in foreign currency
translation reserve related to equity accounted investment
|
|
(227
|
)
|
|
-
|
|
|
(227
|
)
|
Movement in foreign
currency translation reserve
|
|
39,437
|
|
|
-
|
|
|
39,437
|
|
Balance as
of December 31, 2017
|
$
|
(123,359
|
)
|
$
|
-
|
|
$
|
(123,359
|
)
|
There were no reclassifications
from accumulated other comprehensive loss to comprehensive (loss) income during
the three and six months ended December 31, 2017 or 2016.
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, 2017 and 2016:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
average
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
grant date
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
fair value
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2017
|
|
846,607
|
|
|
13.87
|
|
|
3.80
|
|
|
486
|
|
|
|
|
Forfeitures
|
|
(37,333
|
)
|
|
11.23
|
|
|
|
|
|
|
|
|
|
|
Outstanding December
31, 2017
|
|
809,274
|
|
|
13.99
|
|
|
3.15
|
|
|
1,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2016
|
|
2,077,524
|
|
|
15.92
|
|
|
3.65
|
|
|
926
|
|
|
|
|
Expired unexercised
|
|
(474,443
|
)
|
|
22.51
|
|
|
|
|
|
|
|
|
|
|
Outstanding December
31, 2016
|
|
1,603,081
|
|
|
13.98
|
|
|
4.25
|
|
|
1,685
|
|
|
|
|
No stock options were awarded
during the three and six months ended December 31, 2017 or 2016. There were no
forfeitures during the three months ended December 31, 2017. During the six
months ended December 31, 2017, employees forfeited 37,333 stock options. There
were no forfeitures during the three and six months ended December 31, 2016;
however, during the three and six months ended December 31, 2016, 474,443 stock
options awarded in August 2006, expired unexercised.
The following table presents
stock options vested and expecting to vest as of December 31, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
Vested and expecting to vest December 31,
2017
|
|
809,274
|
|
|
13.99
|
|
|
3.15
|
|
|
1,022
|
|
20
13. Stock-based compensation
Stock option and
restricted stock activity (continued)
Options
(continued)
These options have an exercise
price range of $7.35 to $24.46.
The following table presents
stock options that are exercisable as of December 31, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
Exercisable December 31, 2017
|
|
809,274
|
|
|
13.99
|
|
|
3.15
|
|
|
1,022
|
|
No stock options became
exercisable during the three months ended December 31, 2017 and 2016,
respectively. During the six months ended December 31, 2017 and 2016,
respectively, 105,982 and 154,803 stock options became exercisable. The Company
issues new shares to satisfy stock option exercises.
Restricted
stock
The following table summarizes
restricted stock activity for the six months ended December 31, 2017 and 2016:
|
|
Number of
|
|
|
Weighted
|
|
|
|
shares of
|
|
|
average grant
|
|
|
|
restricted
|
|
|
date fair value
|
|
|
|
stock
|
|
|
($000)
|
|
Non-vested June 30, 2017
|
|
505,473
|
|
|
11,173
|
|
Granted August 2017
|
|
588,594
|
|
|
4,288
|
|
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
|
|
|
|
|
|
|
|
|
Non-vested June 30, 2016
|
|
589,447
|
|
|
7,622
|
|
Granted August 2016
|
|
387,000
|
|
|
4,145
|
|
Vested August 2016
|
|
(72,091
|
)
|
|
735
|
|
Non-vested December
31, 2016
|
|
904,356
|
|
|
11,142
|
|
The August 2017 grants comprises
(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 August 2016 grants comprise 350,000 and 37,000
shares of restricted stock awarded to executive officers and non-employee
directors, respectively.
The 326,000 shares of restricted
stock will only vest if the recipient is employed by the Company on a full-time
basis on August 23, 2020. The 52,594 shares of restricted stock awarded to
non-employee directors will only vest if the recipient is a director on August
23, 2018.
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, the following conditions are satisfied: (1 the price of the
Companys common stock must equal or exceed certain agreed VWAP levels (as
described below) during a measurement period commencing on the date that it
files its Annual Report on Form 10-K for the fiscal year ended 2020 and ending
on December 31, 2020 and (2) the recipient is employed by the Company on a
full-time basis when the condition in (1) is met. If either of these conditions
is not satisfied, then none of the shares of restricted stock will vest and they
will be forfeited. The $23.00 price target represents an approximate 35%
increase, compounded annually, in the price of the Companys common stock on
Nasdaq over the $9.38 closing price on August 23, 2017.
21
13. Stock-based compensation (continued)
Stock option and
restricted stock activity (continued)
Restricted
stock (continued)
Performance
Conditions - Market Conditions - Restricted Stock Granted in August
2017(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 $19.0033%
-
At or above $19.00 and below $23.0066%
-
At or above $23.00100%
These 210,000 shares of
restricted stock are effectively forward starting knock-in barrier options with
multi-strike prices of zero. The fair value of these shares of restricted stock
was calculated utilizing a Monte Carlo simulation model which was developed for
the purpose of the valuation of these shares. For each simulated share price
path, the market share price condition was evaluated to determine whether or not
the shares would vest under that simulation. A standard Geometric Brownian
motion process was used in the forecasting of the share price instead of a jump
diffusion model, as the share price volatility was more stable compared to the
highly volatile regime of previous years. Therefore, the simulated share price
paths capture the idiosyncrasies of the observed Company share price
movements.
In scenarios where the shares do
not vest, the final vested value at maturity is zero. In scenarios where vesting
occurs, the final vested value on maturity is the share price on vesting date.
The value of the grant is the average of the discounted vested values. The
Company used an expected volatility of 44.0%, an expected life of approximately
three years, a risk-free rate ranging between 1.275% to 1.657% and no future
dividends in its calculation of the fair value of the restricted stock. The
estimated expected volatility was calculated based on the Companys 30 day VWAP
share price using the exponentially weighted moving average of returns.
Performance
Conditions - Restricted Stock Granted in August 2016
In August 2016 the Company
awarded 350,000 shares of restricted stock to executive officers. In May 2017,
the Company agreed to accelerate the vesting of 200,000 of these shares of
restricted stock granted to the Companys former Chief Executive Officer. These
remaining 150,000 shares continue to be subject to time-based and
performance-based vesting conditions. In order for any of the shares to vest,
the recipient must remain employed by the Company on a full-time basis on the
date that it files its Annual Report on Form 10-K for the fiscal year ended June
30, 2019. If that condition is satisfied, then the shares will vest based on the
level of Fundamental EPS the Company achieves for the fiscal year ended June 30,
2019 (2019 Fundamental EPS), as follows:
-
One-third of the shares will vest if the Company achieves 2019 Fundamental
EPS of $2.60;
-
Two-thirds of the shares will vest if the Company achieves 2019
Fundamental EPS of $2.80; and
-
All of the shares will vest if the Company achieves 2019 Fundamental EPS
of $3.00.
At levels of 2019 Fundamental EPS
greater than $2.60 and less than $3.00, the number of shares that will vest will
be determined by linear interpolation relative to 2019 Fundamental EPS of $2.80.
Any shares that do not vest in accordance with the above-described conditions
will be forfeited. All shares of restricted stock have been valued utilizing the
closing price of shares of the Companys common stock quoted on The Nasdaq
Global Select Market on the date of grant.
Performance
Conditions - Restricted Stock Granted in August 2015
In August 2015 the Company
awarded 301,537 shares of restricted stock to executive officers and employees.
These shares of restricted stock are subject to time-based and performance-based
vesting conditions. In order for any of the shares to vest, the recipient must
remain employed by the Company on a full-time basis on the date that it files
its Annual Report on Form 10-K for the fiscal year ended June 30, 2018. If that
condition is satisfied, then the shares will vest based on the level of
Fundamental EPS the Company achieves for the fiscal year ended June 30, 2018
(2018 Fundamental EPS), as follows:
-
One-third of the shares will vest if the Company achieves 2018 Fundamental
EPS of $2.88;
-
Two-thirds of the shares will vest if the Company achieves 2018
Fundamental EPS of $3.30; and
-
All of the shares will vest if the Company achieves 2018 Fundamental EPS
of $3.76.
At levels of 2018 Fundamental EPS
greater than $2.88 and less than $3.76, the number of shares that will vest will
be determined by linear interpolation relative to 2018 Fundamental EPS of $3.30.
Any shares that do not vest in accordance with the above-described conditions
will be forfeited. All shares of restricted stock have been valued utilizing the
closing price of shares of the Companys common stock quoted on The Nasdaq
Global Select Market on the date of grant.
22
13. Stock-based compensation (continued)
Stock option and
restricted stock activity (continued)
Restricted
stock (continued)
Performance
Conditions - Restricted Stock Granted in August 2015 (continued)
During the three and six months
ended December 31, 2016, the Company reversed the stock-based compensation
charge recognized to date related to the 301,537 shares of restricted stock
because it believed that it was unlikely that the 2018 Fundamental EPS target
would be achieved due to the dilutive impact on the fundamental EPS calculation
as a result of issuance of the approximate 10 million shares to the IFC in May
2016.
Vesting
of all non-employee director shares issued prior to June 30, 2017
Grants of restricted stock to
non-employee directors made during fiscal 2017, as well as those grants made in
prior years, originally vested over a three-year period. After the end of fiscal
2017, the Companys board consulted with Pay Governance, an independent
compensation consultant, and determined that one-year vesting of restricted
stock grants is a more common compensation practice for independent directors
and therefore, amended the terms of outstanding awards to vest one-year after
grant. As a result of this amendment, 61,995 shares of restricted stock held by
the non-employee directors as of June 30, 2017, were fully-vested.
Forfeiture
of restricted stock awarded in August and November 2014 that did not achieve
targeted market conditions
During the 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 the six months ended December 31, 2017 and 2016,
respectively, was $0.5 million and $0.7 million.
Stock-based
compensation charge and unrecognized compensation cost
The Company recorded a
stock-based compensation charge during each of the three months ended December
31, 2017 and 2016 of $0.6 million, which comprised:
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
Three months ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
608
|
|
$
|
-
|
|
$
|
608
|
|
Total three months ended December 31, 2017
|
$
|
608
|
|
$
|
-
|
|
$
|
608
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
635
|
|
$
|
-
|
|
$
|
635
|
|
Total three months ended December 31, 2016
|
$
|
635
|
|
$
|
-
|
|
$
|
635
|
|
23
13. Stock-based compensation (continued)
Stock-based compensation
charge and unrecognized compensation cost (continued)
The Company recorded a
stock-based compensation charge (reversal) during the six months ended December
31, 2017 and 2016 of $1.4 million and ($0.7 million), respectively, which
comprised:
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,138
|
|
$
|
-
|
|
$
|
1,138
|
|
Reversal of stock compensation charge related to
restricted stock
|
|
(1,827
|
)
|
|
-
|
|
|
(1,827
|
)
|
Total six months ended December 31, 2016
|
$
|
(689
|
)
|
$
|
-
|
|
$
|
(689
|
)
|
The stock-based compensation
charges have been allocated to selling, general and administration based on the
allocation of the cash compensation paid to the employees.
As of December 31, 2017, there
was no unrecognized compensation cost related to stock options because all stock
options granted have vested. As of December 31, 2017, the total unrecognized
compensation cost related to restricted stock awards was approximately $4.5
million, which the Company expects to recognize over approximately two years.
This amount excludes the total unrecognized compensation cost as of December 31,
2017, of approximately $3.9 million, related to restricted stock awards that the
Company expects will not vest due to it not achieving the 2018 Fundamental EPS.
As of December 31, 2017, the cumulative unrecorded stock-based compensation
charge related to these awards of restricted stock that the Company has
determined are expected not to vest and has not expensed in its consolidated
statement of operations is approximately $3.2 million (which amount includes the
$1.8 million reversed during the six months ended December 31, 2016).
As of December 31, 2017 and June
30, 2017, the Company recorded a deferred tax asset of approximately $0.7
million and $0.9 million, respectively, related to the stock-based compensation
charge recognized related to employees of Net1. 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, 2017 or 2016.
Accordingly, the two-class method presented below does not include the impact of
any redemption. The Companys redeemable common stock is described in Note 15 to
the Companys audited consolidated financial statements included in its Annual
Report on Form 10-K for the year ended June 30, 2017.
Basic earnings per share include
shares of restricted stock that meet the definition of a participating security
because these shares are eligible to receive non-forfeitable dividend
equivalents at the same rate as common stock. Basic earnings per share have been
calculated using the two-class method and basic earnings per share for the three
and six months ended December 31, 2017 and 2016, reflects only undistributed
earnings. The computation below of basic earnings per share excludes the net
income attributable to shares of unvested restricted stock (participating
non-vested restricted stock) from the numerator and excludes the dilutive impact
of these unvested shares of restricted stock from the denominator.
Diluted earnings per share have
been calculated to give effect to the number of shares of additional common
stock that would have been outstanding if the potential dilutive instruments had
been issued in each period. Stock options are included in the calculation of
diluted earnings per share utilizing the treasury stock method and are not
considered to be participating securities, as the stock options do not contain
non-forfeitable dividend rights.
24
14. Earnings per share (continued)
The calculation of diluted
earnings per share includes the dilutive effect of a portion of the restricted
stock granted to employees in August 2014, November 2014, August 2015, August
2016 and August 2017, as these shares of restricted stock are considered
contingently returnable shares for the purposes of the diluted earnings per
share calculation and the vesting conditions in respect of a portion of the
restricted stock had been satisfied. The vesting conditions for awards made in
August 2017, August 2016 and August 2015 are discussed in Note 13 and the
vesting conditions for all other awards are discussed in Note 18 to the
Companys audited consolidated financial statements included in its Annual
Report on Form 10-K for the year ended June 30, 2017.
The following table presents net
income attributable to Net1 (income from continuing operations) and the share
data used in the basic and diluted earnings per share computations using the
two-class method:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands except
|
|
|
(in thousands except
|
|
|
|
percent and
|
|
|
percent and
|
|
|
|
per share data)
|
|
|
per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Net1
|
$
|
9,622
|
|
$
|
18,641
|
|
$
|
29,105
|
|
$
|
43,273
|
|
Undistributed earnings
|
|
9,622
|
|
|
18,641
|
|
|
29,105
|
|
|
43,273
|
|
Percent allocated to common
shareholders (Calculation 1)
|
|
99%
|
|
|
98%
|
|
|
98%
|
|
|
98%
|
|
Numerator for earnings
per share: basic and diluted
|
$
|
9,481
|
|
$
|
18,296
|
|
$
|
28,664
|
|
$
|
42,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share: weighted-average common shares outstanding
|
|
55,923
|
|
|
51,549
|
|
|
55,902
|
|
|
52,301
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
52
|
|
|
122
|
|
|
50
|
|
|
106
|
|
Denominator for diluted earnings per share: adjusted weighted average
common
shares outstanding and assumed conversion
|
|
55,975
|
|
|
51,671
|
|
|
55,952
|
|
|
52,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.17
|
|
$
|
0.35
|
|
$
|
0.51
|
|
$
|
0.81
|
|
Diluted
|
$
|
0.17
|
|
$
|
0.35
|
|
$
|
0.51
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Calculation 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
outstanding (A)
|
|
55,923
|
|
|
51,549
|
|
|
55,902
|
|
|
52,301
|
|
Basic
weighted-average common shares outstanding and unvested restricted shares
expected to vest (B)
|
|
56,755
|
|
|
52,521
|
|
|
56,762
|
|
|
53,176
|
|
Percent allocated to common
shareholders (A) / (B)
|
|
99%
|
|
|
98%
|
|
|
98%
|
|
|
98%
|
|
Options to purchase 357,643
shares of the Companys common stock at prices ranging from $10.59 to $24.46 per
share were outstanding during the three and six months ended December 31, 2017,
but were not included in the computation of diluted earnings per share because
the options exercise price were greater than the average market price of the
Companys common stock. The options, which expire at various dates through
August 27, 2024, were still outstanding as of December 31, 2017.
15. Supplemental cash flow information
The following table presents
supplemental cash flow disclosures for the three and six months ended December
31, 2017 and 2016:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cash received from interest
|
$
|
4,562
|
|
$
|
5,050
|
|
$
|
9,848
|
|
$
|
9,335
|
|
Cash paid for interest
|
$
|
2,330
|
|
$
|
496
|
|
$
|
4,418
|
|
$
|
1,572
|
|
Cash paid for income taxes
|
$
|
18,613
|
|
$
|
22,564
|
|
$
|
20,649
|
|
$
|
24,067
|
|
25
15. Supplemental cash flow information (continued)
Treasury shares, at cost included
in the Companys condensed consolidated balance sheet as of June 30, 2016,
includes 47,056 shares of the Companys common stock acquired for approximately
$0.5 million which were paid for on July 1, 2016. The liability for this payment
was included in accounts payable on the Companys condensed consolidated balance
sheet as of June 30, 2016. The payment of approximately $0.5 million is included
in acquisition of treasury stock in the Companys condensed consolidated
statement of cash flows for the six months ended December 31, 2016.
16. Operating segments
The Company discloses segment
information as reflected in the management information systems reports that its
chief operating decision maker uses in making decisions and to report certain
entity-wide disclosures about products and services, major customers, and the
countries in which the entity holds material assets or reports material
revenues. A description of the Companys operating segments is contained in Note
23 to the Companys audited consolidated financial statements included in its
Annual Report on Form 10-K for the year ended June 30, 2017.
The reconciliation of the
reportable segments revenue to revenue from external customers for the three
months ended December 31, 2017 and 2016, is as follows:
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
From
|
|
|
|
Reportable
|
|
|
Inter-
|
|
|
external
|
|
|
|
Segment
|
|
|
segment
|
|
|
customers
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
$
|
59,862
|
|
$
|
5,395
|
|
$
|
54,467
|
|
International transaction processing
|
|
44,000
|
|
|
-
|
|
|
44,000
|
|
Financial inclusion and applied technologies
|
|
59,258
|
|
|
6,292
|
|
|
52,966
|
|
Total for the three months ended
December 31, 2016
|
$
|
163,120
|
|
$
|
11,687
|
|
$
|
151,433
|
|
The reconciliation of the
reportable segments revenue to revenue from external customers for the six
months ended December 31, 2017 and 2016, is as follows:
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
From
|
|
|
|
Reportable
|
|
|
Inter-
|
|
|
external
|
|
|
|
Segment
|
|
|
segment
|
|
|
customers
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
$
|
117,430
|
|
$
|
10,796
|
|
$
|
106,634
|
|
International transaction processing
|
|
90,190
|
|
|
-
|
|
|
90,190
|
|
Financial inclusion and applied technologies
|
|
122,800
|
|
|
12,558
|
|
|
110,242
|
|
Total for the six months ended
December 31, 2016
|
$
|
330,420
|
|
$
|
23,354
|
|
$
|
307,066
|
|
26
The Company does not allocate
interest income, interest expense or income tax expense to its reportable
segments. The Company evaluates segment performance based on segment operating
income before acquisition-related intangible asset amortization which represents
operating income before acquisition-related intangible asset amortization and
allocation of expenses allocated to Corporate/Eliminations, all under GAAP. The
reconciliation of the reportable segments measure of profit or loss to income
before income taxes for the three and six months ended December 31, 2017 and
2016, is as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Reportable segments measure of profit or
loss
|
$
|
21,216
|
|
$
|
33,383
|
|
$
|
52,784
|
|
$
|
67,931
|
|
Operating income: Corporate/Eliminations
|
|
(4,909
|
)
|
|
(7,794
|
)
|
|
(11,471
|
)
|
|
(10,161
|
)
|
Interest income
|
|
4,705
|
|
|
5,061
|
|
|
9,749
|
|
|
9,365
|
|
Interest expense
|
|
(2,325
|
)
|
|
(510
|
)
|
|
(4,446
|
)
|
|
(1,306
|
)
|
Income before income
taxes
|
$
|
18,687
|
|
$
|
30,140
|
|
$
|
46,616
|
|
$
|
65,829
|
|
The following tables summarize
segment information that is prepared in accordance with GAAP for the three and
six months ended December 31, 2017 and 2016:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
$
|
64,148
|
|
$
|
59,862
|
|
$
|
130,585
|
|
$
|
117,430
|
|
International
transaction processing
|
|
44,185
|
|
|
44,000
|
|
|
90,207
|
|
|
90,190
|
|
Financial inclusion and applied
technologies
|
|
54,131
|
|
|
59,258
|
|
|
108,444
|
|
|
122,800
|
|
Total
|
|
162,464
|
|
|
163,120
|
|
|
329,236
|
|
|
330,420
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
South African
transaction processing
|
|
13,470
|
|
|
15,372
|
|
|
25,802
|
|
|
28,920
|
|
International transaction processing
|
|
(4,991
|
)
|
|
3,904
|
|
|
325
|
|
|
9,721
|
|
Financial inclusion and
applied technologies
|
|
12,737
|
|
|
14,107
|
|
|
26,657
|
|
|
29,290
|
|
Subtotal: Operating
segments
|
|
21,216
|
|
|
33,383
|
|
|
52,784
|
|
|
67,931
|
|
Corporate/Eliminations
|
|
(4,909
|
)
|
|
(7,794
|
)
|
|
(11,471
|
)
|
|
(10,161
|
)
|
Total
|
|
16,307
|
|
|
25,589
|
|
|
41,313
|
|
|
57,770
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
1,087
|
|
|
1,137
|
|
|
2,240
|
|
|
2,294
|
|
International
transaction processing
|
|
4,381
|
|
|
5,521
|
|
|
9,013
|
|
|
11,357
|
|
Financial inclusion and applied
technologies
|
|
309
|
|
|
354
|
|
|
664
|
|
|
691
|
|
Subtotal:
Operating segments
|
|
5,777
|
|
|
7,012
|
|
|
11,917
|
|
|
14,342
|
|
Corporate/Eliminations
|
|
2,946
|
|
|
3,611
|
|
|
5,772
|
|
|
6,485
|
|
Total
|
|
8,723
|
|
|
10,623
|
|
|
17,689
|
|
|
20,827
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
South African
transaction processing
|
|
900
|
|
|
635
|
|
|
1,377
|
|
|
1,042
|
|
International transaction processing
|
|
892
|
|
|
2,167
|
|
|
1,798
|
|
|
4,966
|
|
Financial inclusion and
applied technologies
|
|
311
|
|
|
324
|
|
|
401
|
|
|
541
|
|
Subtotal: Operating
segments
|
|
2,103
|
|
|
3,126
|
|
|
3,576
|
|
|
6,549
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
2,103
|
|
$
|
3,126
|
|
$
|
3,576
|
|
$
|
6,549
|
|
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.
27
17. 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 or extraordinary items, for instance, changes in tax law,
valuation allowances and non-deductible transaction-related expenses that are
reported separately, and have an impact on the tax charge. The cumulative effect
of any change in the enacted tax rate, if and when applicable, on the opening
balance of deferred tax assets and liabilities is also included in the tax
charge as a discrete event in the interim period in which the enactment date
occurs.
For the three and six months
ended December 31, 2017, the tax charge was calculated using the expected
effective tax rate for the year. The Companys effective tax rate for the three
and six months ended December 31, 2017, was 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.
For the three and six months
ended December 31, 2016, the tax charge was calculated using the expected
effective tax rate for the year. The Companys effective tax rate for the three
and six months ended December 31, 2016, was 36.4% and 33.6%, respectively, and
was higher than the South African statutory rate as a result of additional taxes
payable resulting from the finalization of a tax review in South Korea,
non-deductible expenses and the tax impact attributable to distributions from
our South African subsidiary.
New U.S. Tax Legislation
On December 22, 2017, the Tax
Cuts and Jobs Act (the TCJA), was enacted into law, significantly modifying
U.S. federal tax laws. The TCJA reduces the federal statutory tax rate for
corporations from 35% to 21% effective from January 1, 2018, eliminates
alternative minimum tax for corporations, limits net operating loss
carryforwards (and eliminates carrybacks), limits the deductibility of interest
expense and transitions the system of U.S. international taxation of
corporations from a worldwide tax system to a territorial tax system.
Specifically, the transition to a territorial tax system is not expected to have
a significant impact on the Companys future consolidated effective tax rate as
it generates the majority of its taxable income in tax jurisdictions with tax
rates higher (mainly South Africa, where its income is taxed at 28%, and Korea,
where our income is taxed at 22%) than the new federal statutory tax rate of
21%.
The Company is currently
analyzing the impact of these changes; therefore, an estimate of the full impact
on deferred tax assets and liabilities, income tax expense, net income and other
affected accounts is not yet available. The Company has a June year end and
therefore it will use a blended rate of 28.10% for its tax year ending June 30,
2018, in the U.S. Certain of the Companys deferred tax assets and liabilities
which it expects will be utilized/ reversed during the period ended June 30,
2018, have been re-measured at this blended rate and those deferred taxes that
the Company believes will only be utilized/ reversed in subsequent tax years,
have been remeasured at 21%. The impact of the change in the tax rate on the
Companys deferred taxes included in income tax expense during the three and six
months ended December 31, 2017, was $0.3 million. The Company has also provided
an additional valuation allowance of approximately $0.6 million related to net
operating loss carryforwards that it does not believe will be utilized as a
result of the enactment of the TCJA.
The TCJA also requires a U.S.
shareholder of a specified foreign corporation to include a deemed repatriation
of foreign earnings as part of the transition to a territorial tax system;
however, the Company does not currently believe that it has a deemed
repatriation transition tax liability.
Uncertain tax positions
There were no significant changes
during the three and six months ended December 31, 2017. As of December 31,
2017, 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, 2017 and June
30, 2017, the Company had unrecognized tax benefits of $0.5 million and $0.5
million, respectively, all of which would impact the Companys effective tax
rate. The Company files income tax returns mainly in South Africa, South Korea,
Germany, Hong Kong, India, the United Kingdom, Botswana and in the U.S. federal
jurisdiction. As of December 31, 2017, the Companys South African subsidiaries
are no longer subject to income tax examination by the South African Revenue
Service for periods before June 30, 2013. The Company is subject to income tax
in other jurisdictions outside South Africa, none of which are individually
material to its financial position, statement of cash flows, or results of
operations.
28
18. Commitments and contingencies
Guarantees
The South African Revenue Service
and certain of the Companys customers, suppliers and other business partners
have asked the Company to provide them with guarantees, including standby
letters of credit, issued by a South African bank. The Company is required to
procure these guarantees for these third parties to operate its business.
Nedbank has issued guarantees to
these third parties amounting to ZAR 126.0 million ($10.2 million, translated at
exchange rates applicable as of December 31, 2017) and thereby utilizing part of
the Companys short-term facility. The Company in turn has provided nonrecourse,
unsecured counter-guarantees to Nedbank for ZAR 126.0 million ($10.2 million,
translated at exchange rates applicable as of December 31, 2017). The Company
pays commission of between 0.4% per annum to 2.0% per annum of the face value of
these guarantees and does not recover any of the commission from third
parties.
The Company has not recognized
any obligation related to these counter-guarantees in its consolidated balance
sheet as of December 31, 2017. The maximum potential amount that the Company
could pay under these guarantees is ZAR 126.0 million ($10.2 million, translated
at exchange rates applicable as of December 31, 2017). The guarantees have
reduced the amount available for borrowings under the Companys short-term
credit facility described in Note 9.
As described in Note 9, Net1 has
specifically provided guarantees to Bank Frick related to the EUR 40.0 million
($47.9 million) and CHF 20 million ($20.5 million) revolving overdraft
facilities provided to Masterpayment. As of December 31, 2017, Masterpayment had
utilized approximately $30.7 million of the EUR 40.0 million facility and $4.8
million of the CHF 20 million facility and these obligations are recorded as
short-term facilities in the Companys consolidated balance sheet. The maximum
potential amount that the Company could pay under the guarantees to Bank Frick
was $35.5 million. As described in Note 9, the overdraft facilities were repaid
in full in January 2018 and Net1 will be released from these guarantees once the
facilities have been cancelled.
Contingencies
The Company is subject to a
variety of insignificant claims and suits that arise from time to time in the
ordinary course of business.
Management currently believes
that the resolution of these matters, individually or in the aggregate, will not
have a material adverse impact on the Companys financial position, results of
operations or cash flows.
29
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should
be read in conjunction with our Annual Report on Form 10-K for the year ended
June 30, 2017, and the unaudited condensed consolidated financial statements and
the accompanying notes included in this Form 10-Q.
Forward-looking statements
Some of the statements in this
Form 10-Q constitute forward-looking statements. These statements relate to
future events or our future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause our or our industrys
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed, implied or inferred by these forward-looking statements.
Such factors include, among other things, those listed under Item 1A.Risk
Factors and elsewhere in our Annual Report on Form 10-K for the year ended June
30, 2017. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, could, would, expects,
plans, intends, anticipates, believes, estimates, predicts,
potential or continue or the negative of such terms and other comparable
terminology.
Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we do
not know whether we can achieve positive future results, levels of activity,
performance, or goals. Actual events or results may differ materially. We
undertake no obligation to update any of the forward-looking statements after
the date of this Form 10-Q to conform those statements to reflect the occurrence
of unanticipated events, except as required by applicable law.
You should read this Form 10-Q
and the documents that we reference herein and the documents we have filed as
exhibits hereto and thereto and which we have filed with the United States
Securities and Exchange Commission completely and with the understanding that
our actual future results, levels of activity, performance and achievements may
be materially different from what we expect. We qualify all of our
forward-looking statements by these cautionary statements.
Recent Developments
SASSA Update
Our current contract with SASSA
is scheduled to expire on March 31, 2018. SASSA and the expert panel appointed
by the court filed the regular progress reports in accordance with the
Constitutional Courts order. We have provided the expert panel with all the
information required from us.
On December 10, 2017, the
Minister in the Presidency, Jeff Radebe, announced that the Inter-ministerial
Committee appointed by the South African President to oversee the transition of
grant payments brokered a high-level cooperation agreement between the South
African Post Office, or SAPO, and SASSA, in terms of which SAPO will assume
responsibility for the distribution of social grants with effect from April 1,
2018.
On January 15, 2018, SASSA filed
a report with the Constitutional Court stating the following: The process of
continuing with cash payments will require a tender process, since SAPO has
indicated that they are unable to undertake the cash payment function within the
time period left, although they indicated that they can do this by December
2018. On January 12, 2018, SASSA issued a tender for the cash payment of grants
for a five year period which is due for submission on February 28, 2018. SAPO
issued three tenders on December 22, 2018, for the production of smart cards, a
multi-mode biometric verification engine and an integrated grant payments
system.
In the same report to the court,
SASSA also stated: A phase in period of at least 6 months would be required to
take over payments from the existing provider, CPS. This implies that the court
will have to be approached to extend the suspension of the invalidity of the
current payment contract until 30 September 2018, to allow for a managed phase
out process over a period of 6 months, which will see the new service provider
progressively taking more responsibility for payments, while CPS is still in the
background. This process will be managed by SASSA.
On February 6, 2018, SASSA filed a
notice of motion with the Constitutional Court, applying for the following
order: " Cash Paymaster Services (CPS) is to continue to provide cash payment
services to the social grant beneficiaries of SASSA who receive their social
grants by way of cash payments without personal identification numbers on an
interim basis and on the same terms and conditions as to payment as those
currently in place between CPS and SASSA for the period 1 April 2018 up to 30
September 2018, provided CPS shall be paid only in respect of such limited
services to be rendered to SASSA and in respect of this categories (sic) of
beneficiaries only."
In line with the recommendations
made by the expert panel in its second and third reports to the Constitutional
Court, we wrote a letter to SASSA on December 27, 2017 advocating the use of
commercial bank accounts, subsidized by SASSA to limit the impact of bank
charges, for the distribution of grant payments. SASSA has indicated that the
subsidization of bank accounts will be considered if agreement can be reached
with prospective participating banks regarding the functionality of the accounts
being offered. SASSA has since engaged the South African banks to determine the
feasibility of such an approach.
30
On February 6, 2018, CPS launched
an application with the Constitutional Court seeking an order declaring that CPS
is not prohibited by the Constitutional Courts order of March 17, 2017, from
participating in the tender for the provision of cash payment services for
social assistance issued by SASSA, because SASSA has previously reported that
CPS is not entitled to participate in any future tenders.
We continue to deliver our grant
payment solution in accordance with our current agreement and we have paid all
10.7 million social grant recipients, without interruption, every month since
our contract was extended in March 2017. We will continue to cooperate with
SASSA, the expert panel and any other delegated government entity to assist them
in finding a solution and ensuring a smooth handover to any entity legally
appointed to render the grant payment service.
Progress of financial
inclusion initiatives in South Africa
In June 2015, we began the
rollout of EPE, our business-to-consumer, or B2C, offering in South Africa. At
January 31, 2018, we had more than 2.3 million active EPE accounts, compared to
2.1 million at October 31, 2017. EPE is a fully transactional, low cost account
created to serve the needs of South Africas unbanked and under-banked
population, most of whom are social grant recipients. The EPE account offers
customers a comprehensive suite of financial and various financial inclusion
services, such as prepaid products, in an economical, convenient and secure
solution. EPE provides account holders with a UEPS-EMV debit MasterCard, mobile
and internet banking services, ATM and POS services, as well as loans, insurance
and other financial products and value-added services. However, SASSA and a
nonprofit organization continue to challenge the ability of beneficiaries to
freely transact with the grants that they receive as described under Item
1Legal Proceedings.
In order for us to address the
sizeable opportunity for EPE and related financial inclusion services in South
Africa, in fiscal 2016, we started to expand our brick-and-mortar financial
services branch infrastructure, which supplements our nationwide distribution,
with a UEPS/EMV-enabled ATM network, and hired a dedicated sales force. We
believe that the growth in our brick-and-mortar branch infrastructure has
reached saturation and therefore we have embarked on a program to increase our
financial services revenues through a roaming sales force equipped with a
UEPS/EMV-enabled card-issuing work station. In January 2018, we deployed 500
portable card-issuing working stations and employed 625 temporary staff to
achieve this objective. At January 31, 2018, we had 152 branches (October 31,
2017: 146), 1,073 ATMs (October 31, 2017: 1,008), and 2,394 (October 31, 2017:
1,925) dedicated employees, including the temporary staff.
During the seven months since
July 1, 2017, we sold approximately 109,000 new policies related to our simple,
low-cost life insurance products, in addition to the free basic life insurance
policy provided with every EPE account opened.
The graph below presents the
growth of the number of EPE cards and Smart Life policies:
31
Strategic investments
Investments
in Cell C Proprietary Limited and DNI-4PL Contracts Proprietary Limited
On August 2, 2017, we purchased
15% of Cell C, for an aggregate purchase price of ZAR 2.0 billion ($151.0
million)) in cash. Cell C is one of the three major licensed mobile operators in
South Africa with approximately 16 million active subscribers. We funded the
transaction through a combination of cash and credit facilities.
On July 27, 2017, we subscribed
for 44,999,999 ordinary A shares in DNI, representing a 45% voting and economic
interest in DNI, for a subscription price of ZAR 945.0 million ($72.0 million)
in cash. Under the terms of our agreements with DNI, we are required to pay to
DNI an additional amount of up to ZAR 360 million ($29.1 million, translated at
the foreign exchange rates applicable as of December 31, 2017), in cash, subject
to the achievement of certain performance targets by DNI.
The investments in Cell C and DNI
are consistent with our approach of leveraging our significant and established
infrastructures, and pursuing strategic acquisition opportunities or
partnerships to gain access to new markets or complementary products. We
identified the need to offer customers a truly bespoke, affordable and
comprehensive package that will go beyond basic telephony. An integrated
mobile-based digital product will therefore likely differentiate the offerings
of all the relevant stakeholders in this transaction including Net1. The Cell C
and DNI investments allow us to address the needs of the broader South African
population through ownership in the value chain including the network, payment,
product, distribution and hardware. We have pledged, among other things, our
entire equity interests in Cell C and DNI as security for the South African
facilities used to partially fund the acquisition of Cell C, refer also Note 10
to our unaudited condensed consolidated financial statements.
Investment
in Bank Frick
On October 2, 2017, we acquired a
30% interest in Bank Frick & Co AG, a fully licensed bank based in Balzers,
Liechtenstein, from the Kuno Frick Family Foundation for approximately CHF 39.8
million ($40.8 million translated at exchange rates applicable as of December
31, 2017). On January 26, 2018, the parties entered into an addendum to the Bank
Frick shareholders agreement pursuant to which we agreed to purchase an
additional 5% in Bank Frick from the Frick Foundation for CHF 10.43 million
($10.9 million) and the Frick Foundation agreed to contribute approximately CHF
3.8 million ($3.9 million) to Bank Frick to facilitate the development of Bank
Fricks Fintech and blockchain businesses. We have an option, exercisable until
October 2, 2019, to acquire an additional 35% interest in Bank Frick.
Bank Frick provides a complete
suite of banking services, with one of its key strategic pillars being the
provision of payment services and funding of financial technology opportunities.
Bank Frick holds acquiring licenses from both Visa and MasterCard and operates a
branch in London. We have jointly identified several funding opportunities,
including for our card issuing and acquiring, remittance and transaction
processing activities as well new opportunities in cryptocurrency and
blockchain. The investment in Bank Frick has the potential to provide us with a
stable, long term and strategic relationship with a fully licensed bank.
Masterpayment
Processing for Bitstamp
In November 2017, Masterpayment
was appointed as a new partner for credit card processing and acquiring for
cryptocurrency purchases for Bitstamp, a leading global digital currency
exchange and the largest Bitcoin exchange in the EU in terms of volume. This
partnership will allow Bitstamp customers to enjoy faster and more convenient
transactions, while maintaining the same high-caliber security and has resulted
in higher processing revenue as of a result of the increase in the number of
transactions processed by Masterpayment. Masterpayment transaction volumes in
December 2017 more than doubled compared to November 2017 as a result of its new
cryptocurrency processing initiatives.
Mastertrading - Exit from
Working Capital Financing and Supply Chain Solutions Business
During the second quarter of
fiscal 2018, we re-evaluated the operating performance and ongoing viability of
Masterpayments working capital financing and supply chain solutions offering
and have determined to exit this portion of its business. While we believe we
could scale this offering in the medium to long-term by focusing on customers
and industries outside our initial target market, this standalone offering does
not fit the International Payments Group strategy of providing payment solutions
and working capital to small and medium-sized merchants. In order to focus on
our stated international strategy, we have decided to wind-down the traditional
working capital finance book issued to non-payment solutions customers.
The working capital book has
reduced to $35.8 million, net of an allowance of $11.8 million allowance, as of
December 31, 2017, from $56.5 million, net of an allowance of $4.0 million, as
of September 2017. We have performed a detailed analysis of our U.S. and
European books and have identified two customers included on the U.S. book
servicing customers in the petroleum industry, totaling approximately $7.8
million, that we believe may not be able to settle their loan obligations due to
us. We had expected repayment of the amounts due by these customers by November
2017, however, repayments were not received and we have not been able to
negotiate a reasonable settlement plan with them.
32
While we continue to discuss
recovery alternatives and procedures with these customers and our lawyers, it
appears more likely than not at this stage that these customers will not be able
to settle their obligations due to us in full, or even in part. We have created
an allowance for doubtful working capital finance receivables related to the
total amount due to us by these two customers.
Regarding the European component
of the book, we have entered into an arrangement with Bank Frick under which
they purchased the remaining book of $35.8 million from us in January 2018 at
its face value. We have used the proceeds from this transaction to settle the
amounts due by us to Bank Frick under the EUR 40 million and CHF 20 million
revolving overdraft facilities in full and these facilities will be cancelled
and we will be released from our guarantees.
Critical Accounting Policies
Our unaudited condensed
consolidated financial statements have been prepared in accordance with U.S.
GAAP, which requires management to make estimates and assumptions about future
events that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities. As future events and their effects cannot
be determined with absolute certainty, the determination of estimates requires
managements judgment based on a variety of assumptions and other determinants
such as historical experience, current and expected market conditions and
certain scientific evaluation techniques.
Critical accounting policies are
those that reflect significant judgments or uncertainties, and potentially may
result in materially different results under different assumptions and
conditions. Management has identified the following critical accounting policies
that are described in more detail in our Annual Report on Form 10-K for the year
ended June 30, 2017:
-
Business combinations and the recoverability of goodwill;
-
Intangible assets acquired through acquisitions;
-
Deferred taxation;
-
Stock-based compensation; and
-
Accounts receivable and allowance for doubtful accounts receivable.
Recent accounting
pronouncements adopted
Refer to Note 1 to our unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements adopted, including the dates of adoption and the
effects on our condensed consolidated financial statements.
Recent accounting
pronouncements not yet adopted as of December 31, 2017
Refer to Note 1 to our unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements not yet adopted as of December 31, 2017, including the
expected dates of adoption and effects on our financial condition, results of
operations and cash flows.
New U.S. Tax Legislation
On December 22, 2017, the Tax
Cuts and Jobs Act, or TCJA, was enacted into law, significantly modifying U.S.
federal tax laws. The TCJA reduces the federal statutory tax rate for
corporations from 35% to 21% effective from January 1, 2018, eliminates
alternative minimum tax for corporations, limits net operating loss
carryforwards (and eliminates carrybacks), limits the deductibility of interest
expense and transitions the system of U.S. international taxation of
corporations from a worldwide tax system to a territorial tax system.
Specifically, the transition to a territorial tax system is not expected to have
a significant impact on our future consolidated effective tax rate as we
generate the majority of our taxable income in tax jurisdictions with tax rates
higher (mainly South Africa, where our income is taxed at 28%, and Korea, where
our income is taxed at 22%) than the new federal statutory tax rate of 21%.
We are currently analyzing the
impact of these changes on us; therefore, an estimate of the full impact on our
deferred tax assets and liabilities, income tax expense, net income and other
affected accounts is not yet available. We have a June year end and therefore we
will use a blended rate of 28.10% for our tax year ending June 30, 2018, in the
U.S. Certain of our deferred tax assets and liabilities which we expect will be
utilized/ reversed during the period ended June 30, 2018, have been re-measured
at this blended rate and those deferred taxes that we believe will only be
utilized/ reversed in subsequent tax years, have been re-measured at 21%. The
impact of the change in the tax rate on our deferred taxes included in our
income tax expense during the three and six months ended December 31, 2017, was
$0.3 million. We have also provided an additional valuation allowance of
approximately $0.6 million related to net operating loss carryforwards that we
do not believe will be utilized as a result of the enactment of the TCJA.
The TCJA also requires a U.S.
shareholder of a specified foreign corporation to include a deemed repatriation
of foreign earnings as part of the transition to a territorial tax system;
however, we do not currently believe that we have a deemed repatriation
transition tax liability.
33
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and
at the end of the periods presented were as follows:
Table 1
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
ZAR : $ average exchange rate
|
|
13.6318
|
|
|
13.9300
|
|
|
13.4025
|
|
|
14.0095
|
|
|
13.6147
|
|
Highest ZAR : $ rate during period
|
|
14.4645
|
|
|
14.4618
|
|
|
14.4645
|
|
|
14.8114
|
|
|
14.8114
|
|
Lowest ZAR : $ rate during period
|
|
12.3268
|
|
|
13.3634
|
|
|
12.3268
|
|
|
13.3000
|
|
|
12.4379
|
|
Rate at end of period
|
|
12.3689
|
|
|
13.7392
|
|
|
12.3689
|
|
|
13.7392
|
|
|
13.0535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KRW : $ average exchange rate
|
|
1,107
|
|
|
1,159
|
|
|
1,120
|
|
|
1,140
|
|
|
1,141
|
|
Highest KRW : $ rate during period
|
|
1,148
|
|
|
1,210
|
|
|
1,156
|
|
|
1,210
|
|
|
1,210
|
|
Lowest KRW : $ rate during period
|
|
1,067
|
|
|
1,100
|
|
|
1,067
|
|
|
1,092
|
|
|
1,092
|
|
Rate at end of period
|
|
1,067
|
|
|
1,207
|
|
|
1,067
|
|
|
1,207
|
|
|
1,144
|
|
34
KRW: US $ Exchange Rates
Translation exchange
rates for financial reporting purposes
We are required to translate our
results of operations from ZAR and KRW to U.S. dollars on a monthly basis. Thus,
the average rates used to translate this data for the three and six months ended
December 31, 2017 and 2016, vary slightly from the averages shown in the table
above. The translation rates we use in presenting our results of operations are
the rates shown in the following table:
Table 2
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Income and expense items: $1 = ZAR
|
|
13.6675
|
|
|
13.9434
|
|
|
13.4127
|
|
|
14.0292
|
|
|
13.6182
|
|
Income and expense items: $1 = KRW
|
|
1,107
|
|
|
1,172
|
|
|
1,125
|
|
|
1,152
|
|
|
1,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
12.3689
|
|
|
13.7392
|
|
|
12.3689
|
|
|
13.7392
|
|
|
13.0535
|
|
Balance sheet items: $1 = KRW
|
|
1,067
|
|
|
1,207
|
|
|
1,067
|
|
|
1,207
|
|
|
1,144
|
|
Results of operations
The discussion of our
consolidated overall results of operations is based on amounts as reflected in
our unaudited condensed consolidated financial statements, which are prepared in
accordance with U.S. GAAP. We analyze our results of operations both in U.S.
dollars, as presented in the consolidated financial statements, and
supplementally in ZAR, because ZAR is the functional currency of the entities
which contribute the majority of our profits and is the currency in which the
majority of our transactions are initially incurred and measured. Due to the
significant impact of currency fluctuations between the U.S. dollar and ZAR on
our reported results and because we use the U.S. dollar as our reporting
currency, we believe that the supplemental presentation of our results of
operations in ZAR is useful to investors to understand the changes in the
underlying trends of our business.
Fiscal 2018 includes the results
of Pros Software and C4U Malta for the entire period and excludes XeoHealth from
November 1, 2017 as a result of the sale of the business. Fiscal 2017 includes
the results of Pros Software from October 1, 2016, and C4U Malta from November
1, 2016.
Our operating segment revenue
presented in Results of operations by operating segment represents total
revenue per operating segment before inter-segment eliminations. Reconciliation
between total operating segment revenue and revenue presented in our unaudited
condensed consolidated financial statements is included in Note 16 to those
statements.
35
We analyze our business and
operations in terms of three inter-related but independent operating segments:
(1) South African transaction processing, (2) International transaction
processing and (3) Financial inclusion and applied technologies. In addition,
corporate and corporate office activities that are impracticable to ascribe
directly to any of the other operating segments, as well as any inter-segment
eliminations, are included in corporate/eliminations.
Second quarter of fiscal
2018 compared to second quarter of fiscal 2017
The following factors had a
significant influence on our results of operations during the second quarter of
fiscal 2018 as compared with the same period in the prior year:
-
Favorable impact from the weakening of the U.S. dollar against South
African Rand:
The U.S. dollar depreciated by 2% against the ZAR and 6%
against the KRW during the second quarter of fiscal 2018, which positively
impacted our reported results;
-
Growth in insurance and lending businesses:
Volume growth
and operating efficiencies in our insurance and lending businesses during the
second quarter of fiscal 2018, resulted in an improved contribution to our
financial inclusion revenue and operating income. The significant growth in
our South African lending book during December 2017 resulted in a substantial
increase in the allowance for doubtful finance loans receivable, in accordance
with our policy of providing for doubtful finance loans receivable at the time
that a loan is originated;
-
Ongoing contributions from EasyPay Everywhere:
EPE revenue
and operating income growth was driven primarily by ongoing EPE adoption as we
further expanded our customer base utilizing our ATM infrastructure;
-
Higher equity-accounted earnings related to DNI and Bank Frick:
The acquisition of 45% of DNI and 30% of Bank Frick positively
impacted our reported results by approximately $2.3 million, before
amortization of intangible assets, net of deferred taxes;
-
Higher revenue from Masterpayment and allowance for credit losses:
Masterpayment contributed higher revenues as a result of an increase
in processing activities, particularly related to its cryptocurrency
processing launched in December 2017, as well as from its working capital
financing and supply chain solutions. An allowance for credit losses related
to doubtful working capital finance receivable of $7.8 million was created. A
valuation allowance has been provided for any potential tax benefit from this
event as it is unlikely that this amount would be utilized for taxation
purposes;
-
Regulatory changes in South Korea pertaining to fees on card
transactions:
The regulations governing the fees that may be charged
on card transactions adversely impacted our revenues and operating income in
South Korea;
-
Lower net interest income resulting from investments in Cell C, DNI
and Bank Frick:
Interest income was $1.8 million lower as a result of
cash utilized to purchase non-controlling stakes in Cell C, DNI and Bank
Frick, while interest expense increased due to the South African lending
facility we obtained in August 2017 to partially fund our 15% investment in
Cell C;
-
Lower prepaid sales and ad hoc terminal sales:
The number of
transacting users purchasing prepaid products through our mobile channel
decreased due to security features introduced in fiscal 2017. In addition, our
results were adversely impacted by fewer ad hoc terminal sales; and
-
Lower transaction-related costs in fiscal 2018:
We incurred
$0.6 million in transaction-related costs in connection with various
investment initiatives pursued during the second quarter of fiscal 2018
compared with $1.2 million in fiscal 2017.
36
Consolidated overall
results of operations
This discussion is based on the
amounts prepared in accordance with U.S. GAAP.
The following tables show the
changes in the items comprising our statements of operations, both in U.S.
dollars and in ZAR:
|
|
In U.S. Dollars
|
|
Table 3
|
|
(U.S. GAAP)
|
|
|
|
Three months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
$
|
%
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
148,416
|
|
|
151,433
|
|
|
(2%
|
)
|
Cost of goods sold, IT processing, servicing and support
|
|
73,994
|
|
|
73,518
|
|
|
1%
|
|
Selling, general and administration
|
|
49,392
|
|
|
41,703
|
|
|
18%
|
|
Depreciation and amortization
|
|
8,723
|
|
|
10,623
|
|
|
(18%
|
)
|
Operating income
|
|
16,307
|
|
|
25,589
|
|
|
(36%
|
)
|
Interest income
|
|
4,705
|
|
|
5,061
|
|
|
(7%
|
)
|
Interest expense
|
|
2,325
|
|
|
510
|
|
|
356%
|
|
Income before income tax expense
|
|
18,687
|
|
|
30,140
|
|
|
(38%
|
)
|
Income tax expense
|
|
10,062
|
|
|
10,984
|
|
|
(8%
|
)
|
Net income before earnings from equity-accounted
investments
|
|
8,625
|
|
|
19,156
|
|
|
(55%
|
)
|
Earnings from equity-accounted investments
|
|
1,354
|
|
|
74
|
|
|
1,730%
|
|
Net income
|
|
9,979
|
|
|
19,230
|
|
|
(48%
|
)
|
Less net income attributable to
non-controlling interest
|
|
357
|
|
|
589
|
|
|
(39%
|
)
|
Net income attributable to us
|
|
9,622
|
|
|
18,641
|
|
|
(48%
|
)
|
|
|
In South African Rand
|
|
Table 4
|
|
(U.S. GAAP)
|
|
|
|
Three months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
2,028,475
|
|
|
2,111,493
|
|
|
(4%
|
)
|
Cost of goods sold, IT processing, servicing and support
|
|
1,011,312
|
|
|
1,025,093
|
|
|
(1%
|
)
|
Selling, general and administration
|
|
675,065
|
|
|
581,482
|
|
|
16%
|
|
Depreciation and amortization
|
|
119,222
|
|
|
148,120
|
|
|
(20%
|
)
|
Operating income
|
|
222,876
|
|
|
356,798
|
|
|
(38%
|
)
|
Interest income
|
|
64,306
|
|
|
70,568
|
|
|
(9%
|
)
|
Interest expense
|
|
31,777
|
|
|
7,111
|
|
|
347%
|
|
Income before income tax expense
|
|
255,405
|
|
|
420,255
|
|
|
(39%
|
)
|
Income tax expense
|
|
137,522
|
|
|
153,154
|
|
|
(10%
|
)
|
Net income before earnings from equity-accounted
investments
|
|
117,883
|
|
|
267,101
|
|
|
(56%
|
)
|
Earnings from equity-accounted investments
|
|
18,506
|
|
|
1,032
|
|
|
1,693%
|
|
Net income
|
|
136,389
|
|
|
268,133
|
|
|
(49%
|
)
|
Less net income attributable to
non-controlling interest
|
|
4,879
|
|
|
8,213
|
|
|
(41%
|
)
|
Net income attributable to us
|
|
131,510
|
|
|
259,920
|
|
|
(49%
|
)
|
The decrease in revenue was
primarily due to lower prepaid airtime sales, fewer ad hoc terminal sales, and a
lower contribution from KSNET due to regulatory changes in South Korea, which
was partially offset by an improved contribution from Masterpayment, more fees
generated from our EPE and ATM offerings, improved insurance activities, and a
modest increase in the number of SASSA UEPS/EMV beneficiaries paid.
In ZAR, the decrease in cost of
goods sold, IT processing, servicing and support was primarily due to fewer
prepaid airtime and ad hoc terminal sales, which was partially offset by
increases in goods and services purchased from third parties, higher expenses
incurred due to increased usage of the South African National Payment System by
beneficiaries and expenses incurred to operate our EPE and ATM offerings.
The increase in selling, general
and administration expense was primarily due to an allowance for doubtful
working capital finance receivables of $7.8 million, the impact of October 2017
annual salary increases for our South African employees, an increase in our
allowance for doubtful finance loans receivable resulting from a commensurate
increase in our lending book in the last lending cycle of calendar 2017, as well
as increases in goods and services purchased from third parties. These increases
were partially offset by fewer agent incentive costs paid in Korea due to weaker
trading conditions in fiscal 2018, lower executive remuneration and lower
transaction-related expenditures of $0.6 million, compared to $1.2 million in
the prior year.
37
Depreciation and amortization
decreased primarily due to lower overall amortization of intangible assets that
are fully amortized and tangible assets that are fully depreciated.
Our operating income margin for
second quarter of fiscal 2018 and 2017 was 11% and 17% respectively. Operating
income margin excluding the $7.8 million valuation allowance would have been 16%
in fiscal 2018. We discuss the components of operating income margin under
Results of operations by operating segment. The decrease was primarily
attributable to higher cost of goods sold, IT processing, servicing and support
relative to the reduction in revenue.
Interest on surplus cash
decreased to $4.7 million (ZAR 64.3 million) from $5.1 million (ZAR 70.6
million), due primarily to the lower average daily ZAR cash balances, partially
offset by interest earned on the loan to Finbond.
Interest expense increased to
$2.3 million (ZAR 31.8 million) from $0.5 million (ZAR 7.1 million), due
primarily to interest on the South African facility we obtained to partially
fund our investment in Cell C, partially offset by lower average long-term debt
balance on our South Korean debt as a result of repayment of the debt in full in
October 2017.
Fiscal 2018 tax expense was $10.1
million (ZAR 137.5 million) compared to $11.0 million (ZAR 153.2 million) in
fiscal 2017. Our effective tax rate for fiscal 2018, was 53.8% and 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 law. Our effective
tax rate for fiscal 2017, was 36.4% and was higher than the South African
statutory rate as a result of non-deductible expenses.
Earnings from equity-accounted
investments increased primarily due to the inclusion of our portion of DNI and
Bank Frick. The table below presents the relative earnings (loss) from our
equity accounted investments:
Table 5
|
|
Three months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
DNI
|
|
1,046
|
|
|
-
|
|
|
nm
|
|
Share of net income
|
|
1,832
|
|
|
-
|
|
|
nm
|
|
Amortization of
intangible assets, net of deferred tax
|
|
(786
|
)
|
|
-
|
|
|
nm
|
|
Bank Frick
|
|
322
|
|
|
-
|
|
|
nm
|
|
Share of net
income
|
|
487
|
|
|
-
|
|
|
nm
|
|
Amortization of intangible
assets, net of deferred tax
|
|
(165
|
)
|
|
-
|
|
|
nm
|
|
Finbond
|
|
-
|
|
|
-
|
|
|
nm
|
|
Other
|
|
(14
|
)
|
|
74
|
|
|
(119%
|
)
|
Earnings from
equity accounted investments
|
|
1,354
|
|
|
74
|
|
|
1,730%
|
|
38
Results of operations by operating segment
The composition of revenue and the contributions of our
business activities to operating income are illustrated below:
Table 6
|
|
In U.S. Dollars (U.S. GAAP)
|
|
|
|
Three months ended December 31,
|
|
|
|
2017
|
|
|
% of
|
|
|
2016
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
64,148
|
|
|
43%
|
|
|
59,862
|
|
|
40%
|
|
|
7%
|
|
International transaction processing
|
|
44,185
|
|
|
30%
|
|
|
44,000
|
|
|
29%
|
|
|
-
|
|
Financial inclusion and applied technologies
|
|
54,131
|
|
|
36%
|
|
|
59,258
|
|
|
39%
|
|
|
(9%
|
)
|
Subtotal:
Operating segments
|
|
162,464
|
|
|
109%
|
|
|
163,120
|
|
|
108%
|
|
|
-
|
|
Intersegment eliminations
|
|
(14,048
|
)
|
|
(9%
|
)
|
|
(11,687
|
)
|
|
(8%
|
)
|
|
20%
|
|
Consolidated revenue
|
|
148,416
|
|
|
100%
|
|
|
151,433
|
|
|
100%
|
|
|
(2%
|
)
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
13,470
|
|
|
83%
|
|
|
15,372
|
|
|
60%
|
|
|
(12%
|
)
|
International transaction processing
|
|
(4,991
|
)
|
|
(31%
|
)
|
|
3,904
|
|
|
15%
|
|
|
(228%
|
)
|
Financial inclusion and applied
technologies
|
|
12,737
|
|
|
78%
|
|
|
14,107
|
|
|
55%
|
|
|
(10%
|
)
|
Subtotal: Operating segments
|
|
21,216
|
|
|
130%
|
|
|
33,383
|
|
|
130%
|
|
|
(36%
|
)
|
Corporate/Eliminations
|
|
(4,909
|
)
|
|
(30%
|
)
|
|
(7,794
|
)
|
|
(30%
|
)
|
|
(37%
|
)
|
Consolidated operating income
|
|
16,307
|
|
|
100%
|
|
|
25,589
|
|
|
100%
|
|
|
(36%
|
)
|
Table 7
|
|
In South African Rand (U.S. GAAP)
|
|
|
|
Three months ended December 31,
|
|
|
|
2017
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
876,743
|
|
|
43%
|
|
|
834,680
|
|
|
40%
|
|
|
5%
|
|
International transaction processing
|
|
603,898
|
|
|
30%
|
|
|
613,510
|
|
|
29%
|
|
|
(2%
|
)
|
Financial inclusion and applied technologies
|
|
739,835
|
|
|
36%
|
|
|
826,258
|
|
|
39%
|
|
|
(10%
|
)
|
Subtotal:
Operating segments
|
|
2,220,476
|
|
|
109%
|
|
|
2,274,448
|
|
|
108%
|
|
|
(2%
|
)
|
Intersegment eliminations
|
|
(192,001
|
)
|
|
(9%
|
)
|
|
(162,955
|
)
|
|
(8%
|
)
|
|
18%
|
|
Consolidated
revenue
|
|
2,028,475
|
|
|
100%
|
|
|
2,111,493
|
|
|
100%
|
|
|
(4%
|
)
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
184,101
|
|
|
83%
|
|
|
214,338
|
|
|
60%
|
|
|
(14%
|
)
|
International transaction processing
|
|
(68,214
|
)
|
|
(31%
|
)
|
|
54,435
|
|
|
15%
|
|
|
(225%
|
)
|
Financial inclusion and applied
technologies
|
|
174,083
|
|
|
78%
|
|
|
196,700
|
|
|
55%
|
|
|
(11%
|
)
|
Subtotal: Operating segments
|
|
289,970
|
|
|
130%
|
|
|
465,473
|
|
|
130%
|
|
|
(38%
|
)
|
Corporate/Eliminations
|
|
(67,094
|
)
|
|
(30%
|
)
|
|
(108,675
|
)
|
|
(30%
|
)
|
|
(38%
|
)
|
Consolidated operating income
|
|
222,876
|
|
|
100%
|
|
|
356,798
|
|
|
100%
|
|
|
(38%
|
)
|
South African transaction
processing
The increase in segment revenue
was primarily due to higher EPE transaction revenue as a result of increased
usage of our ATMs, increased inter-segment transaction processing activities and
a modest increase in the number of social welfare grants distributed. Operating
income decreased primarily due to an increase in inter-segment charges, the
impact of annual salary increases granted to our South African employees in
October 2017 and increases in goods and services purchased from third parties.
These decreases were partially offset by the aforementioned increases in segment
revenue.
Our operating income margin for
the second quarter of fiscal 2018 and 2017 was 21% and 26%, respectively. Our
fiscal 2018 margin was adversely impacted by the annual salary increases granted
to our South African employees in October 2017 and increases in goods and
services purchased from third parties.
International
transaction-based activities
Segment revenue was slightly
higher during the second quarter of fiscal 2018, primarily due to ongoing impact
of regulatory changes in South Korea on KSNETs revenue, largely offset by
increased contributions from Masterpayment. Operating income during the second
quarter of fiscal 2018 was lower due to an allowance for doubtful working
capital finance receivable of $7.8 million, a decrease in revenue at KSNET and
losses incurred by all other major contributors to the segment. Operating income
and margin for the second quarter of fiscal 2017 was positively impacted by a
refund of approximately $0.8 million that had been paid several years ago in
connection with industry-wide litigation that has now been finalized.
39
Operating (loss) income margin
for the second quarter of fiscal 2018 and 2017 was (11%) and 9%, respectively.
Excluding the Mastertrading allowance for doubtful working capital finance
receivables, segment operating income and margin were $2.8 million and 6%
respectively.
Financial inclusion and
applied technologies
Financial inclusion and applied
technologies revenue decreased primarily due to fewer prepaid airtime and other
value added services sales, as well as lower ad hoc terminal sales, partially
offset by increased volumes in our insurance businesses, and an increase in
inter-segment revenues. Operating income was also impacted by these factors as
well as an increase in the allowance for doubtful finance loans receivable
resulting from a commensurate increase in our lending book in the last lending
cycle of calendar 2017.
Operating income margin for the
Financial inclusion and applied technologies segment was 24% during each of the
second quarter of fiscal 2018 and 2017, respectively, and was impacted by fewer
low margin prepaid product sales, improved revenues from our insurance
businesses and an increase in inter-segment revenues, offset by fewer ad hoc
terminal and annual salary increases granted to our South African employees and
the increase in the allowance for credit losses.
Corporate/Eliminations
Our corporate expenses generally
include acquisition-related intangible asset amortization; expenses incurred
related to acquisitions and investments pursued; expenditure related to
compliance with Sarbanes-Oxley Act of 2002; non-employee directors fees;
employee and executive bonuses; stock-based compensation; legal fees; audit
fees; directors and officers insurance premiums; telecommunications expenses;
property-related expenditures including utilities, rental, security and
maintenance; and elimination entries.
Our corporate expenses have
decreased primarily due to lower transaction-related expenditures, a $0.5
million profit related to the sale of XeoHealth, and lower executive
compensation, which was partially offset by a modest increases in U.S. dollar
denominated goods and services purchased from third parties and directors fees.
First half of fiscal 2018
compared to first half of fiscal 2017
The following factors had a
significant influence on our results of operations during the first half of
fiscal 2018 as compared with the same period in the prior year:
-
Favorable impact from the weakening of the U.S. dollar against South
African Rand:
The U.S. dollar depreciated by 4% against the ZAR during
the first half of fiscal 2018, which positively impacted our reported results;
-
Growth in insurance businesses:
Volume growth and operating
efficiencies in our insurance businesses during the first half of fiscal 2018,
resulted in an improved contribution to our financial inclusion revenue and
operating income. The significant growth in our South African lending book
during December 2017 resulted in a substantial increase in the allowance for
doubtful finance loans receivable, in accordance with our policy of providing
for doubtful finance loans receivable at the time that a loan is originated;
-
Ongoing contributions from EasyPay Everywhere:
EPE revenue
and operating income growth was driven primarily by ongoing EPE adoption as we
further expanded our customer base utilizing our ATM infrastructure;
-
Higher equity-accounted earnings related to DNI:
The
acquisition of 45% of DNI has positively impacted our reported results by
approximately $3.7 million, before amortization of intangible assets, net of
deferred taxes;
-
Higher revenue from Masterpayment and allowance for credit losses:
Masterpayment contributed higher revenues as a result of an increase
in processing activities, particularly related to its cryptocurrency
processing launched in December 2017, as well as from its working capital
financing and supply chain solutions. An allowance for credit losses related
to doubtful working capital finance receivable of $7.8 million was created. A
valuation allowance has been provided for any potential tax benefit from this
event as it is unlikely that this amount would be utilized for taxation
purposes;
-
Lower net interest income resulting from investments in Cell C, DNI
and Bank Frick:
Interest income was $2.9 million lower as a result of
cash utilized to purchase non-controlling stakes in Cell C, DNI and Bank
Frick, while interest expense increased due to the South African lending
facility we obtained in August 2017 to partially fund our 15% investment in
Cell C;
-
Regulatory changes in South Korea pertaining to fees on card
transactions:
The regulations governing the fees that may be charged
on card transactions adversely impacted our revenues and operating income in
South Korea;
-
Lower prepaid sales and ad hoc terminal sales:
The number of
transacting users purchasing prepaid products through our mobile channel
decreased due to security features introduced in fiscal 2017. In addition, our
results were adversely impacted by few ad hoc terminal sales; and
-
Higher transaction-related costs in fiscal 2018:
We incurred
$2.1 million in transaction-related costs in connection with various
acquisition and investment initiatives pursued during the first half of fiscal
2018 compared with $1.5 million in fiscal 2017.
40
Consolidated overall
results of operations
This discussion is based on the
amounts prepared in accordance with U.S. GAAP.
The following tables show the
changes in the items comprising our statements of operations, both in U.S.
dollars and in ZAR:
|
|
In U.S. Dollars
|
|
Table 8
|
|
(U.S. GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
300,974
|
|
|
307,066
|
|
|
(2%
|
)
|
Cost of goods sold, IT processing, servicing and support
|
|
148,646
|
|
|
148,298
|
|
|
0%
|
|
Selling, general and administration
|
|
93,326
|
|
|
80,171
|
|
|
16%
|
|
Depreciation and amortization
|
|
17,689
|
|
|
20,827
|
|
|
(15%
|
)
|
Operating income
|
|
41,313
|
|
|
57,770
|
|
|
(28%
|
)
|
Interest income
|
|
9,749
|
|
|
9,365
|
|
|
4%
|
|
Interest expense
|
|
4,446
|
|
|
1,306
|
|
|
240%
|
|
Income before income tax expense
|
|
46,616
|
|
|
65,829
|
|
|
(29%
|
)
|
Income tax expense
|
|
20,339
|
|
|
22,087
|
|
|
(8%
|
)
|
Net income before earnings from equity-accounted
investments
|
|
26,277
|
|
|
43,742
|
|
|
(40%
|
)
|
Earnings from equity-accounted investments
|
|
3,429
|
|
|
733
|
|
|
368%
|
|
Net income
|
|
29,706
|
|
|
44,475
|
|
|
(33%
|
)
|
Less net income attributable to
non-controlling interest
|
|
601
|
|
|
1,202
|
|
|
(50%
|
)
|
Net income attributable to us
|
|
29,105
|
|
|
43,273
|
|
|
(33%
|
)
|
|
|
In South African Rand
|
|
Table 9
|
|
(U.S. GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
4,036,874
|
|
|
4,307,891
|
|
|
(6%
|
)
|
Cost of goods sold, IT processing, servicing and support
|
|
1,993,745
|
|
|
2,080,503
|
|
|
(4%
|
)
|
Selling, general and administration
|
|
1,251,754
|
|
|
1,124,735
|
|
|
11%
|
|
Depreciation and amortization
|
|
237,257
|
|
|
292,187
|
|
|
(19%
|
)
|
Operating income
|
|
554,118
|
|
|
810,466
|
|
|
(32%
|
)
|
Interest income
|
|
130,760
|
|
|
131,383
|
|
|
(0%
|
)
|
Interest expense
|
|
59,633
|
|
|
18,322
|
|
|
225%
|
|
Income before income tax expense
|
|
625,245
|
|
|
923,527
|
|
|
(32%
|
)
|
Income tax expense
|
|
272,801
|
|
|
309,863
|
|
|
(12%
|
)
|
Net income before earnings from equity-accounted
investments
|
|
352,444
|
|
|
613,664
|
|
|
(43%
|
)
|
Earnings from equity-accounted investments
|
|
45,992
|
|
|
10,283
|
|
|
347%
|
|
Net income
|
|
398,436
|
|
|
623,947
|
|
|
(36%
|
)
|
Less net income attributable to
non-controlling interest
|
|
8,061
|
|
|
16,863
|
|
|
(52%
|
)
|
Net income attributable to us
|
|
390,375
|
|
|
607,084
|
|
|
(36%
|
)
|
The decrease in revenue was
primarily due to lower prepaid airtime sales, fewer ad hoc terminal sales, and a
lower contribution from KSNET due to regulatory changes in South Korea, which
was partially offset by an improved contribution from Masterpayment and Transact
24, more fees generated from our EPE and ATM offerings, improved insurance
activities, and an increase in the number of SASSA UEPS/EMV beneficiaries paid.
In ZAR, the decrease in cost of
goods sold, IT processing, servicing and support was primarily due to fewer
prepaid airtime and ad hoc terminal sales, which was partially offset by
increases in goods and services purchased from third parties, higher expenses
incurred due to increased usage of the South African National Payment System by
beneficiaries, and expenses incurred to operate our EPE and ATM offerings.
41
Our selling, general and
administration expense increased primarily due to an allowance for doubtful
working capital finance receivables of $7.8 million, the impact of October 2017
annual salary increases for our South African employees, an increase in our
allowance for doubtful finance loans receivable, higher transaction related
expenditures, and an increase in goods and services purchased from third
parties. These increases were partially offset by fewer agent incentive costs
paid in Korea due to weaker trading conditions in fiscal 2018 and lower
executive remuneration in fiscal 2018. Fiscal 2017 includes $1.8 million related
to the reversal of stock-based compensation charges related to awards of
restricted stock with performance conditions which we believe will not be
achieved.
Depreciation and amortization
decreased primarily due to lower overall amortization of intangible assets that
are fully amortized and tangible assets that are fully depreciated.
Our operating income margin for
first half of fiscal 2018 and 2017 was 14% and 19% respectively. Excluding the
$7.8 million valuation allowance for Masterpayment, fiscal 2018 operating income
margin would have been 16%. We discuss the components of operating income margin
under Results of operations by operating segment. The decrease was primarily
attributable to higher cost of goods sold, IT processing, servicing and support
relative to the reduction in revenue.
In ZAR, interest on surplus cash
decreased to $9.6 million (ZAR 130.8 million) from $9.4 million (ZAR 131.4
million), due primarily to lower average daily ZAR cash balances, partially
offset by interest earned on the loan to Finbond.
Interest expense increased to
$4.4 million (ZAR 59.6 million) from $1.3 million (ZAR 18.3 million), due
primarily to interest on the South African facility we obtained to partially
fund our investment in Cell C, somewhat offset by lower average long-term debt
balance on our South Korean debt and a lower interest rate.
Fiscal 2018 tax expense was $20.3
million (ZAR 272.8 million) compared to $21.9 million (ZAR 239.7 million) in
fiscal 2017. Our effective tax rate for fiscal 2018, was 43.6% and 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 law. Our effective
tax rate for fiscal 2017, was 33.6% and was higher than the South African
statutory rate as a result of non-deductible expenses and the tax impact
attributable to distributions from our South African subsidiary.
Earnings from equity-accounted
investments increased primarily due to the inclusion of our portion of DNI and
Bank Frick and an increase, in USD, in Finbonds net income. Finbond is listed
on the Johannesburg Stock Exchange and reports its six-month results during our
first half and its annual results during our fourth quarter. The table below
presents the relative earnings (loss) from our equity accounted investments:
Table 10
|
|
Six months ended December 31,
|
|
|
|
2017
|
|
|
|
2016
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
|
change
|
|
DNI
|
|
1,911
|
|
|
|
-
|
|
|
nm
|
|
Share of net income
|
|
3,240
|
|
|
|
-
|
|
|
nm
|
|
Amortization of
intangible assets, net of deferred tax
|
|
(1,329
|
)
|
|
|
-
|
|
|
nm
|
|
Bank Frick
|
|
322
|
|
|
|
-
|
|
|
nm
|
|
Share of net
income
|
|
487
|
|
|
|
-
|
|
|
nm
|
|
Amortization of intangible
assets, net of deferred tax
|
|
(165
|
)
|
|
|
-
|
|
|
nm
|
|
Finbond
|
|
1,101
|
|
|
|
930
|
|
|
18%
|
|
Other
|
|
95
|
|
|
|
(197
|
)
|
|
(148%
|
)
|
Earnings from
equity accounted investments
|
|
3,429
|
|
|
|
733
|
|
|
368%
|
|
42
Results of operations by
operating segment
The composition of revenue and
the contributions of our business activities to operating income are illustrated
below:
Table 11
|
|
In U.S. Dollars (U.S. GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2017
|
|
|
% of
|
|
|
2016
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
130,585
|
|
|
43%
|
|
|
117,430
|
|
|
38%
|
|
|
11%
|
|
International transaction processing
|
|
90,207
|
|
|
30%
|
|
|
90,190
|
|
|
29%
|
|
|
-
|
|
Financial inclusion and applied technologies
|
|
108,444
|
|
|
36%
|
|
|
122,800
|
|
|
40%
|
|
|
(12%
|
)
|
Subtotal:
Operating segments
|
|
329,236
|
|
|
109%
|
|
|
330,420
|
|
|
107%
|
|
|
-
|
|
Intersegment eliminations
|
|
(28,262
|
)
|
|
(9%
|
)
|
|
(23,354
|
)
|
|
(7%
|
)
|
|
21%
|
|
Consolidated revenue
|
|
300,974
|
|
|
100%
|
|
|
307,066
|
|
|
100%
|
|
|
(2%
|
)
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
25,802
|
|
|
62%
|
|
|
28,920
|
|
|
50%
|
|
|
(11%
|
)
|
International transaction processing
|
|
325
|
|
|
1%
|
|
|
9,721
|
|
|
17%
|
|
|
(97%
|
)
|
Financial inclusion and applied
technologies
|
|
26,657
|
|
|
65%
|
|
|
29,290
|
|
|
51%
|
|
|
(9%
|
)
|
Subtotal: Operating segments
|
|
52,784
|
|
|
128%
|
|
|
67,931
|
|
|
118%
|
|
|
(22%
|
)
|
Corporate/Eliminations
|
|
(11,471
|
)
|
|
(28%
|
)
|
|
(10,161
|
)
|
|
(18%
|
)
|
|
13%
|
|
Consolidated operating income
|
|
41,313
|
|
|
100%
|
|
|
57,770
|
|
|
100%
|
|
|
(28%
|
)
|
Table 12
|
|
In South African Rand (U.S. GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2017
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
1,751,497
|
|
|
43%
|
|
|
1,647,449
|
|
|
38%
|
|
|
6%
|
|
International transaction processing
|
|
1,209,919
|
|
|
30%
|
|
|
1,265,294
|
|
|
29%
|
|
|
(4%
|
)
|
Financial inclusion and applied technologies
|
|
1,454,527
|
|
|
36%
|
|
|
1,722,786
|
|
|
40%
|
|
|
(16%
|
)
|
Subtotal:
Operating segments
|
|
4,415,943
|
|
|
109%
|
|
|
4,635,529
|
|
|
107%
|
|
|
(5%
|
)
|
Intersegment eliminations
|
|
(379,069
|
)
|
|
(9%
|
)
|
|
(327,638
|
)
|
|
(7%
|
)
|
|
16%
|
|
Consolidated revenue
|
|
4,036,874
|
|
|
100%
|
|
|
4,307,891
|
|
|
100%
|
|
|
(6%
|
)
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
346,074
|
|
|
62%
|
|
|
405,724
|
|
|
50%
|
|
|
(15%
|
)
|
International transaction processing
|
|
4,359
|
|
|
1%
|
|
|
136,378
|
|
|
17%
|
|
|
(97%
|
)
|
Financial inclusion and applied
technologies
|
|
357,542
|
|
|
65%
|
|
|
410,915
|
|
|
51%
|
|
|
(13%
|
)
|
Subtotal: Operating segments
|
|
707,975
|
|
|
128%
|
|
|
953,017
|
|
|
118%
|
|
|
(26%
|
)
|
Corporate/Eliminations
|
|
(153,857
|
)
|
|
(28%
|
)
|
|
(142,551
|
)
|
|
(18%
|
)
|
|
8%
|
|
Consolidated operating income
|
|
554,118
|
|
|
100%
|
|
|
810,466
|
|
|
100%
|
|
|
(32%
|
)
|
South African transaction
processing
The increase in segment revenue
was primarily due to higher EPE transaction revenue as a result of increased
usage of our ATMs, increased inter-segment transaction processing activities and
a modest increase in the number of social welfare grants distributed. Operating
income decreased primarily due to an increase in inter-segment charges, the
impact of annual salary increases granted to our South African employees in
October 2017 and increases in goods and services purchased from third parties,
partially offset by higher EPE transaction revenue as a result of increased
usage of our ATMs, increased inter-segment transaction processing activities and
a modest increase in the number of social welfare grants distributed.
Our operating income margin for
the first half of fiscal 2018 and 2017 was 20% and 25%, respectively. Our fiscal
2018 margin was adversely impacted by the annual salary increases granted to our
South African employees in October 2017 and increases in goods and services
purchased from third parties.
International
transaction-based activities
Segment revenue was slightly
higher during the first half of fiscal 2018, primarily due to increased
contributions from Masterpayment and Transact24, largely offset by the ongoing
impact of regulatory changes in South Korea on KSNETs revenue. Operating income
during the first half of fiscal 2018 was lower due to an allowance for doubtful
working capital finance receivable of $7.8 million, a decrease in revenue at
KSNET, partially offset by a smaller loss incurred by Masterpayment.
43
Operating income and margin for
the first half of fiscal 2017, was also positively impacted by a refund of
approximately $0.8 million that had been paid several years ago in connection
with industry-wide litigation that has now been finalized.
Operating income margin for the
first half of fiscal 2018 and 2017 was 0% and 11%, respectively. Excluding the
Mastertrading allowance for doubtful working capital finance receivables,
segment operating income and margin were $8.1 million and 9% respectively.
Financial inclusion and
applied technologies
Financial inclusion and applied
technologies revenue decreased primarily due to fewer prepaid airtime and other
value added services sales, as well as lower ad hoc terminal sales, partially
offset by increased volumes in our insurance businesses, and an increase in
inter-segment revenues. Operating income was also impacted by these factors as
well as an increase in the allowance for doubtful finance loans receivable
resulting from a commensurate increase in our lending book in the last lending
cycle of calendar 2017.
Operating income margin for the
Financial inclusion and applied technologies segment was 25% and 24% during the
first half of fiscal 2018 and 2017, respectively, and has increased primarily
due to fewer low margin prepaid product sales, improved revenues from our
insurance businesses and an increase in inter-segment revenues, offset by fewer
ad hoc terminal and annual salary increases granted to our South African
employees and the increase in the allowance for credit losses.
Corporate/Eliminations
Our corporate expenses have
increased primarily due to higher transaction-related expenditures and modest
increases in U.S. dollar denominated goods and services purchased from third
parties and directors fees. Our corporate expenses for the first half of fiscal
2017, includes the reversal of $1.8 million of stock-based compensation charges.
Liquidity and Capital Resources
At December 31, 2017, our cash
and cash equivalents were $64.9 million and comprised mainly KRW-denominated
balances of KRW 28.1 billion ($24.4 million), ZAR-denominated balances of ZAR
272.0 million ($22.0 million), U.S. dollar-denominated balances of $11.4
million, and other currency deposits, primarily euros, of $7.1 million, all
amounts translated at exchange rates applicable as of December 31, 2017. The
decrease in our cash balances from June 30, 2017, was primarily due to our
investments in DNI, Bank Frick, Cell C and a $9 million listed note, scheduled
repayments of our South African long-term debt, unscheduled repayment of Korean
debt in full, growth in our South African lending book, and capital
expenditures, which was partially offset by cash generated by most of our core
businesses.
We currently believe that our
cash and credit facilities are sufficient to fund our future operations for at
least the next four quarters.
We generally invest the surplus
cash held by our South African operations in overnight call accounts that we
maintain at South African banking institutions, and surplus cash held by our
non-South African companies in U.S. dollar denominated money market accounts. We
have invested surplus cash in Korea in short-term investment accounts at Korean
banking institutions.
Historically, we have financed
most of our operations, research and development, working capital, capital
expenditures and acquisitions through internally generated cash. When
considering whether to borrow under our financing facilities, we consider the
cost of capital, cost of financing, opportunity cost of utilizing surplus cash
and availability of tax efficient structures to moderate financing costs.
We have a short-term South
African credit facility with Nedbank of ZAR 400 million ($32.3 million), which
consists of (i) a primary amount of up to ZAR 200 million, and (ii) a secondary
amount of up to ZAR 200 million. The primary amounts comprise an overdraft
facility of up to ZAR 50 million and indirect and derivative facilities of up to
ZAR 150 million, which include letters of guarantee, letters of credit and
forward exchange contracts.
As of December 31, 2017, we had
used none of the overdraft and ZAR 126.0 million ($10.2 million, translated at
exchange rates applicable as of December 31, 2017) of the indirect and
derivative facilities to obtain foreign exchange contracts and to support
guarantees issued by Nedbank to various third parties on our behalf.
We obtained EUR 40.0 million
($47.9 million) and CHF 20 million ($20.5 million) revolving overdraft
facilities from Bank Frick. As of December 31, 2017, we had utilized
approximately EUR 25.7 million ($30.7 million) of the EUR 40 million facility
and CHF 4.7 million ($4.8 million) of the CHF 20 million facility. As of
December 31, 2017, the interest rate on each of these facilities was 5.00%. We
have assigned all claims against amounts due from Masterpayment customers, which
have been financed from the CHF 20 million facility, plus all secondary rights
and preferential rights as collateral for this facility to Bank Frick. Our
Masterpayment subsidiary was required to open a primary business account with
Bank Frick, and this account has been pledged to Bank Frick as collateral for
the EUR 40 million facility. The initial term of the EUR 40 million facility
ends on December 31, 2019, but it will automatically be extended for one year if
it is not terminated with 12 months written notice.
44
The CHF 20 million facility does
not have a fixed term; however, it may be terminated by either party with six
months written notice at the end of a calendar month. Refer to Note 12 to our
audited consolidated financial statements included in our Annual Report on Form
10-K for the year ended June 30, 2017, for additional information related to our
short-term facilities and Note 9 to our unaudited condensed consolidated
financial statements for the three and six months ended December 31, 2017, for
additional information related to our short-term facilities.
As of December 31, 2017, we had
outstanding long-term debt of ZAR 870.7 million (approximately $70.4 million
translated at exchange rates applicable as of December 31, 2017) under our loan
South African facilities. Interest due on the facility is based on the
Johannesburg Interbank Agreed Rate, or JIBAR, in effect from time to time plus a
margin of 2.25% for the Facility A loan, 3.5% for the Facility B loan and 2.25%
for the Facility C loan. The JIBAR rate has been set at 7.158% for the period to
March 29, 2018. Principal repayments on the Facility A and Facility B loans are
due in eight equal quarterly installments, which began on September 30, 2017.
Principal repayment on the Facility C loan is to be determined by the Lenders
based on the date of the repayment of any borrowings under the Facility A loan.
Voluntary prepayments are permitted without early repayment fees or
penalties.
Cash flows from operating activities
Second quarter
Net cash provided by operating
activities for the second quarter of fiscal 2018 was $13.3 million (ZAR 182.0
million) compared to $15.7 million (ZAR 218.8 million) for the second quarter of
fiscal 2017. Excluding the impact of interest received, interest paid under our
Korean and South Africa debt and taxes presented in the table below, the
decrease relates primarily to the expansion of our South African lending book
and weaker trading activity during fiscal 2018 compared to 2017, offset
partially by the receipt of certain working capital loans outstanding.
During the second quarter of
fiscal 2018, we paid South African tax of $16.5 million (ZAR 216.7 million)
related to our 2018 tax year in South Africa. We also paid taxes totaling $2.4
million in other tax jurisdictions, primarily South Korea. During the second
quarter of fiscal 2017, we paid South African tax of $17.8 million (ZAR 246.6
million) related to our 2017 tax year in South Africa. We also paid taxes
totaling $5.0 million in other tax jurisdictions, primarily South Korea.
Taxes paid during the second quarter of fiscal 2018 and 2017
were as follows:
Table 13
|
|
Three months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
First provisional payments
|
|
16,511
|
|
|
17,775
|
|
|
216,654
|
|
|
246,558
|
|
Taxation paid related to prior years
|
|
-
|
|
|
1
|
|
|
-
|
|
|
13
|
|
Taxation refunds received
|
|
(251
|
)
|
|
(166
|
)
|
|
(3,292
|
)
|
|
(2,315
|
)
|
Total South African taxes paid
|
|
16,260
|
|
|
17,610
|
|
|
213,362
|
|
|
244,256
|
|
Foreign taxes paid
|
|
2,353
|
|
|
4,954
|
|
|
32,738
|
|
|
69,186
|
|
Total tax paid
|
|
18,613
|
|
|
22,564
|
|
|
246,100
|
|
|
313,442
|
|
We expect to make additional
first provisional tax payments in South Africa of approximately $1.1 million
(ZAR 14 million), translated at exchange rates applicable as of December 31,
2017, related to our 2018 tax year in the third quarter of fiscal 2018.
First
half
Net cash provided by operating
activities for the first half of fiscal 2018 was $12.5 million (ZAR 167.9
million) compared to cash provided by operating activities of $69.6 million (ZAR
976.5 million) for the first half of fiscal 2017. Excluding the impact of
interest received, interest paid under our Korean and South Africa debt and
taxes presented in the table below, the decrease relates primarily to the
expansion of our lending book and weaker trading activity during fiscal 2018
compared to 2017.
During the first half of fiscal
2018, we paid South African tax of $16.5 million (ZAR 216.7 million) related to
our 2017 tax year in South Africa. During the first half of fiscal 2017, we made
an additional tax payment of $1.2 million (ZAR 16.7 million) related to our 2016
tax year in South Africa and received a refund of approximately $0.3 million
(ZAR 3.3 million) related to taxes overpaid in previous tax years in South
Africa. We also paid taxes totaling $2.5 million in other tax jurisdictions,
primarily South Korea. During the first half of fiscal 2017, we paid South
African tax of $17.8 million (ZAR 246.6 million) related to our 2017 tax year
and $1.2 million (ZAR 16.7 million) related to prior tax years. We also received
a refund of approximately $1.4 million (ZAR 18.9 million) related to taxes
overpaid in previous tax years in South Africa. We paid dividend withholding
taxes of $1.5 million (ZAR 21.3 million) during the first half of fiscal 2017.
We also paid taxes totaling $5.0 million in other tax jurisdictions, primarily
South Korea.
45
Taxes paid during the first half
of fiscal 2018 and 2017 were as follows:
Table 14
|
|
Six months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
First provisional payments
|
|
16,511
|
|
|
17,775
|
|
|
216,654
|
|
|
246,558
|
|
Taxation paid related to prior years
|
|
1,919
|
|
|
1,187
|
|
|
25,227
|
|
|
16,721
|
|
Taxation refunds received
|
|
(251
|
)
|
|
(1,369
|
)
|
|
(3,292
|
)
|
|
(18,878
|
)
|
Dividend withholding taxation
|
|
-
|
|
|
1,471
|
|
|
-
|
|
|
21,300
|
|
Total South
African taxes paid
|
|
18,179
|
|
|
19,064
|
|
|
238,589
|
|
|
265,701
|
|
Foreign taxes paid
|
|
2,470
|
|
|
5,003
|
|
|
34,276
|
|
|
69,877
|
|
Total tax paid
|
|
20,649
|
|
|
24,067
|
|
|
272,865
|
|
|
335,578
|
|
Cash flows from investing
activities
Second
quarter
Cash used in investing activities
for the second quarter of fiscal 2018 includes capital expenditure of $2.1
million (ZAR 28.7 million), primarily for the acquisition of payment processing
terminals in Korea. We also paid approximately $40.9 million for a 30% interest
in Bank Frick and $9.0 million for a 7.625% interest in a listed note.
Cash used in investing activities
for the second quarter of fiscal 2017 includes capital expenditure of $3.1
million (ZAR 43.6 million), primarily for the acquisition of payment processing
terminals in Korea. Our Korean capital expenditures have declined due to
regulatory changes in South Korea which now prohibit the provision of payment
equipment to the majority of merchants. We also provided a $10.0 million loan to
Finbond and paid approximately $2.9 million and $1.7 million, respectively, net
of cash received, to acquire 100% of each of C4U Malta and Pros Softwares
ordinary shares.
First
half
Cash used in investing activities
for the first half of fiscal 2018 includes capital expenditure of $3.6 million
(ZAR 48.0 million), primarily for the acquisition of payment processing
terminals in Korea. We also paid approximately $151.0 million (ZAR 2.0 billion)
for a 15% interest in Cell C, $72.0 million (ZAR 945.0 million) for a 45%
interest in DNI, $40.9 million for a 30% interest in Bank Frick and $9.0 million
for a 7.625% interest in a listed note.
Cash used in investing activities
for the first half of fiscal 2017 includes capital expenditure of $6.5 million
(ZAR 91.9 million), primarily for the acquisition of payment processing
terminals in Korea. We also paid approximately $15.3 million for a 7.5% interest
in MobiKwik; provided a $10.0 million loan to Finbond and paid approximately
$2.9 million and $1.7 million, respectively, net of cash received, to acquire
100% of each of C4U Malta and Pros Softwares ordinary shares.
Cash flows from financing
activities
Second
quarter
During the second quarter of
fiscal 2018, we made an unscheduled $16.6 million repayment to settle our
outstanding South Korean debt facility in full and made a scheduled South
African debt facility payment of $14.3 million (ZAR 187.5 million). We also
repaid $11.4 million of our overdraft facilities.
During the second quarter of
fiscal 2017, we made a $1.8 million unscheduled repayment of our Korean debt and
paid a guarantee fee of $1.1 million related to the guarantee issued by RMB.
First
half
During the first half of fiscal
2018, we utilized approximately $94.3 million (ZAR 1.25 billion) of our South
African facility to part-fund our investment in Cell C and utilized
approximately $0.3 million of our Korean facility to pay a portion of our
quarterly interest due. We made accumulated scheduled South African debt
facility payments of $28.5 million (ZAR 375 million) and made a $16.6 million
payment to settle our outstanding South Korean debt facility in full. We also
utilized $32.6 million of our overdraft facilities and repaid $14.3 million of
these overdraft facilities.
During the first half of fiscal
2017, we paid approximately $31.6 million to repurchase 3,137,609 shares of our
common stock and also paid $0.5 million, on July 1, 2016, related to settlement
of amounts outstanding related to the repurchases at the end of June 2016. We
also made a $28.5 million unscheduled repayment of our Korean debt. In addition,
we paid a guarantee fee of $1.1 million related to the guarantee issued by RMB
and paid a dividend of approximately $0.6 million to certain of our
non-controlling interests.
46
Off-Balance Sheet Arrangements
We have no off-balance sheet
arrangements.
Capital Expenditures
We expect capital spending for
the third quarter of fiscal 2018 to primarily include the acquisition of payment
terminals for the expansion of our operations in Korea and expansion of our ATM
infrastructure and branch network in South Africa.
Our historical capital
expenditures for the second quarter of fiscal 2018 and 2017 are discussed under
Liquidity and Capital ResourcesCash flows from investing activities. All of
our capital expenditures for the past three fiscal years were funded through
internally generated funds. We had outstanding capital commitments as of
December 31, 2017, of $0.7 million related mainly to the procurement of ATMs. We
expect to fund these expenditures through internally generated funds.