for the three and nine months ended March 31, 2016 and 2015
(All amounts in tables stated in thousands or thousands of U.S. Dollars, unless otherwise stated)
| 1. | Basis of Presentation and Summary of Significant Accounting Policies |
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 USU.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 nine months ended March 31, 20152016 and 2014,2015, are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014.2015. 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 March 31, 2016, the Company identified a balance sheet misclassification between current assets and long-term assets of approximately $27.4 million. The Company has restated these amounts in its unaudited condensed consolidated balance sheet as at June 30, 2015, and has decreased its accounts receivable, net of allowances, and increased its other long-term assets by approximately $27.4 million. This restatement has no impact on the Company's previously reported consolidated income, comprehensive income or cash flows.
References to the “Company” refer to Net1 and its consolidated subsidiaries, unless the context otherwise requires. References to Net1 are references solely to Net 1 UEPS Technologies, Inc.
Recent accounting pronouncements adopted
InThere were no accounting pronouncements adopted during the three months ended March 2013, the FASB issued guidance regardingParent’s Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity. This guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance is effective for the Company beginning July 1, 2014, and is applied prospectively. The adoption of this guidance did not have a material impact on the Company’s financial statements.31, 2016.
Recent accounting pronouncements not yet adopted as of March 31, 20152016
In May 2014, the FASB issued guidance regardingRevenue 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 iswas effective for the Company beginning July 1, 2017.2017, however this date has been extended as per subsequent guidance issued by the FASB. Early adoption is not permitted. The Company expects that this guidance willmay have a material impact on its financial statements and is currently evaluating the impact of this guidance on its financial statements on adoption.
In August 2015, the FASB issued guidance regardingRevenue from Contracts with Customers, Deferral of the Effective Date. This guidance defers the required implementation date specified inRevenue from Contracts with Customers to December 2017. Public companies may elect to adopt the standard along the original timeline. The Company expects that this guidance may have a material impact on its financial statements and is currently evaluating the impact of this guidance on its financial statements on adoption.
In August 2014, the FASB issued guidance regardingDisclosure of Uncertainties Aboutabout an Entity’s 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 entity’s ability to continue as a going concern. The guidance is effective for the Company beginning July 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In February 2015, the FASB issued guidance regardingAmendments to the Consolidation Analysis. This guidance amends both the variable interest entity and voting interest entity consolidation models. The requirement to assess an entity under a different consolidation model may change previous consolidation conclusions. The guidance is effective for the Company beginning July 1, 2016. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
2. Pre-funded social welfare grants receivable7
| 1. | Basis of Presentation and Summary of Significant Accounting Policies (continued) |
Recent accounting pronouncements not yet adopted as of March 31, 2016 (continued)
In July 2015, the FASB issued guidance regardingSimplifying the Measurement of Inventory. This guidance requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures). The guidance will not apply to inventories that are measured by using either the last-in, first-out (“LIFO”) method or the retail inventory method (“RIM”). The guidance is effective for the Company beginning July 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In November 2015, the FASB issued guidance regardingBalance Sheet Classification of Deferred Taxes. This guidance requires that deferred tax liabilities and assets are to be classified as non-current in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. This guidance is effective for the Company beginning July 1, 2017, with early adoption permitted on a prospective or retrospective basis. The Company is currently assessing the impact of this guidance on its financial statements disclosures.
In January 2016, the FASB issued guidance regardingRecognition and Measurement of Financial Assets and Financial Liabilities. The guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the guidance clarifies the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This guidance is effective for the Company beginning July 1, 2018, and early adoption is not permitted, with certain exceptions. The amendments are required to be applied by means of a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In February 2016, the FASB issued guidance regardingLeases. The guidance increases transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. The amendments to current lease guidance includes the recognition of assets and liabilities by lessees for those leases currently classified as operating leases. The guidance also requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for the Company beginning July 1, 2019. Early adoption is permitted. The Company expects that this guidance may have a material impact on its financial statements and is currently evaluating the impact of this guidance on its financial statements on adoption.
In March 2016, the FASB issued guidance regardingInvestments — Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting. The guidance simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. Consequently, when an investment qualifies for the equity method (as a result of an increase in the level of ownership interest or degree of influence), the cost of acquiring the additional interest in the investee would be added to the current basis of the investor’s previously held interest and the equity method would be applied subsequently from the date on which the investor obtains the ability to exercise significant influence over the investee. The guidance further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available for sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. This guidance is effective for the Company beginning July 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In March 2016, the FASB issued guidance regardingImprovements to Employee Share-Based Payment Accounting. The guidance simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance is effective for the Company beginning July 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
8
| 2. | Acquisition |
Transact24 Limited
On January 20, 2016, the Company acquired the remaining 56% of the issued and outstanding ordinary shares of Transact24 Limited (“T24”) for $3.0 million in cash and through the issue of 391,645 shares of the Company’s common stock with an aggregate issue date fair value of approximately $4.0 million. T24 is a specialist Hong Kong-based payment services company and is now a wholly-owned subsidiary. The Company acquired approximately 44% of T24 in May 2015. Philip Meyer, Managing Director of T24 and an industry veteran in the international payments and transaction processing industries, has become an executive officer of the Company.
The Company elected to settle part of the purchase price in shares in order to appropriately align the T24 management team with the Company and its global strategy. The parties have agreed that 50% of the Company’s shares issued in the transaction are contractually restricted as to resale until after June 30, 2016, and the remaining 50% of the shares are so restricted until after June 30, 2017.
The preliminary purchase price allocation, translated at the foreign exchange rates applicable on the date of acquisition, is provided in the table below:
| Cash and cash equivalents | $ | 1,334 | ||
| Accounts receivable | 2,356 | |||
| Property, plant and equipment, net | 154 | |||
| Deferred tax assets | 1,070 | |||
| Intangible assets | 4,430 | |||
| Goodwill (Note 7) | 6,095 | |||
| Accounts payables and other payables | (1,898 | ) | ||
| Deferred tax liabilities | (1,107 | ) | ||
| Fair value of T24 on acquisition | 12,434 | |||
| Less: gain on fair value of T24 | (1,908 | ) | ||
| Less: carrying value of equity-accounted investment at the | ||||
| acquisition date | (3,563 | ) | ||
| Total purchase price | $ | 6,963 |
The preliminary purchase price allocation is based on management estimates as of March 31, 2016, and may be adjusted up to one year following the closing of the acquisition. The Company expects to finalize the purchase price allocation on or before June 30, 2016. Pro forma results of operations have not been presented because the effect of the T24 acquisition was not material to the Company’s results of operations.
During each of the three and nine months ended March 31, 2016, the Company incurred acquisition-related expenditure of $0.1 million related to this acquisition. Since the closing of the T24 acquisition, it has contributed revenue and net income, after acquired intangible asset amortization, net of taxation, of $2.0 million and $0.3 million, respectively, for the three months ended March 31, 2016.
| 3. | Pre-funded social welfare grants receivable |
Pre-funded social welfare grants receivable represents amounts pre-funded by the Company to certain merchants participating in the merchant acquiring system. The April 20152016 payment service commenced on April 1, 2015,2016, but the Company pre-funded certain merchants participating in the merchant acquiring system on the last two days of March 2015.2016.
| 4. | Inventory |
7
3. Inventory
The Company’s inventory comprised the following categoriescategory as of March 31, 20152016 and June 30, 2014.2015.
| March 31, | June 30, | |||||
| 2015 | 2014 | |||||
| Finished goods | $ | 12,095 | $ | 10,785 | ||
| $ | 12,095 | $ | 10,785 |
| March 31, | June 30, | ||||||
| 2016 | 2015 | ||||||
| Finished goods | $ | 11,555 | $ | 12,979 | |||
| $ | 11,555 | $ | 12,979 |
4. Settlement assets and settlement obligations9
| 5. | Settlement assets and settlement obligations |
Settlement assets comprise (1) cash received from the South African government that the Company holds pending disbursement to recipient cardholdersbeneficiaries 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 cardholdersbeneficiaries of social welfare grants, and (2) amounts that the Company is obligated to pay to customer employees, payroll-related payees and other payees designated by the customer.
The balances at each reporting date may vary widely depending on the timing of the receipts and payments of these assets and obligations.
| 6. | Fair value of financial instruments |
5. Fair value of financial instruments
Initial recognition and measurement
Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction costs.
Risk managementmanagement
The Company seeks to reduce its exposure to currencies other than the South African Rand (“ZAR”) through a policy of matching, to the extent possible, assets and liabilities denominated in those currencies. In addition, the Company uses financial instruments in order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company is also exposed to equity price and liquidity risks as well as credit risks.
Currency exchange risk
The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and USU.S. dollar. The Company has used forward contracts in order to limit its exposure in these transactions to fluctuations in exchange rates between the ZAR, on the one hand, and the USU.S. dollar and the euro, on the other hand.
Translation risk
Translation risk relates to the risk that the Company’s results of operations will vary significantly as the USU.S. dollar is its reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The USU.S. dollar to ZAR exchange rate has fluctuated significantly over the past three years. As exchange rates are outside the Company’s control, there can be no assurance that future fluctuations will not adversely affect the Company’s results of operations and financial condition.
Interest rate risk
As a result of its normal borrowing and leasing activities, the Company’s operating results are exposed to fluctuations in interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited investment in cash equivalents and has occasionally invested in marketable securities.
8
5. Fair value of financial instruments (continued)
Risk management (continued)
Credit risk
Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties. The Company maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an evaluation of a potential counterparty’s financial condition, credit rating, and other credit criteria and risk mitigation tools as the Company’s management deems appropriate.
With respect to credit risk on financial instruments, the Company maintains a policy of entering into such transactions only with South African and European financial institutions that have a credit rating of BBB or better, as determined by credit rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings.
10
| 6. | Fair value of financial instruments (continued) |
Risk management (continued)
UEPS-based microlending credit risk
The Company is exposed to credit risk in its UEPS-based microlending activities, which provides unsecured short-term loans to qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer and assigns a “creditworthiness score”, which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses.
Equity price and liquidity risk
Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities that it holds and the risk that it may not be able to liquidate these securities. The market price of these securities may fluctuate for a variety of reasons, consequently, the amount the Company may obtain in a subsequent sale of these securities may significantly differ from the reported market value.
Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an extended period of time without influencing the exchange traded price, or at all.
Financial instruments
The following section describes the valuation methodologies the Company uses to measure its significant financial assets and liabilities at fair value.
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to Level 1 investments. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments are included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. Investments valued using such techniques are included in Level 3 investments.
Asset measured at fair value using significant unobservable inputs – investment in Finbond Group Limited (“Finbond”)
The Company'sCompany’s Level 3 asset represents an investment of 156,788,712197,522,435 shares of common stock of Finbond, which are exchange-traded equity securities. In March 2016, Finbond completed a rights issue and the Company acquired an additional 40,733,723 shares for approximately $8.9 million. The Company’s ownership interest in Finbond as of March 31, 2016, is approximately 26%. Finbond’s shares are traded on the Johannesburg Stock Exchange (“JSE”) and the Company has designated such shares as available for sale investments. The Company has concluded that the market for Finbond shares is not active and consequently has employed alternative valuation techniques in order to determine the fair value of such stock. Finbond issues financial products and services under a mutual banking licence and also has a microlending offering. In determining the fair value of Finbond, the Company has considered amongst other things Finbond’s historical financial information (including its most recent public accounts), press releases issued by Finbond and its published net asset value. The Company believes that the best indicator of fair value of Finbond is its published net asset value and has used this value to determine the fair value.
9
5. Fair value of financial instruments (continued)
Financial instruments (continued)
Asset measured at fair value using significant unobservable inputs – investment in Finbond Group Limited (“Finbond”) (continued)
The fair value of these securities as of March 31, 2015,2016, represented approximately 1% of the Company’s total assets, including these securities. The Company expects to hold these securities for an extended period of time and it is not concerned with short-term equity price volatility with respect to these securities provided that the underlying business, economic and management characteristics of the company remain sound.
Derivative transactions - Foreign exchange contracts
As part of the Company’s risk management strategy, the Company enters into derivative transactions to mitigate exposures to foreign currencies using foreign exchange contracts. These foreign exchange contracts are over-the-counter derivative transactions. Substantially all of the Company’s derivative exposures are with counterparties that have long-term credit ratings of BBB or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair value (Level 2). The Company has no derivatives that require fair value measurement under Level 1 or 3 of the fair value hierarchy.
11
| 6. | Fair value of financial instruments (continued) |
Financial instruments (continued)
The Company’s outstanding foreign exchange contracts are as follows:
As of March 31, 20152016
| Fair market | ||||
| Notional amount | Strike price | value price | Maturity | |
| EUR | ZAR | ZAR | April 20, | |
| EUR | ZAR | ZAR | May 20, | |
| EUR | ZAR | ZAR | June | |
| EUR | ZAR | ZAR | July 20, | |
| EUR | ZAR | ZAR | August | |
| EUR | ZAR | ZAR | September | |
| EUR | ZAR | ZAR | October 20, | |
| EUR | ZAR | ZAR | November | |
As of June 30, 20142015
| Fair market | ||||
| Notional amount | Strike price | value price | Maturity | |
| EUR | ZAR | ZAR | July | |
| EUR | ZAR | ZAR | August 20, 2015 | |
| EUR 526,263.00 | ZAR 15.2944 | ZAR 13.7898 | September 21, 2015 | |
| EUR 526,263.00 | ZAR 15.3809 | ZAR 13.8683 | October 20, 2015 | |
| EUR 509,516.00 | ZAR 15.4728 | ZAR 13.9540 | November 20, 2015 | |
| EUR 529,865.00 | ZAR 15.5654 | ZAR 14.0397 | December 21, 2015 | |
| EUR 526,663.00 | ZAR 15.6625 | ZAR 14.1239 | January 20, |
10
5. Fair value of financial instruments (continued)
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2015,2016, according to the fair value hierarchy:
| Quoted | ||||||||||||
| Price in | ||||||||||||
| Active | Significant | |||||||||||
| Markets for | Other | Significant | ||||||||||
| Identical | Observable | Unobservable | ||||||||||
| Assets | Inputs | Inputs | ||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||
| Assets | ||||||||||||
| Related to insurance business (included in other long-term assets): | ||||||||||||
| Cash and cash equivalents | $ | 1,643 | $ | - | $ | - | $ | 1,643 | ||||
| Investment in Finbond (available for sale assets included in other long-term assets) | - | - | 7,608 | 7,608 | ||||||||
| Other | - | 1,300 | - | 1,300 | ||||||||
| Total assets at fair value | $ | 1,643 | $ | 1,300 | $ | 7,608 | $ | 10,551 | ||||
| Liabilities | ||||||||||||
| Foreign exchange contracts | $ | - | $ | 819 | $ | - | $ | 819 | ||||
| Total liabilities at fair value | $ | - | $ | 819 | $ | - | $ | 819 |
| Quoted | |||||||||||||
| price in | |||||||||||||
| active | Significant | ||||||||||||
| markets for | other | Significant | |||||||||||
| identical | observable | unobservable | |||||||||||
| assets | inputs | inputs | |||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||
| Assets | |||||||||||||
| Related to insurance business (included in other long-term assets): | |||||||||||||
| Cash and cash equivalents | $ | 525 | $ | - | $ | - | $ | 525 | |||||
| Investment in Finbond (available for sale assets included in other long-term assets) | - | - | 16,249 | 16,249 | |||||||||
| Foreign exchange contracts | - | 380 | - | 380 | |||||||||
| Other | - | 1,048 | - | 1,048 | |||||||||
| Total assets at fair value | $ | 525 | $ | 1,428 | $ | 16,249 | $ | 18,202 |
12
| 6. | Fair value of financial instruments (continued) |
Financial instruments (continued)
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2014,2015, according to the fair value hierarchy:
| Quoted | ||||||||||||
| Price in | ||||||||||||
| Active | Significant | |||||||||||
| Markets for | Other | Significant | ||||||||||
| Identical | Observable | Unobservable | ||||||||||
| Assets | Inputs | Inputs | ||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||
| Assets | ||||||||||||
| Related to insurance business (included in other long-term assets): | ||||||||||||
| Cash and cash equivalents | $ | 1,800 | $ | - | $ | - | $ | 1,800 | ||||
| Investment in Finbond (available for sale assets included in other long-term assets) | - | - | 8,068 | 8,068 | ||||||||
| Other | - | 47 | - | 47 | ||||||||
| Total assets at fair value | $ | 1,800 | $ | 47 | $ | 8,068 | $ | 9,915 | ||||
| Liabilities | ||||||||||||
| Foreign exchange contracts | $ | - | $ | 164 | $ | - | $ | 164 | ||||
| Total liabilities at fair value | $ | - | $ | 164 | $ | - | $ | 164 |
| Quoted | |||||||||||||
| price in | |||||||||||||
| active | Significant | ||||||||||||
| markets for | other | Significant | |||||||||||
| identical | observable | unobservable | |||||||||||
| assets | inputs | inputs | |||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||
| Assets | |||||||||||||
| Related to insurance business (included in other long-term assets): | |||||||||||||
| Cash and cash equivalents | $ | 1,640 | $ | - | $ | - | $ | 1,640 | |||||
| Investment in Finbond (available for sale | |||||||||||||
| assets included in other long-term assets) | - | - | 7,488 | 7,488 | |||||||||
| Other | - | 1,259 | - | 1,259 | |||||||||
| Total assets at fair value | $ | 1,640 | $ | 1,259 | $ | 7,488 | $ | 10,387 | |||||
| Liabilities | |||||||||||||
| Foreign exchange contracts | $ | - | $ | 452 | $ | - | $ | 452 | |||||
| Total liabilities at fair value | $ | - | $ | 452 | $ | - | $ | 452 |
Changes in the Company’s investment in Finbond (Level 3 that are measured at fair value on a recurring basis) were insignificant during the three and nine months ended March 31, 20152016 and 2014,2015, respectively. There have been no transfers in or out of Level 3 during the three and nine months ended March 31, 20152016 and 2014,2015, 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 Company’s 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.
| 7. |
|
Goodwill
Goodwill
Summarized below is the movement in the carrying value of goodwill for the nine months ended March 31, 2015:2016:
| Accumulated | Carrying | ||||||||
| Gross value | impairment | value | |||||||
| Balance as of June 30, 2014 | $ | 186,576 | $ | - | $ | 186,576 | |||
| Foreign currency adjustment(1) | (17,143 | ) | - | (17,143 | ) | ||||
| Balance as of March 31, 2015 | $ | 169,433 | $ | - | $ | 169,433 |
| Accumulated | Carrying | |||||||||
| Gross value | impairment | value | ||||||||
| Balance as of June 30, 2015 | $ | 166,437 | $ | - | $ | 166,437 | ||||
| Acquisition (Note 2) | 6,095 | - | 6,095 | |||||||
| Foreign currency adjustment(1) | (9,194 | ) | - | (9,194 | ) | |||||
| Balance as of March 31, 2016 | $ | 163,338 | $ | - | $ | 163,338 |
(1) – The foreign currency adjustment represents the effects of the fluctuations between the South African rand and the Korean won, and the USU.S. dollar on the carrying value.
Goodwill associated with the acquisition of T24 represents the excess of cost over the fair value of acquired net assets. The goodwill is not deductible for tax purposes. See Note 2 for the allocation of the purchase price to the fair value of acquired net assets. T24 has been allocated to the Company’s International transaction processing operating segment.
13
| 7. | Goodwill and intangible assets, net (continued) |
Goodwill (continued)
Goodwill has been allocated to the Company’s reportable segments as follows:
| As of | As of | |||||
| March 31, | June 30, | |||||
| 2015 | 2014 | |||||
| South African transaction processing | $ | 24,974 | $ | 28,517 | ||
| International transaction processing | 117,788 | 128,427 | ||||
| Financial inclusion and applied technologies | 26,671 | 29,632 | ||||
| Total | $ | 169,433 | $ | 186,576 |
| South | Financial | ||||||||||||
| African | International | inclusion and | |||||||||||
| transaction | transaction | applied | Carrying | ||||||||||
| processing | processing | technologies | value | ||||||||||
| Balance as of June 30, 2015 | $ | 24,579 | $ | 115,519 | $ | 26,339 | $ | 166,437 | |||||
| Acquisition (Note 2) | - | 6,095 | - | 6,095 | |||||||||
| Foreign currency adjustment(1) | (4,221 | ) | (1,444 | ) | (3,529 | ) | (9,194 | ) | |||||
| Balance as of March 31, 2016 | $ | 20,358 | $ | 120,170 | $ | 22,810 | $ | 163,338 |
(1) The foreign currency adjustment represents the effects of the fluctuations between the South African rand and the Korean won, and the U.S. dollar on the carrying value.
Intangible assets, net
T24 intangible assets acquired
Summarized below is the fair value of the T24 intangible assets acquired, translated at the exchange rate applicable as of January 20, 2016, and the weighted-average amortization period of the intangible assets:
| Weighted- | |||||||
| Fair value | average | ||||||
| as of | amortization | ||||||
| January 20, | period (in | ||||||
| 2016 | years) | ||||||
| Finite-lived intangible asset: | |||||||
| Customer relationships | $ | 3,350 | 5 | ||||
| Software and unpatented technology | $ | 1,080 | 3 |
On acquisition, the Company recognized a deferred tax liability of approximately $1.1 million related to the acquisition of the intangible assets.
Carrying value and amortization of intangible assets
Summarized below is the carrying value and accumulated amortization of the intangible assets as of March 31, 20152016 and June 30, 2014:2015:
| As of March 31, 2015 | As of June 30, 2014 | |||||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||||
| carrying | Accumulated | carrying | carrying | Accumulated | carrying | |||||||||||||
| value | amortization | value | value | amortization | value | |||||||||||||
| Finite-lived intangible assets: | ||||||||||||||||||
| Customer relationships | $ | 89,797 | $ | (43,972 | ) | $ | 45,825 | $ | 98,676 | $ | (41,273 | ) | $ | 57,403 | ||||
| Software and unpatented technology | 30,534 | (27,585 | ) | 2,949 | 33,604 | (26,207 | ) | 7,397 | ||||||||||
| FTS patent | 3,169 | (3,169 | ) | - | 3,619 | (3,619 | ) | - | ||||||||||
| Exclusive licenses | 4,506 | (4,506 | ) | - | 4,506 | (4,506 | ) | - | ||||||||||
| Trademarks | 6,205 | (3,314 | ) | 2,891 | 6,890 | (3,176 | ) | 3,714 | ||||||||||
| Total finite-lived intangible assets | $ | 134,211 | $ | (82,546 | ) | $ | 51,665 | $ | 147,295 | $ | (78,781 | ) | $ | 68,514 | ||||
| As of March 31, 2016 | As of June 30, 2015 | ||||||||||||||||||
| Gross | Net | Gross | Net | ||||||||||||||||
| carrying | Accumulated | carrying | carrying | Accumulated | carrying | ||||||||||||||
| value | amortization | value | value | amortization | value | ||||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||||
| Customer relationships(1). | $ | 88,141 | $ | (49,325 | ) | $ | 38,816 | $ | 88,109 | $ | (45,312 | ) | $ | 42,797 | |||||
| Software and unpatented technology(1) | 29,756 | (28,766 | ) | 990 | 29,964 | (28,323 | ) | 1,641 | |||||||||||
| FTS patent | 2,583 | (2,583 | ) | - | 3,119 | (3,119 | ) | - | |||||||||||
| Exclusive licenses | 4,506 | (4,506 | ) | - | 4,506 | (4,506 | ) | - | |||||||||||
| Trademarks | 5,644 | (3,580 | ) | 2,064 | 6,094 | (3,408 | ) | 2,686 | |||||||||||
| Total finite-lived intangible | |||||||||||||||||||
| assets | $ | 130,630 | $ | (88,760 | ) | $ | 41,870 | $ | 131,792 | $ | (84,668 | ) | $ | 47,124 | |||||
(1) Includes the customer relationships and software and unpatented technology acquired as part of the T24 acquisition in January 2016.
Aggregate amortization expense on the finite-lived intangible assets for the three months ended March 31, 2016 and 2015, was approximately $2.3 million and $3.6 million, respectively. Aggregate amortization expense on the finite-lived intangible assets for the nine months ended March 31, 2016 and 2015, was approximately $3.6$8.2 million and $11.3 million, respectively (three and nine months ended March 31, 2014, was approximately $4.6 million and $12.5 million, respectively).respectively.
14
| 7. | Goodwill and intangible assets, net (continued) |
Intangible assets, net (continued)
Future estimated annual amortization expense for the next five fiscal years and thereafter, assuming exchange rates prevailingthat prevailed on March 31, 2015,2016, is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a result of acquisitions, changes in useful lives, exchange rate fluctuations and other relevant factors.
| 2015 | $ | 14,446 | |
| 2016 | 10,800 | ||
| 2017 | 8,611 | ||
| 2018 | 8,612 | ||
| 2019 | 8,293 | ||
| Thereafter | $ | 11,507 |
| 2016 | $ | 10,972 | ||
| 2017 | 9,283 | |||
| 2018 | 9,281 | |||
| 2019 | 8,793 | |||
| 2020 | 8,437 | |||
| Thereafter | $ | 3,493 |
| 8. | Reinsurance assets and policy holder liabilities under insurance and investment contracts |
12
7. Reinsurance assets and policy holder liabilities under insurance and investment contracts
Reinsurance assets and policy holder liabilities under insurance contracts
Summarized below is the movement in reinsurance assets and policy holder liabilities under insurance contracts during the nine months ended March 31, 2015:2016:
| Reinsurance | Insurance | |||||
| assets (1) | contracts (2) | |||||
| Balance as of June 30, 2014 | $ | 21,062 | $ | (21,478 | ) | |
| Foreign currency adjustment(3) | (2,617 | ) | 2,668 | |||
| Balance as of March 31, 2015 | $ | 18,445 | $ | (18,810 | ) |
| Reinsurance | Insurance | ||||||
| assets(1) | contracts(2) | ||||||
| Balance as of June 30, 2015 | $ | 183 | $ | (567 | ) | ||
| Increase in policy holder benefits under insurance contracts | 65 | (304 | ) | ||||
| Claims and policyholders’ benefits under insurance contracts | (46 | ) | 109 | ||||
| Foreign currency adjustment(3) | (32 | ) | 98 | ||||
| Balance as of March 31, 2016 | $ | 170 | $ | (664 | ) |
(1) Included in other long-term assets.
(2) Included in other long-term liabilities.
(3) The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the USU.S. dollar.
The Company has agreements with reinsurance companies in order to limit its losses from large insurance contracts, however, if the reinsurer is unable to meet its obligations, the Company retains the liability.
ThePolicyholders’ liabilities under insurance contracts are derived from actual claims submitted which had not been settled as of March 31, 2016 and June 30, 2015, respectively, and represents management’s estimate of the net present value of future claims and benefits under existing insurance contract liabilities is based on best estimates assumptionscontracts, offset by probable future premiums to be received (net of future experience plus prescribed margins, as required in the markets in which these products are offered, namely South Africa. The process of deriving the best estimates assumptions plus prescribed margins includes assumptions related to future mortality and morbidity (an appropriate base table of standard mortality is chosen depending on the type of contract and class of business), withdrawals (based on recent withdrawal investigations and expected future trends), investment returns (based on government treasury rates adjusted by an applicable margin), expense inflation (based on a 10-year real return on CPI-linked government bonds from the risk-free rate and adding an allowance for salary inflation and book shrinkage of 1% per annum) and claim reporting delays (based on average industry experience)service cost).
Assets and policy holder liabilities under investment contracts
Summarized below is the movement in assets and policy holder liabilities under investment contracts during the nine months ended March 31, 2015:2016:
| Investment | ||||||
| Assets (1) | contracts (2) | |||||
| Balance as of June 30, 2014 | $ | 688 | $ | (688 | ) | |
| Foreign currency adjustment(3) | (85 | ) | 85 | |||
| Balance as of March 31, 2015 | $ | 603 | $ | (603 | ) |
| Investment | |||||||
| Assets(1) | contracts(2) | ||||||
| Balance as of June 30, 2015 | $ | 593 | $ | (593 | ) | ||
| Increase in policy holder benefits under investment contracts . | 34 | (34 | ) | ||||
| Foreign currency adjustment(3) | (102 | ) | 102 | ||||
| Balance as of March 31, 2016 | $ | 525 | $ | (525 | ) |
(1) Included in other long-term assets.
(2) Included in other long-term liabilities.
(3) The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the USU.S. dollar.
The Company does not offer any investment products with guarantees related to capital or returns.
8. Short-term credit facility15
| 9. | Short-term credit facility |
The Company’s short-term credit facilities are described in Note 12 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2014.2015.
South Africa
The Company’s short-term South African credit facility with Nedbank Limited comprises 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 March 31, 2015,2016, the interest rate on the overdraft facility was 9.35% . As of March 31, 2016 and June 30, 2014,2015, respectively, the Company had not utilized any of its overdraft facility. As of March 31, 2016, the Company had utilized approximately ZAR 250.0137.1 million ($20.79.2 million, translated at exchange rates applicable as of March 31, 2015) overdraft facility. As of March 31, 2015, the interest rate on the overdraft facility was 8.10%. At March 31, 2015, the Company had utilized approximately ZAR 137.2 million ($11.3 million, translated at exchange rates applicable as of March 31, 2015)2016) of its ZAR 150 million indirect and derivative facilities to obtain foreign exchange contracts from the bank and to enable the bank to issue guarantees, including stand-by letters of credit, in order for the Company to honor its obligations to third parties requiring such guarantees (refer to Note 17)18). As of June 30, 2014,2015, the Company had utilized approximately ZAR 139.0139.6 million ($13.111.4 million, translated at exchange rates applicable as of June 30, 2014)2015) of its indirect and derivative facilities.
13
8. Short-term credit facility (continued)Korea
Korea
The Company had not utilized any of its KRW 10 billion ($9.08.8 million, translated at exchange rates applicable as of March 31, 2015)2016) overdraft facility as of March 31, 20152016 and June 30, 2014.2015. As of March 31, 2015,2016, the interest rate on the overdraft facility was 3.80%3.56% . The facility expires in January 2016.2017.
| 10. | Long-term borrowings |
9. Long-term borrowings
The Company’s Korean senior secured loan facility is described in Note 13 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2014.2015. The current carrying value as of March 31, 2015,2016, is $60.0$61.0 million. As of March 31, 2015,2016, the carrying amount of the long-term borrowings approximated fair value. The interest rate in effect on March 31, 2015,2016, was 5.22%4.75% .
On April 29, 2016, the Company made a scheduled principal payment of $8.8 million (translated at exchange rates applicable as of March 31, 2016).
Interest expense incurred during the three months ended March 31, 2016 and 2015, was $0.7 million and $0.8 million, respectively. Interest expense incurred during the nine months ended March 31, 2016 and 2015, and 2014, was $0.8$2.1 million and $2.2 million; and $1.1 million and $3.7 million, respectively. Prepaid facility fees amortized during each of the three and nine months ended March 31, 20152016, and 2014,2015, was $0.04 million and $0.2 million; and $0.1 million and $0.7 million, respectively. Prepaid facility fees amortized during the nine months ended March 31, 2014, include the remaining prepaid facility fees related to the refinanced facility of approximately $0.42016, and 2015, was $0.1 million that were expensed.
The next scheduled principal payment of $9.0and $0.2 million, (translated at exchange rates applicable as of March 31, 2015) will be made on April 29, 2016.respectively.
| 11. | Capital structure |
10. 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 nine months ended March 31, 20152016 and 2014,2015, respectively, and the number of shares, net of treasury, excluding non-vested equity shares that have not vested during the nine months ended March 31, 2016 and 2015, and 2014, respectively:
| 2015 | 2014 | |||||
| Number of shares, net of treasury: | ||||||
| Statement of changes in equity | 46,607,153 | 45,783,342 | ||||
| Less: Non-vested equity shares that have not vested (Note 12) | (341,529 | ) | (385,778 | ) | ||
| Number of shares, net of treasury excluding non-vested equity shares that have not vested | 46,265,624 | 45,397,564 |
| March 31, | March 31, | ||||||
| 2016 | 2015 | ||||||
| Number of shares, net of treasury: | |||||||
| Statement of changes in equity | 45,636,435 | 46,607,153 | |||||
| Less: Non-vested equity shares that have not vested (Note 13) | (589,447 | ) | (341,529 | ) | |||
| Number of shares, net of treasury excluding non-vested equity shares that have not vested | 45,046,988 | 46,265,624 |
16
| 11. | Capital structure (continued) |
Common stock repurchases and transaction with non-controlling interests (continued)
On February 3, 2016, the Company’s Board of Directors approved the replenishment of its share repurchase authorization to repurchase up to an aggregate of $100 million of common stock. The authorization has no expiration date. During the three months ended March 31, 2016, the Company repurchased 1,328,699 shares for approximately $12.7 million under its applicable share repurchase authorizations. During the nine months ended March 31, 2016, the Company repurchased 2,077,912 shares for approximately $23.9 million under its share repurchase authorizations. The Company did not repurchase any of its shares during the three and nine months ended March 31, 2015, and 2014, under its share repurchase authorization. However, on
On August 27, 2014, the Company entered into a Subscription and Sale of Shares Agreement with Business Venture Investments No 1567 Proprietary Limited (RF) (“BVI”), one of the Company’s BEE partners, in preparation for any new potential SASSA tender. Pursuant to the agreement: (i) the Company repurchased BVI’s remaining 1,837,432 shares of the Company’s common stock for approximately ZAR 97.4 million in cash ($9.2 million translated at exchange rates prevailing as of August 27, 2014) and (ii) BVI has subscribed for new ordinary shares of Cash Paymaster Services (Pty) Ltd (“CPS”) representing approximately 12.5% of CPS’ ordinary shares outstanding after the subscription for ZAR 15.0 million in cash (approximately $1.4 million translated at exchange rates prevailing as of August 27, 2014). In connection with transactions described above, the CPS shareholder agreement that was negotiated as part of the original December 2013 Relationship Agreement became effective.
| 12. | Accumulated other comprehensive loss |
Acquisition of KSNET non-controlling interests
During the nine months ended March 31, 2014, the Company acquired all of the issued share capital of KSNET, Inc. that it did not previously own for approximately $2.0 million in cash. The transaction was accounted for as an equity transaction with a non-controlling interest and accordingly, no gain or loss was recognized in the Company’s consolidated statement of operations. The carrying amount of the non-controlling interest was adjusted to reflect the change in ownership interest in KSNET. The difference between the fair value of the consideration paid and the amount by which the non-controlling interest was adjusted, of $1.5 million, was recognized in equity attributable to Net1.
14
11. Accumulated other comprehensive loss
The table below presents the change in accumulated other comprehensive (loss) income per component during the nine months ended March 31, 2015:2016:
| Nine months ended | |||||||||
| March 31, 2015 | |||||||||
| Accumulated | |||||||||
| Net | |||||||||
| unrealized | |||||||||
| Accumulated | income (loss) | ||||||||
| Foreign | on asset | ||||||||
| currency | available for | ||||||||
| translation | sale, net of | ||||||||
| reserve | tax | Total | |||||||
| Balance as of June 30, 2014 | $ | (83,359 | ) | $ | 618 | $ | (82,741 | ) | |
| Movement in foreign currency translation reserve | (49,096 | ) | - | (49,096 | ) | ||||
| Unrealized gain on asset available for sale, net of tax of $97 | - | 422 | 422 | ||||||
| Balance as of March 31, 2015 | $ | (132,455 | ) | $ | 1,040 | $ | (131,415 | ) | |
| Nine months ended | ||||||||||
| March 31, 2016 | ||||||||||
| Accumulated | ||||||||||
| net | ||||||||||
| unrealized | ||||||||||
| Accumulated | income on | |||||||||
| foreign | asset | |||||||||
| currency | available for | |||||||||
| translation | sale, net of | |||||||||
| reserve | tax | Total | ||||||||
| Balance as of June 30, 2015 | $ | (140,221 | ) | $ | 1,040 | $ | (139,181 | ) | ||
| Movement in foreign currency translation reserve | (45,893 | ) | - | (45,893 | ) | |||||
| Unrealized gain on asset available for sale, net of tax of $159 | - | 692 | 692 | |||||||
| Balance as of March 31, 2016 | $ | (186,114 | ) | $ | 1,732 | $ | (184,382 | ) | ||
There were no reclassifications from accumulated other comprehensive loss to comprehensive (loss) income during the three and nine months ended March 31, 20152016 or 2014,2015, respectively.
12. Stock-based compensation17
| 13. | Stock-based compensation |
Stock option and restricted stock activity
Options
The following table summarizes stock option activity for the nine months ended March 31, 20152016 and 2014:2015:
| Weighted | Weighted | ||||||||||||||
| Weighted | Average | Average | |||||||||||||
| average | Remaining | Aggregate | Grant | ||||||||||||
| exercise | Contractual | Intrinsic | Date Fair | ||||||||||||
| Number of | price | Term | Value | Value | |||||||||||
| shares | ($) | (in years) | ($’000) | ($) | |||||||||||
| Outstanding – June 30, 2014 | 2,710,392 | 14.16 | 5.38 | 3,909 | |||||||||||
| Granted under Plan: August 2014 | 464,410 | 11.23 | 10.00 | 2,113 | 4.55 | ||||||||||
| Exercised | (748,633 | ) | 8.64 | 3,750 | |||||||||||
| Outstanding – March 31, 2015 | 2,426,169 | 15.30 | 4.99 | 4,570 | |||||||||||
| Outstanding – June 30, 2013 | 2,648,583 | 15.15 | 5.98 | 313 | |||||||||||
| Granted under Plan: August 2013 | 224,896 | 7.35 | 10.00 | 568 | 2.53 | ||||||||||
| Exercised | (10,000 | ) | 8.75 | 12 | |||||||||||
| Forfeited | (136,420 | ) | 23.51 | ||||||||||||
| Outstanding – March 31, 2014 | 2,727,059 | 14.12 | 5.63 | 2,290 |
| Weighted | ||||||||||||||||
| Weighted | average | Weighted | ||||||||||||||
| average | remaining | Aggregate | average | |||||||||||||
| exercise | contractual | intrinsic | grant date | |||||||||||||
| Number of | price | term | value | fair value | ||||||||||||
| shares | ($) | (in years) | ($’000) | ($) | ||||||||||||
| Outstanding – June 30, 2015 | 2,401,169 | 15.34 | 4.74 | 11,516 | ||||||||||||
| Exercised | (323,645 | ) | 11.62 | 2,669 | ||||||||||||
| Outstanding – March 31, 2016 | 2,077,524 | 15.92 | 3.89 | 654 | ||||||||||||
| Outstanding – June 30, 2014 | 2,710,392 | 14.16 | 5.38 | 3,909 | ||||||||||||
| Granted under Plan: August 2014 | 464,410 | 11.23 | 10.00 | 2,113 | 4.55 | |||||||||||
| Exercised | (748,633 | ) | 8.64 | 3,750 | ||||||||||||
| Outstanding – March 31, 2015 | 2,426,169 | 15.30 | 4.99 | 4,570 |
No stock options were awarded during the three and nine months ended March 31, 2016. The fair value of each option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the assumptions noted in the following table. The estimated expected volatility is calculated based on the Company’s 250 day volatility. The estimated expected life of the option was determined based on historical behavior of employees who were granted options with similar terms. The Company has estimated no forfeitures for options awarded in August 2013 and 2014, respectively.2014.
15
12. Stock-based compensation (continued)
Stock option and restricted stock activity (continued)
Options (continued)
The table below presents the range of assumptions used to value options granted during the nine months ended March 31, 20152016 and 2014:2015:
| Nine months ended | ||||||
| March 31, | ||||||
| 2015 | 2014 | |||||
| Expected volatility | 60% | 50% | ||||
| Expected dividends | 0% | 0% | ||||
| Expected life (in years) | 3 | 3 | ||||
| Risk-free rate | 1.0% | 0.9% | ||||
| Nine months ended | |||||||
| March 31, | |||||||
| 2016 | 2015 | ||||||
| Expected volatility | n/a | 60% | |||||
| Expected dividends | n/a | 0% | |||||
| Expected life (in years) | n/a | 3 | |||||
| Risk-free rate | n/a | 1.0% | |||||
There were no forfeitures during the three and nine months ended March 31, 2016 or 2015. During the three and nine months ended March 31, 2014, terminated employees forfeited 136,420 stock options.
The following table presents stock options vested and expecting to vest as of March 31, 2015:2016:
| Weighted | ||||||||||||
| Weighted | Average | |||||||||||
| average | Remaining | Aggregate | ||||||||||
| exercise | Contractual | Intrinsic | ||||||||||
| Number of | price | Term | Value | |||||||||
| shares | ($) | (in years) | ($’000) | |||||||||
| Vested and expecting to vest – March 31, 2015 | 2,426,169 | 15.30 | 4.99 | 4,570 |
| Weighted | |||||||||||||
| Weighted | average | ||||||||||||
| average | remaining | Aggregate | |||||||||||
| exercise | contractual | intrinsic | |||||||||||
| Number of | price | term | value | ||||||||||
| shares | ($) | (in years) | ($’000) | ||||||||||
| Vested and expecting to vest – March 31, 2016 | 2,077,524 | 15.92 | 3.89 | 654 |
These options have an exercise price range of $7.35 to $24.46.
18
| 13. | Stock-based compensation (continued) |
Stock option and restricted stock activity (continued)
Options (continued)
The following table presents stock options that are exercisable as of March 31, 2015:2016:
| Weighted | ||||||||||||
| Weighted | Average | |||||||||||
| average | Remaining | Aggregate | ||||||||||
| exercise | Contractual | Intrinsic | ||||||||||
| Number of | price | Term | Value | |||||||||
| shares | ($) | (in years) | ($’000) | |||||||||
| Exercisable – March 31, 2015 | 1,668,163 | 17.71 | 3.24 | 1,775 |
| Weighted | |||||||||||||
| Weighted | average | ||||||||||||
| average | remaining | Aggregate | |||||||||||
| exercise | contractual | intrinsic | |||||||||||
| Number of | price | term | value | ||||||||||
| shares | ($) | (in years) | ($’000) | ||||||||||
| Exercisable – March 31, 2016 | 1,692,952 | 17.17 | 2.91 | 516 |
No stock options became exercisable during the three months ended March 31, 20152016 and 2014, respectively.2015. During the nine months ended March 31, 2016 and 2015, respectively, 373,435 and 2014, respectively, 330,967 and 358,333 stock options became exercisable. No stock options were exercised during the three months ended March 31, 2016. During the three months ended March 31, 2015, the Company received approximately $0.8 million from 60,000 stock options exercised. During the nine months ended March 31, 2016, the Company received approximately $3.8 million from the exercise of 323,645 stock options. During the nine months ended March 31, 2015, the Company received approximately $1.8 million from 176,395 stock options exercised. The remaining 572,238 stock options were exercised through recipients delivering 336,584 shares of the Company’s common stock to the Company on September 9, 2014, to settle the exercise price due. During the three and nine months ended March 31, 2014, the Company received approximately $0.1 million from 10,000 stock options exercised. The Company issues new shares to satisfy stock option exercises.
16
12. Stock-based compensation (continued)
Stock option and restricted stock activity (continued)
Restricted stock
The following table summarizes restricted stock activity for the nine months ended March 31, 2016 and 2015:
| Number of | Weighted | ||||||
| shares of | average grant | ||||||
| restricted | date fair value | ||||||
| stock | ($’000) | ||||||
| Non-vested – June 30, 2015 | 341,529 | 1,759 | |||||
| Granted – August 2015 | 319,492 | 6,406 | |||||
| Vested – August 2015 | (71,574 | ) | 1,435 | ||||
| Non-vested – March 31, 2016 | 589,447 | 7,622 | |||||
| Non-vested – June 30, 2014 | 385,778 | 3,534 | |||||
| Granted – August 2014 | 141,707 | 581 | |||||
| Granted – November 2014 | 71,530 | 229 | |||||
| Vested – August 2014 | (74,152 | ) | 828 | ||||
| Vested – February 2015 | (183,334 | ) | 2,400 | ||||
| Non-vested – March 31, 2015 | 341,529 | 1,759 |
The August 2015 grants comprise 301,537 and 2014:17,955 shares of restricted stock awarded to employees and non-employee directors, respectively. The shares of restricted stock awarded to employees in August 2015 are subject to time-based and performance-based vesting conditions. In order for any of the shares to vest, the recipient must remain employed by the Company on a full-time basis on the date that it files its Annual Report on Form 10-K for the fiscal year ended June 30, 2018. If that condition is satisfied, then the shares will vest based on the level of Fundamental EPS the Company achieves for the fiscal year ended June 30, 2018 (“2018 Fundamental EPS”), as follows:
| Weighted | ||||||
| Number of | Average | |||||
| Shares of | Grant Date | |||||
| Restricted | Fair Value | |||||
| Stock | ($’000) | |||||
| Non-vested – June 30, 2014 | 385,778 | 3,534 | ||||
| Granted – August 2014 | 141,707 | 581 | ||||
| Granted – November 2014 | 71,530 | 229 | ||||
| Vested – August 2014 | (74,152 | ) | 828 | |||
| Vested – February 2015 | (183,334 | ) | 2,400 | |||
| Non-vested – March 31, 2015 | 341,529 | 1,759 | ||||
| Non-vested – June 30, 2013 | 405,226 | 4,393 | ||||
| Granted – August 2013 | 187,963 | 1,382 | ||||
| Vested – August 2013 | (16,907 | ) | 161 | |||
| Vested – February 2014 | (183,333 | ) | 1,742 | |||
| Forfeitures – October 2013 | (7,171 | ) | 84 | |||
| Non-vested – March 31, 2014 | 385,778 | 3,534 |
• | 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 Company’s common stock quoted on The Nasdaq Global Select Market on the date of grant.
19
| 13. | Stock-based compensation (continued) |
Stock option and restricted stock activity (continued)
Restricted stock (continued)
The August 2014 grants comprise 127,626 and 14,081 shares of restricted stock awarded to employees and non-employee directors, respectively. All of the November 2014 grants were awarded to employees. The 127,626 and 71,530 shares of restricted stock will vest in full only on the date, if any, the following conditions are satisfied: (1) the closing price of shares of the Company’s common stock equals or exceeds $19.41 (subject to appropriate adjustment for any stock split or stock dividend) for a period of 30 consecutive trading days during a measurement period commencing on the date that the Company files its Annual Report on Form 10-K for the fiscal year ended 2017 and ending on December 31, 2017 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited. The $19.41 price target represents a 20% increase, compounded annually, in the price of shares of the Company’s common stock on Nasdaq over the $11.23 closing price on August 27, 2014.
The 127,626 and 71,530 shares of restricted stock are effectively forward starting knock-in barrier options with a strike price of zero. The fair value of these shares of restricted stock was calculated utilizing an adjusted Monte Carlo simulation discounted cash flow model which was developed for the purpose of the valuation of these shares. For each simulated share price path, the market share price condition was evaluated to determine whether or not the shares would vest under that simulation. The “adjustment” to the Monte Carlo simulation model incorporates a “jump diffusion” process to the standard Geometric Brownian Motion simulation, in order to capture the discontinuous share price jumps observed in the Company’s share price movements on stock exchanges on which it is listed. Therefore, the simulated share price paths capture the idiosyncrasies of the observed Company share price movements.
In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the final vested value on maturity is the share price on vesting date. The value of the grant is the average of the discounted vested values.
The Company used an expected volatility of 76.01%, an expected life of approximately three years, a risk-free rate of 1.27% and no future dividends in its calculation of the fair value of the 127,626 shares of restricted stock. The Company used an expected volatility of 63.73%, an expected life of approximately three years, a risk-free rate of 1.21% and no future dividends in its calculation of the fair value of the 71,530 shares of restricted stock. Estimated expected volatility was calculated based on the Company’s 30 day VWAP share price using the exponentially weighted moving average of returns.
No shares of restricted stock vested during the three months ended March 31, 2016. The fair value of restricted stock vesting during the three months ended March 31, 2015, and 2014, respectively, was $2.4 million and $1.7 million. The fair value of restricted stock vesting during the nine months ended March 31, 20152016 and 2014,2015, respectively, was $3.2$1.4 million and $1.9$3.2 million. The fair value of restricted stock is based on the closing price of the Company’s stock quoted on The Nasdaq Global Select Market on the date of grant.
17
12. Stock-based compensation (continued)
Stock-based compensation charge and unrecognized compensation cost
The Company has recorded a stock-based compensation charge of $0.7$1.0 million and $0.9$0.7 million, respectively, during the three months ended March 31, 20152016 and 2014,2015, which comprised:
| Allocated to cost | |||||||||
| of goods sold, IT | Allocated to | ||||||||
| processing, | selling, general | ||||||||
| Total | servicing and | and | |||||||
| charge | support | administration | |||||||
| Three months ended March 31, 2015 | |||||||||
| Stock-based compensation charge | $ | 731 | $ | - | $ | 731 | |||
| Total – three months ended March 31, 2015 | $ | 731 | $ | - | $ | 731 | |||
| Three months ended March 31, 2014 | |||||||||
| Stock-based compensation charge | $ | 922 | $ | - | $ | 922 | |||
| Total – three months ended March 31, 2014 | $ | 922 | $ | - | $ | 922 |
| Allocated to cost | ||||||||||
| of goods sold, IT | Allocated to | |||||||||
| processing, | selling, general | |||||||||
| �� | Total | servicing and | and | |||||||
| charge | support | administration | ||||||||
| Three months ended March 31, 2016 | ||||||||||
| Stock-based compensation charge | $ | 954 | $ | - | $ | 954 | ||||
| Total – three months ended March 31, 2016 | $ | 954 | $ | - | $ | 954 | ||||
| Three months ended March 31, 2015 | ||||||||||
| Stock-based compensation charge | $ | 731 | $ | - | $ | 731 | ||||
| Total – three months ended March 31, 2015 | $ | 731 | $ | - | $ | 731 |
20
| 13. | Stock-based compensation (continued) |
Stock-based compensation charge and unrecognized compensation cost (continued)
The Company has recorded a stock-based compensation charge of $2.7$2.6 million and $2.8$2.7 million, respectively, during the nine months ended March 31, 20152016 and 2014,2015, which comprised:
| Allocated to cost | |||||||||
| of goods sold, IT | Allocated to | ||||||||
| processing, | selling, general | ||||||||
| Total | servicing and | and | |||||||
| charge | support | administration | |||||||
| Nine months ended March 31, 2015 | |||||||||
| Stock-based compensation charge | $ | 2,682 | $ | - | $ | 2,682 | |||
| Total – nine months ended March 31, 2015 | $ | 2,682 | $ | - | $ | 2,682 | |||
| Nine months ended March 31, 2014 | |||||||||
| Stock-based compensation charge | $ | 2,826 | $ | - | $ | 2,826 | |||
| Reversal of stock compensation charge related to restricted stock forfeited | (6 | ) | - | (6 | ) | ||||
| Total – nine months ended March 31, 2014 | $ | 2,820 | $ | - | $ | 2,820 |
| Allocated to cost | ||||||||||
| of goods sold, IT | Allocated to | |||||||||
| processing, | selling, general | |||||||||
| Total | servicing and | and | ||||||||
| charge | support | administration | ||||||||
| Nine months ended March 31, 2016 | ||||||||||
| Stock-based compensation charge | $ | 2,645 | $ | - | $ | 2,645 | ||||
| Total –nine months ended March 31, 2016 | $ | 2,645 | $ | - | $ | 2,645 | ||||
| Nine months ended March 31, 2015 | ||||||||||
| Stock-based compensation charge | $ | 2,682 | $ | - | $ | 2,682 | ||||
| Total –nine months ended March 31, 2015 | $ | 2,682 | $ | - | $ | 2,682 |
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 March 31, 2015,2016, the total unrecognized compensation cost related to stock options was approximately $2.1$1.1 million, which the Company expects to recognize over approximately threetwo years. As of March 31, 2015,2016, the total unrecognized compensation cost related to restricted stock awards was approximately $1.3$2.0 million, which the Company expects to recognize over approximately two years.
As of March 31, 20152016 and June 30, 2014,2015, respectively, the Company has recorded a deferred tax asset of approximately $1.3 million and $1.6$1.7 million related to the stock-based compensation charge recognized related to employees and directors of Net1 as it is able to deduct the grant date fair value for taxation purposes in the United States.U.S.
| 14. | Earnings per share |
13. Earnings per share
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 nine months ended March 31, 20152016 and 2014,2015, reflects only undistributed earnings. The computation below of basic earnings per share excludes the net income attributable to shares of unvested restricted stock (participating non-vested restricted stock) from the numerator and excludes the dilutive impact of these unvested shares of restricted stock from the denominator.
18
13. Earnings per share (continued)
Diluted earnings per share hashave been calculated to give effect to the number of shares of additional common stock that would have been outstanding if the potential dilutive instruments had been issued in each period. Stock options are included in the calculation of diluted earnings per share utilizing the treasury stock method and are not considered to be participating securities as the stock options do not contain non-forfeitable dividend rights. The calculation of diluted earnings per share includes the dilutive effect of a portion of the restricted stock granted to employees in February 2012, August 2013, August 2014, and November 2014 and August 2015 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 2015 are discussed in Note 13 and the vesting conditions for all other awards are discussed in Note 18 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2014.2015.
21
| 14. | Earnings per share (continued) |
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 | Nine months ended | |||||||||||
| March 31, | March 31, | |||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||
| (in thousands except percent | (in thousands except percent | |||||||||||
| and | and | |||||||||||
| per share data) | per share data) | |||||||||||
| Numerator: | ||||||||||||
| Net income attributable to Net1 | $ | 24,358 | $ | 17,182 | $ | 70,821 | $ | 41,527 | ||||
| Undistributed earnings | 24,358 | 17,182 | 70,821 | 41,527 | ||||||||
| Percent allocated to common shareholders (Calculation 1) | 99% | 99% | 99% | 99% | ||||||||
| Numerator for earnings per share: basic and diluted | $ | 24,102 | $ | 16,944 | $ | 70,011 | $ | 40,917 | ||||
| Denominator: | ||||||||||||
| Denominator for basic earnings per share: weighted-average common shares outstanding | 46,071 | 45,142 | 46,235 | 45,070 | ||||||||
| Effect of dilutive securities: | ||||||||||||
| Stock options | 178 | 91 | 137 | 106 | ||||||||
| Denominator for diluted earnings per share: adjusted weighted average common shares outstanding and assumed conversion | 46,249 | 45,233 | 46,372 | 45,176 | ||||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 0.52 | $ | 0.38 | $ | 1.51 | $ | 0.91 | ||||
| Diluted | $ | 0.52 | $ | 0.37 | $ | 1.51 | $ | 0.90 | ||||
| (Calculation 1) | ||||||||||||
| Basic weighted-average common shares outstanding (A) | 46,071 | 45,142 | 46,235 | 45,070 | ||||||||
| Basic weighted-average common shares outstanding and unvested restricted shares expected to vest (B) | 46,561 | 45,776 | 46,770 | 45,742 | ||||||||
| Percent allocated to common shareholders (A) / (B) | 99% | 99% | 99% | 99% | ||||||||
| Three months ended | Nine months ended | ||||||||||||
| March 31, | March 31, | ||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| (in thousands except percent | (in thousands except percent | ||||||||||||
| and | and | ||||||||||||
| per share data) | per share data) | ||||||||||||
| Numerator: | |||||||||||||
| Net income attributable to Net1 | $ | 18,420 | $ | 24,358 | $ | 58,098 | $ | 70,821 | |||||
| Undistributed earnings | 18,420 | 24,358 | 58,098 | 70,821 | |||||||||
| Percent allocated to common shareholders (Calculation 1) | 99% | 99% | 99% | 99% | |||||||||
| Numerator for earnings per share: basic and diluted | $ | 18,158 | $ | 24,102 | $ | 57,334 | $ | 70,011 | |||||
| Denominator: | |||||||||||||
| Denominator for basic earnings per share: | |||||||||||||
| weighted-average common shares outstanding | 45,683 | 46,071 | 46,171 | 46,235 | |||||||||
| Effect of dilutive securities: | |||||||||||||
| Stock options | 89 | 178 | 288 | 137 | |||||||||
| Denominator for diluted earnings per share: adjusted weighted average common shares outstanding and assumed conversion | 45,772 | 46,249 | 46,459 | 46,372 | |||||||||
| Earnings per share: | |||||||||||||
| Basic | $ | 0.40 | $ | 0.52 | $ | 1.24 | $ | 1.51 | |||||
| Diluted | $ | 0.40 | $ | 0.52 | $ | 1.23 | $ | 1.51 | |||||
| (Calculation 1) | |||||||||||||
| Basic weighted-average common shares outstanding (A) | 45,683 | 46,071 | 46,171 | 46,235 | |||||||||
| Basic weighted-average common shares outstanding and unvested restricted shares expected to vest (B) | 46,341 | 46,561 | 46,786 | 46,770 | |||||||||
| Percent allocated to common shareholders (A) / (B) | 99% | 99% | 99% | 99% | |||||||||
Options to purchase 1,798,8531,041,938 shares of the Company’s common stock at prices ranging from $11.23 to $24.46 per share were outstanding during the three and nine months ended March 31, 2015,2016, but were not included in the computation of diluted earnings per share because the options’ exercise price were greater than the average market price of the Company’s common stock. The options, which expire at various dates through August 27, 2024, were still outstanding as of March 31, 2015.2016.
| 15. | Supplemental cash flow information |
19
14. Supplemental cash flow information
The following table presents supplemental cash flow disclosures for the three and nine months ended March 31, 20152016 and 2014:2015:
| Three months ended | Nine months ended | |||||||||||
| March 31, | March 31, | |||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||
| Cash received from interest | $ | 4,200 | $ | 3,422 | $ | 11,940 | $ | 9,886 | ||||
| Cash paid for interest | $ | 915 | $ | 1,651 | $ | 3,328 | $ | 5,317 | ||||
| Cash paid for income taxes | $ | 3,086 | $ | 1,570 | $ | 28,639 | $ | 16,097 | ||||
| Three months ended | Nine months ended | ||||||||||||
| March 31, | March 31, | ||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| Cash received from interest | $ | 3,341 | $ | 4,200 | $ | 11,262 | $ | 11,940 | |||||
| Cash paid for interest | $ | 813 | $ | 915 | $ | 2,864 | $ | 3,328 | |||||
| Cash paid for income taxes | $ | 4,052 | $ | 3,086 | $ | 28,374 | $ | 28,639 | |||||
The sale of the Company’s NUETS business is described in Note 19 to its audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2014. The Company received cash sale proceeds of $1.9 million related to this transaction in July 2014.
As discussed in Note 12,2, on January 20, 2016, the Company issued 391,645 shares of its common stock with an aggregate issue date fair value of approximately $4.0 million as part consideration for the Company’s 56% interest in T24.
22
| 15. | Supplemental cash flow information (continued) |
As discussed in Note 13, during the nine months ended March 31, 2015, employees exercised stock options through the delivery 336,584 shares of the Company’s common stock at the closing price on September 9, 2014 or $13.93 under the terms of their option agreements. These shares are
The sale of the Company’s NUETS business is described in Note 19 to its audited consolidated financial statements included in the Company’s total share count and amount reflected as treasury sharesits Annual Report on the unaudited condensed consolidated balance sheet as of March 31, 2015 and unaudited condensed consolidated statement of changes in equityForm 10-K for the nine monthsyear ended March 31,June 30, 2015. The Company received cash sale proceeds of $1.9 million related to this transaction in July 2014.
| 16. | Operating segments |
15. Operating segments
The Company discloses segment information as reflected in the management information systems reports that its chief operating decision maker uses in making decisions and to report certain entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets or reports material revenues. A description of the Company’s operating segments is contained in Note 23 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2014.2015.
The reconciliation of the reportable segments revenue to revenue from external customers for the three months ended March 31, 20152016 and 2014,2015, respectively, is as follows:
| Revenue | |||||||||
| From | |||||||||
| Reportable | Inter- | external | |||||||
| Segment | segment | customers | |||||||
| South African transaction processing | $ | 57,999 | $ | 5,359 | $ | 52,640 | |||
| International transaction processing | 38,311 | - | 38,311 | ||||||
| Financial inclusion and applied technologies | 66,830 | 6,660 | 60,170 | ||||||
| Total for the three months ended March 31, 2015 | 163,140 | 12,019 | 151,121 | ||||||
| South African transaction processing | 57,397 | 3,886 | 53,511 | ||||||
| International transaction processing | 35,245 | - | 35,245 | ||||||
| Financial inclusion and applied technologies | 56,226 | 6,856 | 49,370 | ||||||
| Total for the three months ended March 31, 2014 | $ | 148,868 | $ | 10,742 | $ | 138,126 | |||
| Revenue | ||||||||||
| From | ||||||||||
| Reportable | Inter- | external | ||||||||
| Segment | segment | customers | ||||||||
| South African transaction processing | $ | 50,594 | $ | 5,621 | $ | 44,973 | ||||
| International transaction processing | 40,588 | - | 40,588 | |||||||
| Financial inclusion and applied technologies | 54,286 | 5,111 | 49,175 | |||||||
| Total for the three months ended March 31, 2016 | 145,468 | 10,732 | 134,736 | |||||||
| South African transaction processing | 57,999 | 5,359 | 52,640 | |||||||
| International transaction processing | 38,311 | - | 38,311 | |||||||
| Financial inclusion and applied technologies | 66,830 | 6,660 | 60,170 | |||||||
| Total for the three months ended March 31, 2015 | $ | 163,140 | $ | 12,019 | $ | 151,121 | ||||
The reconciliation of the reportable segments revenue to revenue from external customers for the nine months ended March 31, 20152016 and 2014,2015, respectively, is as follows:
| Revenue | |||||||||
| From | |||||||||
| Reportable | Inter- | external | |||||||
| Segment | segment | customers | |||||||
| South African transaction processing | $ | 176,678 | $ | 15,917 | $ | 160,761 | |||
| International transaction processing | 121,981 | - | 121,981 | ||||||
| Financial inclusion and applied technologies | 199,558 | 20,607 | 178,951 | ||||||
| Total for the nine months ended March 31, 2015 | $ | 498,217 | $ | 36,524 | $ | 461,693 | |||
| Revenue | ||||||||||
| From | ||||||||||
| Reportable | Inter- | external | ||||||||
| Segment | segment | customers | ||||||||
| South African transaction processing | $ | 158,997 | $ | 12,598 | $ | 146,399 | ||||
| International transaction processing | 122,653 | - | 122,653 | |||||||
| Financial inclusion and applied technologies | 187,332 | 16,894 | 170,438 | |||||||
| Total for the nine months ended March 31, 2016 | 468,982 | 29,492 | 439,490 | |||||||
| South African transaction processing | 176,678 | 15,917 | 160,761 | |||||||
| International transaction processing | 121,981 | - | 121,981 | |||||||
| Financial inclusion and applied technologies | 199,558 | 20,607 | 178,951 | |||||||
| Total for the nine months ended March 31, 2015 | $ | 498,217 | $ | 36,524 | $ | 461,693 | ||||
2023
| 16. | Operating segments (continued) |
15. Operating segments (continued)
| Revenue | |||||||||
| From | |||||||||
| Reportable | Inter- | external | |||||||
| Segment | segment | customers | |||||||
| South African transaction processing | $ | 173,312 | $ | 6,866 | $ | 166,446 | |||
| International transaction processing | 110,524 | - | 110,524 | ||||||
| Financial inclusion and applied technologies | 143,502 | 21,569 | 121,933 | ||||||
| Total for the nine months ended March 31, 2014 | $ | 427,338 | $ | 28,435 | $ | 398,903 | |||
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 nine months ended March 31, 20152016 and 2014,2015, respectively, is as follows:
| Three months ended | Nine months ended | |||||||||||
| March 31, | March 31, | |||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||
| Reportable segments measure of profit or loss | $ | 37,703 | $ | 30,238 | $ | 112,751 | $ | 80,590 | ||||
| Operating income: Corporate/Eliminations | (5,737 | ) | (6,289 | ) | (16,845 | ) | (21,439 | ) | ||||
| Interest income | 4,211 | 3,438 | 11,888 | 9,993 | ||||||||
| Interest expense | (941 | ) | (1,734 | ) | (3,360 | ) | (5,712 | ) | ||||
| Income before income taxes | $ | 35,236 | $ | 25,653 | $ | 104,434 | $ | 63,432 | ||||
| Three months ended | Nine months ended | ||||||||||||
| March 31, | March 31, | ||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| Reportable segments measure of profit or loss | $ | 29,415 | $ | 37,703 | $ | 95,862 | $ | 112,751 | |||||
| Operating income: Corporate/Eliminations | (3,224 | ) | (5,737 | ) | (13,677 | ) | (16,845 | ) | |||||
| Interest income | 3,345 | 4,211 | 11,284 | 11,888 | |||||||||
| Interest expense | (852 | ) | (941 | ) | (2,880 | ) | (3,360 | ) | |||||
| Income before income taxes | $ | 28,684 | $ | 35,236 | $ | 90,589 | $ | 104,434 | |||||
The following tables summarize segment information which is prepared in accordance with GAAP for the three and nine months ended March 31, 20152016 and 2014:2015:
| Three months ended | Nine months ended | |||||||||||
| March 31, | March 31, | |||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||
| Revenues | ||||||||||||
| South African transaction processing | $ | 57,999 | $ | 57,397 | $ | 176,678 | $ | 173,312 | ||||
| International transaction processing | 38,311 | 35,245 | 121,981 | 110,524 | ||||||||
| Financial inclusion and applied technologies | 66,830 | 56,226 | 199,558 | 143,502 | ||||||||
| Total | 163,140 | 148,868 | 498,217 | 427,338 | ||||||||
| Operating income (loss) | ||||||||||||
| South African transaction processing | 13,218 | 9,137 | 39,740 | 22,726 | ||||||||
| International transaction processing | 6,579 | 4,642 | 19,671 | 15,305 | ||||||||
| Financial inclusion and applied technologies | 17,906 | 16,459 | 53,340 | 42,559 | ||||||||
| Subtotal: Operating segments | 37,703 | 30,238 | 112,751 | 80,590 | ||||||||
| Corporate/Eliminations | (5,737 | ) | (6,289 | ) | (16,845 | ) | (21,439 | ) | ||||
| Total | 31,966 | 23,949 | 95,906 | 59,151 | ||||||||
| Depreciation and amortization | ||||||||||||
| South African transaction processing | 1,726 | 1,653 | 5,271 | 5,475 | ||||||||
| International transaction processing | 4,560 | 3,959 | 13,224 | 11,822 | ||||||||
| Financial inclusion and applied technologies | 207 | 172 | 589 | 495 | ||||||||
| Subtotal: Operating segments | 6,493 | 5,784 | 19,084 | 17,792 | ||||||||
| Corporate/Eliminations | 3,567 | 4,658 | 11,307 | 12,453 | ||||||||
| Total | $ | 10,060 | $ | 10,442 | $ | 30,391 | $ | 30,245 | ||||
| Three months ended | Nine months ended | ||||||||||||
| March 31, | March 31, | ||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| Revenues | |||||||||||||
| South African transaction processing | $ | 50,594 | $ | 57,999 | $ | 158,997 | $ | 176,678 | |||||
| International transaction processing | 40,588 | 38,311 | 122,653 | 121,981 | |||||||||
| Financial inclusion and applied technologies | 54,286 | 66,830 | 187,332 | 199,558 | |||||||||
| Total | 145,468 | 163,140 | 468,982 | 498,217 | |||||||||
| Operating income (loss) | |||||||||||||
| South African transaction processing | 13,133 | 13,218 | 38,724 | 39,740 | |||||||||
| International transaction processing | 4,813 | 6,579 | 15,596 | 19,671 | |||||||||
| Financial inclusion and applied technologies | 11,469 | 17,906 | 41,542 | 53,340 | |||||||||
| Subtotal: Operating segments | 29,415 | 37,703 | 95,862 | 112,751 | |||||||||
| Corporate/Eliminations | (3,224 | ) | (5,737 | ) | (13,677 | ) | (16,845 | ) | |||||
| Total | 26,191 | 31,966 | 82,185 | 95,906 | |||||||||
| Depreciation and amortization | |||||||||||||
| South African transaction processing | 1,463 | 1,726 | 4,858 | 5,271 | |||||||||
| International transaction processing | 5,232 | 4,560 | 15,991 | 13,224 | |||||||||
| Financial inclusion and applied technologies | 272 | 207 | 844 | 589 | |||||||||
| Subtotal: Operating segments | 6,967 | 6,493 | 21,693 | 19,084 | |||||||||
| Corporate/Eliminations | 2,314 | 3,567 | 8,289 | 11,307 | |||||||||
| Total | 9,281 | 10,060 | 29,982 | 30,391 | |||||||||
| Expenditures for long-lived assets | |||||||||||||
| South African transaction processing | 926 | 1,514 | 3,469 | 3,678 | |||||||||
| International transaction processing | 6,864 | 4,561 | 23,107 | 20,167 | |||||||||
| Financial inclusion and applied technologies | 263 | 232 | 2,122 | 977 | |||||||||
| Subtotal: Operating segments | 8,053 | 6,307 | 28,698 | 24,822 | |||||||||
| Corporate/Eliminations | - | - | - | - | |||||||||
| Total | $ | 8,053 | $ | 6,307 | $ | 28,698 | $ | 24,822 | |||||
21
15. Operating segments (continued)
| Three months ended | Nine months ended | |||||||||||
| March 31, | March 31, | |||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||
| Expenditures for long-lived assets | ||||||||||||
| South African transaction processing | $ | 1,514 | $ | 303 | $ | 3,678 | $ | 2,903 | ||||
| International transaction processing | 4,561 | 4,231 | 20,167 | 13,747 | ||||||||
| Financial inclusion and applied technologies | 232 | 314 | 977 | 659 | ||||||||
| Subtotal: Operating segments | 6,307 | 4,848 | 24,822 | 17,309 | ||||||||
| Corporate/Eliminations | - | - | - | - | ||||||||
| Total | $ | 6,307 | $ | 4,848 | $ | 24,822 | $ | 17,309 | ||||
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.
16. Income tax24
| 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 nine months ended March 31, 2015,2016, the tax charge was calculated using the expected effective tax rate for the year. The Company’s effective tax rate for the three and nine months ended March 31, 2016, was 34.2% and 34.6%, respectively, and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees) and the tax impact, including withholding taxes, of distributions from subsidiary companies in foreign jurisdictions.
The Company’s effective tax rate for the three and nine months ended March 31, 2015, was 29.2% and 30.8%, respectively, and was higher than the South African statutory rate primarily as a result of non-deductible expenses (including consulting and legal fees, and interest expense related to the Company’s long-term Korean borrowings).
The Company’s effective tax rate for the three and nine months ended March 31, 2014, was 33.3% and 34.9%, respectively, and was higher than the South African statutory rate primarily as a result of non-deductible expenses (including interest expense related to the Company’s long-term Korean borrowings and stock-based compensation charges).
Uncertain tax positions
There were no changes to the Company’s unrecognized tax benefits during the three months ended March 31, 2016. The Company increased its unrecognized tax benefits by $1.2approximately $0.2 million during the three and nine months ended March 31, 2015.2016. As of March 31, 2015,2016, the Company had accrued interest related to uncertain tax positions of approximately $0.2$0.3 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 March 31, 20152016 and June 30, 2014,2015, the Company has unrecognized tax benefits of $2.3$1.9 million and $1.2$2.3 million, respectively, all of which would impact the Company’s effective tax rate. The Company files income tax returns mainly in South Africa, South Korea, Austria,India, the United Kingdom, Botswana and in the USU.S. federal jurisdiction. As of March 31, 2015,2016, the Company’s South African subsidiaries are no longer subject to income tax examination by the South African Revenue Service for periods before June 30, 2010.2011. The Company is subject to income tax in other jurisdictions outside South Africa, none of which are individually material to its financial position, results of operations or cash flows.
| 18. |
|
Guarantees
Guarantees
The South African Revenue Service and certain of the Company’s customers, suppliers and other business partners have asked the Company to provide them with guarantees, including standby letters of credit, issued by a South African bank. The Company is required to procure these guarantees for these third parties to operate its business.
Nedbank has issued guarantees to these third parties amounting to ZAR 135.0128.4 million ($11.28.7 million, translated at exchange rates applicable as of March 31, 2015)2016) and thereby utilizing part of the Company’s short-term facility. The Company in turn has provided nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 125.0128.4 million ($10.38.7 million, translated at exchange rates applicable as of March 31, 2015)2016). The Company pays commission of between 0.2%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 March 31, 20152016 and June 30, 2014.2015. The maximum potential amount that the Company could pay under these guarantees is ZAR 135.0128.4 million ($11.28.7 million, translated at exchange rates applicable as of March 31, 2015)2016). The guarantees have reduced the amount available for borrowings under the Company’s short-term credit facility described in Note 8.9.
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| 18. | Commitments and contingencies (continued) |
Contingencies
Securities Litigation
On March 6, 2015, the plaintiff filed an opposition to the Company’s motion to dismiss its complaint and the Company filed a reply brief on March 27, 2015.
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 Company’s financial position, results of operations or cash flows.
| 19. | Subsequent events |
23Acquisition of Masterpayment AG
In early April 2016, the Company acquired a 60% interest in Masterpayment AG (“Masterpayment”), a specialist payment services processor based in Munich, Germany for approximately $10.0 million. Masterpayment provides payment and acquiring services for all major European debit and credit cards; and invoicing for online retail, digital goods and content. Masterpayment currently has a client portfolio of approximately 5,000 registered merchants.
The purchase price allocation has not been finalized, as management has not yet analyzed in detail the assets acquired and liabilities assumed. The Company expects to finalize the purchase price allocation on or before September 30, 2016. Pro forma results of operations have not been presented because the effect of the Masterpayment acquisition, individually and in the aggregate, was not material to the Company’s results of operations. The Company has incurred transaction-related expenditures of approximately $0.1 million to date related to this acquisition and expects to incur additional such expenses during the three months ending June 30, 2016. The Company is currently unable to quantify the amount of these additional expenditures.
Transaction with the International Finance Corporation and certain funds managed by IFC Asset Management Company
Subscription Agreement
On April 11, 2016, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with International Finance Corporation, IFC African, Latin American and Caribbean Fund, LP, IFC Financial Institutions Growth Fund, LP, and Africa Capitalization Fund, Ltd. (collectively, the “IFC Investors”). Under the Subscription Agreement, the Investors have agreed to purchase, and the Company has agreed to sell, in the aggregate, approximately 9.98 million shares of the Company’s common stock, par value $0.001 per share, at a price of $10.79 per share, for gross proceeds to the Company of approximately $107.7 million. All pre-closing deliverables stipulated in the Subscription Agreement have been received by and approved by the Investors. Pursuant to the terms of the Subscription Agreement, the transaction is expected to close on May 11, 2016.
Policy Agreement
The Company has entered into a Policy Agreement with the IFC Investors (the “Policy Agreement”) that becomes effective on the closing under the Subscription Agreement. The material terms of the Policy Agreement are described below.
Board Rights
For so long as the IFC Investors in aggregate beneficially own shares representing at least 5% of the Company’s common stock, the IFC Investors will have the right to nominate one director to the Company’s board of directors. For so long as the IFC Investors in aggregate beneficially own shares representing at least 2.5% of the Company’s common stock, the IFC Investors will have the right to appoint an observer to the Company’s board of directors at any time when they have not designated, or do not have the right to designate, a director.
Registration Rights
The Company has agreed to grant certain registration rights to the IFC Investors for the resale of their shares of the Company’s common stock, including filing a resale shelf registration statement and taking certain actions to facilitate resales thereunder.
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| 19. | Subsequent events (continued) |
Policy Agreement (continued)
Put Option
Each Investor will have the right, upon the occurrence of specified triggering events, to require the Company to repurchase all of the shares of its common stock purchased by the IFC Investors pursuant to the Subscription Agreement (or upon exercise of their preemptive rights discussed below). Events triggering this put right relate to (1) the Company being the subject of a governmental complaint alleging, a court judgment finding or an indictment alleging that the Company (a) engaged in specified corrupt, fraudulent, coercive, collusive or obstructive practices; (b) entered into transactions with targets of economic sanctions; or (c) failed to operate its business in compliance with anti-money laundering and anti-terrorism laws; or (2) the Company rejecting a bona fide offer to acquire all of its outstanding Common Stock at a time when it has in place or implements a shareholder rights plan, or adopting a shareholder rights plan triggered by a beneficial ownership threshold of less than twenty percent. The put price per share will be the higher of the price per share paid by the IFC Investors pursuant to the Subscription Agreement (or paid when exercising their preemptive rights) and the volume weighted average price per share prevailing for the 60 trading days preceding the triggering event, except that with respect a put right triggered by rejection of a bona fide offer, the put price per share will be the highest price offered by the offeror.
Preemptive Rights
For so long as the IFC Investors hold in aggregate 5% of the outstanding shares of common stock of the Company, each Investor will have the right to purchase its pro-rata share of new issuances of securities by the Company, subject to certain exceptions.
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Item 2. Management’s 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, 2014,2015, 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 industry’s 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, 2014, and Item 1A.—“Risk Factors” and elsewhere2015and in this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially. We undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.
You should read this Form 10-Q and the documents that we reference herein and the documents we have filed as exhibits hereto and thereto and which we have filed with the Securities and Exchange Commission completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Recent Developments
Update on SASSA tender processProgress of financial inclusion initiatives in South Africa
As ordered byIn June 2015, we began the rollout of EPE our business-to-consumer, or B2C, offering in South African Constitutional CourtAfrica and we have experienced rapid growth in its April 2014 ruling, SASSA initiated a new tender process for a five-year contract relating to the payment of social grants by issuing an initial Request for Proposal, or RFP, in October 2014. Following a detailed analysis of the tender specifications, we concluded that the tender specifications were not sufficiently clear regarding a number of critical pointsnew customers. At April 30, 2016, we had more than 1,087,000 active EPE accounts, compared to 830,000 at January 31, 2016. EPE is a fully transactional account created to serve the needs of South Africa’s unbanked and failedunder-banked population, and is available to complyall consumers regardless of their financial or social status. 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 the RFP requirements specified in the Court’s rulinga UEPS-EMV debit MasterCard, mobile and in November 2014, we applied to the Courtinternet banking services, ATM and POS services, as well as loans, insurance and other financial products and value-added services.
In order for an order setting aside the RFP and directing SASSA to issue a corrected RFP. Although the Court did not set aside the RFP, it did order SASSA to issue a draft amended RFP. SASSA issued amended RFPs on two separate occasions (in December 2014 and February 2015). We continued to object to deficiencies in the amended RFPs and made further applications to the Court setting forth our objections. In February 2015, SASSA applied to the Court for an extension of timeus to address the sizeable opportunity for EPE and related financial inclusion services in South Africa, we have had to expand our objections.
In orders dated March 19 and 24, 2015, the Court ordered SASSA to effect further amendments to the RFP to address our objections. The Court ordered that, absent further objections (1) SASSA must circulate a further amended draft RFP by April 17, 2015; (2) all bids must be submitted by May 17, 2015 and (3) SASSA shall award the new tender by October 15, 2015. The Court’s April 2014 ruling does not require SASSA to award a new tender, though we expect that any decision not to make an award would be subject to judicial review and scrutiny. On April 17, 2015, SASSA issued and circulated an amended RFP to all prospective bidders. The amended RFP specifies that bidders must submit their proposals to SASSA on or before May 18, 2015 and also states that no part of the contents of the RFP may be used, copied, disclosed or conveyed in whole or in part to any party in any manner whatsoever other than for the purpose of the proposal.
We are currently analyzing the RFP to determine whether it is in the best interest of the Company to participate in the tender process or to focus on our otherbrick-and-mortar financial services businesses without beingbranch infrastructure and supplement our nationwide distribution with a contractor to SASSA. WeUEPS/EMV-enabled ATM network, as well as a dedicated sales force. Such investments have not yet made a final determination but expect to do so by the tender deadline. In any event,accelerated through fiscal 2016 and at March 31, 2016, we cannot predict what the timing or ultimate outcome of the tender process will be, or if a new tender award will be made at all after the process is complete.had 118 branches, 827 ATMs, and 2,001 dedicated employees.
See Part II, Item 1A.—“Risk Factors,” for additional details.
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ATMs in South Africa
We haveOur deployed ATMs, which are both EMV-and UEPS-compliant, and provide biometric verification as well as proof of life functionality, in South Africa. We have been able to expand our customer base because our ATMs accept all EMV-compliant cards. We currently have approximately 400 operational ATMs and we are actively deploying more ATMs in high demand areas. We have placedplace these ATMs with our merchant partners and within our own branches, creating a new delivery channel for our products and services that did not exist before. Although capital intensive, ourpreviously exist. The ATM rollout has already beguncontinued to make a positive contribution to our reported results.results and we have been able to expand our customer base because our ATMs accept all South African issued bank cards. We will continue to expand our ATM footprint during the remainder of fiscal 2016.
ZAZOO
We established ZAZOO to overseeIn September 2015, we resumed marketing and business development activities in selected areas for the global expansiondistribution of our mobile paymentssimple, low-cost life insurance products and value-added services businesses, includinghave sold approximately 85,000 new policies though April 30, 2016, in addition to the basic life insurance policy provided with every EPE account opened. We recruited additional and oftentimes specialized staff to expand our insurance activities currently conductedduring the second quarter of fiscal 2016, and expect the investment in Smart Life staff to continue through to the end of fiscal 2016.
Following the high sequential growth in our N1MS business unit. ZAZOO’s management is focused on worldwide growth opportunities, especially inlending book during the UK, Europe,second quarter of fiscal 2016 as a result of high demand for our loans during the USA, Indiafestive season and other developed and emerging markets. ZAZOO coordinates all research and development, operations and marketing activities associated with N1MS’ mobile businesses.
ZAZOO entered into strategic collaborations with Uber, Microsoft and Cell C (onethe opening of South Africa’s largest mobile operators)new branches, we experienced lower demand during the third quarter of fiscal 2015 for our VCPay mobile application. VCPay is a mobile phone-based application that generates transaction specific virtual MasterCards that can be used for online purchases, or in brick-and-mortar retailers, that accept manual Card-Not-Present payments. Users can also send a virtual card to friends or family anywhere via email, SMS, MMS or WhatsApp, making it simpler than ever before to send money to third parties. VCPay is fully interoperable and does not require merchants to change the way in which payments are accepted online or via mobile applications, like Uber. We believe that VCPay bridges the electronic payment requirement gap for online or in-application payments by providing an immediate, safe and secure payment solution to anybody, regardless of their banking status.
Under the collaboration with Uber2016. Tougher economic conditions in South Africa, aggravated by rising food prices as a result of widespread drought conditions and a weakening currency, has had an impact on the number of clients who qualify for our loan products.
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The graph below presents the growth of the number of EPE cards and Smart Life policies:
ZAZOO
WorldRemit
We processed our first transactions as a result of our relationship with WorldRemit during the third quarter of fiscal 2016. ZAZOO has entered into an agreement with WorldRemit, a global money transfer services provider, to enable South Africans to instantly receive international money transfers directly into their personal bank accounts. WorldRemit’s has developed an application, or app, that enables people who do not own credit cardsto transfer money to friends and family using a smartphone, tablet or computer at any time or from anywhere. ZAZOO will enable WorldRemit to offer this service in South Africa by using technology developed and customized by FIHRST, an authorized systems operator and third-party processor. FIHRST’s technology streamlines the relationship between the payer and payee and ensures data integrity using sophisticated encryption routines with secure dedicated lines to South Africa’s major banks.
South Africans receive inbound remittances of more than USD 1 billion per year. According to theRemittance Prices Worldwide report published by the World Bank, the average global cost for remittances is 7.68% of the transaction value, with Sub-Saharan Africa listed as the most expensive region in the world at 9.74% . These numbers emphasize the opportunity that exists in South Africa to attract customers through the introduction of highly efficient financial technology, namely lowering cost and increasing accessibility.
In addition, unbanked recipients have the option of opening an EPE account. Should a recipient select to receive their funds into their EPE account, ZAZOO will enable that recipient to make use of its Mobile Virtual Card, or MVC, technology to create a virtual MasterCard to spend digitally for any online purchase in South Africa.
Oxigen Services India Pvt. Ltd, or Oxigen
ZAZOO has recently entered into an agreement with Oxigen, a payment solutions provider in India, to seamlessly integrate its MVC technology to power VIRTUALe into Oxigen Wallet in association with RBL Bank as sponsor bank and co-branding partner. The Oxigen Wallet utilizes ZAZOO’s MVC technology to power the VIRTUALe Visa Prepaid card securely and off-line for card-not-present transactions, such as e-commerce or m-commerce purchases. The MVC technology runs as an application on any mobile phone, transforming it into a cashless, secure and convenient electronic payment device that eliminates the risks of theft, phishing, skimming, spoofing and other fraudulent activities. Oxigen Wallet customers are now able to use VCPaythe application to paymake any purchases or bill payments at online merchants, or send virtual gift cards to friends and family.
We launched the beta version of our MVC technology with Oxigen during January 2016 and as at April 30, 2016 we had approximately 180,000 users and processed transaction value of INR 35 million (approximately $0.5 million translated at exchange rates prevailing as of April 30, 2016).
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Acquisitions
Transact24 Limited
On January 20, 2016, we acquired the remaining 56% of the issued and outstanding ordinary shares of T24 for $3 million in cash and through the Uber service.issue of 391,645 shares of our common stock. T24 is a specialist Hong Kong-based payment services company and is now our wholly-owned subsidiary. We originally acquired approximately 44% of T24 in May 2015. Philip Meyer, the Managing Director of T24 and an industry veteran in the international payments and transaction processing industries, has become an executive officer of our company.
Under theMasterpayment AG
In early April 2016, we acquired a 60% interest in Masterpayment, a specialist payment services processor based in Munich, Germany for approximately $10.0 million. Masterpayment provides payment and acquiring services for all major European debit and credit cards; and invoicing for online retail, digital goods and content. Masterpayment currently has a client portfolio of approximately 5,000 registered merchants.
In collaboration with MicrosoftBank Frick & Co. AG, a Liechtenstein-based bank, Masterpayment provides its e-commerce merchants with working capital optimization by providing a flexible form of financing, which employs a trading transaction instead of traditional bank credit. Masterpayment’s “Finetrading” product enables the seamless financing of a merchant’s inventory orders, resulting in accelerated payment settlement and Cell C, ZAZOO agreedthe elimination of the requirement for a merchant to sponsormaintain rolling reserves or cash advances.
As part of the transaction, we, together with Masterpayment, entered into a R250long term co-operation agreement with Bank Frick, in terms of which Bank Frick will become our strategic banking partner and will provide us with the support and banking services required to deploy our products and services, including VCPay, voucherFinetrading and money remittances in Europe. The management team of Masterpayment and a Bank Frick-affiliate will retain the remaining 40% interest in Masterpayment. We have negotiated an option to consumers who purchase the new Microsoft Lumia 535 onremaining 40% shareholding upon the achievement of certain milestones.
Share Repurchases
During the third quarter of fiscal 2016, we repurchased 1,328,699 shares of our common stock for approximately $12.7 million under our share repurchase program.
Issue of shares to the International Finance Corporation and certain funds managed by IFC Asset Management Company, or, collectively, IFC Investors
We entered into a Cell C contract. The new device became available on Cell C’s talk and data contracts beginning February 1, 2015, and the initial batch was packagedsubscription agreement with the VCPay voucherIFC Investors and expect to receive approximately $107.7 million from the IFC Investors on May 11, 2016, related to the issuance of approximately 9.98 million shares of our common stock at a subscription price of $10.79 per share to them. Refer to Note 19 to our unaudited condensed consolidated financial statements for new owners to use in completing a purchase of their choice when using our VCPay service.
World Food Program
The Southern Africa Regional Office ofadditional detail regarding the United Nations World Food Program, or the WFP, has awarded us a tender for 12 countries that are members of the Southern African Development Community. The contract is for the distribution of cash and food grants to hundreds of thousands of WFP beneficiaries in these territories.
Our technology makes use of any infrastructure present in each territory, and allows for the biometric verification of all beneficiaries regardless of the infrastructure being utilized even when such infrastructure is not biometrically enabled. In these scenarios, we utilize our patented variable PIN technology in conjunction with fingerprint or voice verification methods using any mobile phone. We do not expect that this socially responsible initiative will necessarily translate into a meaningful financial contributor for us in the short term, but we strongly believe that the exposure and credibility associated with winning and operating a project of this nature and scale will create further opportunities for us to implement the same or similar solutions in other contexts. We are currently finalizing our deployment contract with the WFP office based in South Africa.transaction.
Critical Accounting Policies
Our unaudited condensed consolidated financial statements have been prepared in accordance with USU.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 management’s judgment based on a variety of assumptions and other determinants such as historical experience, current and expected market conditions and certain scientific evaluation techniques.
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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, 2014:2015:
Business combinations and the recoverability of goodwill;Intangible assets acquired through acquisitions;Deferred taxation;Stock-based compensation and equity instrument issued pursuant to BEE transaction;Accounts receivable and allowance for doubtful accounts receivable; andResearch and development.
• | Business combinations and the recoverability of goodwill; | |
• | Intangible assets acquired through acquisitions; | |
• | Deferred taxation; | |
• | Stock-based compensation and equity instrument issued pursuant to BEE transaction; | |
• | Accounts receivable and allowance for doubtful accounts receivable; and | |
• | Research and development. |
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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 March 31, 20152016
Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of March 31, 2015,2016, including the expected dates of adoption and effects on our financial condition, results of operations and cash flows.
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 | Nine months ended | Year ended | Three months ended | Nine months ended | Year ended | ||||||||||||||||||||||||
| March 31, | March 31, | June 30, | March 31, | March 31, | June 30, | |||||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | 2014 | 2016 | 2015 | 2016 | 2015 | 2015 | |||||||||||||||||||||
| ZAR : $ average exchange rate | 11.7422 | 10.8622 | 11.2377 | 10.3375 | 10.3798 | 15.8201 | 11.7422 | 14.3395 | 11.2377 | 11.4494 | ||||||||||||||||||||
| Highest ZAR : $ rate during period | 12.4792 | 11.2667 | 12.4792 | 11.2667 | 11.2579 | 16.8231 | 12.4792 | 16.8231 | 12.4792 | 12.5779 | ||||||||||||||||||||
| Lowest ZAR : $ rate during period | 11.3622 | 10.4848 | 10.5128 | 9.6324 | 9.6259 | 14.8330 | 11.3622 | 12.1965 | 10.5128 | 10.5128 | ||||||||||||||||||||
| Rate at end of period | 12.0907 | 10.5833 | 12.0907 | 10.5833 | 10.5887 | 14.8330 | 12.0907 | 14.8330 | 12.0907 | 12.2854 | ||||||||||||||||||||
| KRW : $ average exchange rate | 1,101 | 1,071 | 1,072 | 1,083 | 1,068 | 1,201 | 1,101 | 1,176 | 1,072 | 1,078 | ||||||||||||||||||||
| Highest KRW : $ rate during period | 1,139 | 1,089 | 1,139 | 1,168 | 1,147 | 1,245 | 1,139 | 1,245 | 1,139 | 1,139 | ||||||||||||||||||||
| Lowest KRW : $ rate during period | 1,077 | 1,053 | 1,009 | 1,052 | 1,014 | 1,143 | 1,077 | 1,122 | 1,009 | 1,009 | ||||||||||||||||||||
| Rate at end of period | 1,106 | 1,071 | 1,106 | 1,071 | 1,014 | 1,143 | 1,106 | 1,143 | 1,106 | 1,128 | ||||||||||||||||||||
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ZAR: US $ Exchange Rates
KRW: US $ Exchange Rates
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Translation exchange rates for financial reporting purposes
We are required to translate our results of operations from ZAR and KRW to USU.S. dollars on a monthly basis. Thus, the average rates used to translate this data for the three and nine months ended March 31, 20152016 and 2014,2015, vary slightly from the averages shown in the table above. The translation rates we use in presenting our results of operations are the rates shown in the following table:
| Table 2 | Three months ended | Nine months ended | Year ended | Three months ended | Nine months ended | Year ended | ||||||||||||||||||||||||
| March 31, | March 31, | June 30, | March 31, | March 31, | June 30, | |||||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | 2014 | 2016 | 2015 | 2016 | 2015 | 2015 | |||||||||||||||||||||
| Income and expense items: $1 = ZAR | 11.7218 | 10.8743 | 11.2251 | 10.3801 | 10.3966 | |||||||||||||||||||||||||
| Income and expense items: $1 = ZAR . | 15.8185 | 11.7218 | 14.1683 | 11.2251 | 11.4275 | |||||||||||||||||||||||||
| Income and expense items: $1 = KRW | 1,101 | 1,070 | 1,064 | 1,076 | 1,049 | 1,198 | 1,101 | 1,178 | 1,064 | 1,073 | ||||||||||||||||||||
| Balance sheet items: $1 = ZAR | 12.0907 | 10.5833 | 12.0907 | 10.5833 | 10.5887 | 14.8330 | 12.0907 | 14.8330 | 12.0907 | 12.2854 | ||||||||||||||||||||
| Balance sheet items: $1 = KRW | 1,106 | 1,071 | 1,106 | 1,071 | 1,014 | 1,143 | 1,106 | 1,143 | 1,106 | 1,128 | ||||||||||||||||||||
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 USU.S. GAAP. We analyze our results of operations both in USU.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 USU.S. dollar and ZAR on our reported results and because we use the USU.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 2016 includes the results of T24 from the third quarter of fiscal 2016. Fiscal 2015 does not include MediKredit and the NUETS business and fiscal 2014 includes MediKredit and the NUETS business for the entire period.T24.
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Our operating segment revenue presented in “—Results of operations by operating segment” represents total revenue per operating segment before inter-segment eliminations. A reconciliationReconciliation between total operating segment revenue and revenue presented in our consolidated financial statements is included in Note 1516 to those statements.
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.
Third quarter of fiscal 20152016 compared to third quarter of fiscal 20142015
The following factors had a significant influence on our results of operations during the third quarter of fiscal 20152016 as compared with the same period in the prior year:
Unfavorable impact from the strengthening of the US dollar against the ZAR:The US dollar appreciated by 8% against the ZAR during the third quarter of fiscal 2015, which negatively impacted our reported results;Increased contribution by KSNET:Our results were positively impacted by growth in our Korean operations and a refund of $1.7 million that had been paid several years ago in connection with industry-wide litigation that has now been finalized;Increase in the number of SASSA grants paid:Our revenue and operating income have increased as a result of the higher number of SASSA UEPS/EMV cardholders paid during fiscal 2015 compared with 2014; andContinued growth in financial inclusion services:We continued to grow our financial inclusion services offerings during the third quarter of fiscal 2015, which has resulted in higher revenues and operating income from more sales of low-margin prepaid airtime and UEPS-based lending.
| • | Unfavorable impact from the strengthening of the U.S. dollar against primary functional currencies:The U.S. dollar appreciated by 35% against the ZAR and 9% against the KRW during the third quarter of fiscal 2016, which negatively impacted our reported results; | |
| • | Continued growth in airtime revenue and transaction fees:We continued to grow our financial inclusion services offerings during the third quarter of fiscal 2016, which has resulted in higher revenues and operating income, primarily from more sales of low-margin prepaid airtime and an increase in transaction fees; | |
| • | Ongoing contributions from EPE and Smart Life and expansion of branch network:Our EPE and Smart Life offerings contributed to an increase in revenue in ZAR, as well as an associated increase in establishment costs for our branch network; | |
| • | Gain on acquisition of T24:We recognized a fair value adjustment gain of $1.9 million related to the acquisition of T24. We accounted for T24 as an equity method investment prior to obtaining control and recognized a gain arising from the consolidation and purchase accounting adjustments related to the T24 acquisition; | |
| • | Tax impact of dividends from South African subsidiary:Our income tax expense includes approximately $2.1 million related to the tax impact, including withholding taxes, resulting from further distributions from our South African subsidiary during fiscal 2016, which helped reduce the impact of a weakened ZAR on our reported cash balances. The conversion of a significant portion of our ZAR cash reserves to USD has again negatively impacted our interest income due to the material difference between ZAR and USD deposit rates; and | |
| • | Third quarter of fiscal 2015 results include a refund related to Korean industry-wide litigation:Our results for the third quarter of fiscal 2015 were positively impacted by a refund of $1.7 million that had been paid several years ago in connection with industry-wide litigation that has now been finalized. |
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Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with USU.S. GAAP.
The following tables show the changes in the items comprising our statements of operations, both in USU.S. dollars and in ZAR:
| In United States Dollars | In U.S. Dollars | |||||||||||||||||
| Table 3 | (US GAAP) | (U.S. GAAP) | ||||||||||||||||
| Three months ended March 31, | Three months ended March 31, | |||||||||||||||||
| 2015 | 2014 | $ % | 2016 | 2015 | $ % | |||||||||||||
| $ ’000 | $ ’000 | change | $ ’000 | $ ’000 | change | |||||||||||||
| Revenue | 151,121 | 138,126 | 9% | 134,736 | 151,121 | (11% | ) | |||||||||||
| Cost of goods sold, IT processing, servicing and support | 71,094 | 63,149 | 13% | 63,266 | 71,094 | (11% | ) | |||||||||||
| Selling, general and administration | 38,001 | 40,586 | (6% | ) | 35,998 | 38,001 | (5% | ) | ||||||||||
| Depreciation and amortization | 10,060 | 10,442 | (4% | ) | 9,281 | 10,060 | (8% | ) | ||||||||||
| Operating income | 31,966 | 23,949 | 33% | 26,191 | 31,966 | (18% | ) | |||||||||||
| Interest income | 4,211 | 3,438 | 22% | 3,345 | 4,211 | (21% | ) | |||||||||||
| Interest expense | 941 | 1,734 | (46% | ) | 852 | 941 | (9% | ) | ||||||||||
| Income before income tax expense | 35,236 | 25,653 | 37% | 28,684 | 35,236 | (19% | ) | |||||||||||
| Income tax expense | 10,305 | 8,535 | 21% | 9,816 | 10,305 | (5% | ) | |||||||||||
| Net income before earnings from equity-accounted investments | 24,931 | 17,118 | 46% | 18,868 | 24,931 | (24% | ) | |||||||||||
| Earnings from equity-accounted investments | 65 | 52 | 25% | 2 | 65 | (97% | ) | |||||||||||
| Net income | 24,996 | 17,170 | 46% | 18,870 | 24,996 | (25% | ) | |||||||||||
| Less (Add) net income (loss) attributable to non-controlling interest | 638 | (12 | ) | nm | ||||||||||||||
| Less net income attributable to non-controlling interest | 450 | 638 | (29% | ) | ||||||||||||||
| Net income attributable to us | 24,358 | 17,182 | 42% | 18,420 | 24,358 | (24% | ) | |||||||||||
| In South African Rand | In South African Rand | |||||||||||||||||
| Table 4 | (US GAAP) | (U.S. GAAP) | ||||||||||||||||
| Three months ended March 31, | Three months ended March 31, | |||||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||||
| ZAR | ZAR | ZAR % | ZAR | ZAR | ZAR % | |||||||||||||
| ’000 | ’000 | change | ’000 | ’000 | change | |||||||||||||
| Revenue | 1,771,411 | 1,502,024 | 18% | 2,131,321 | 1,771,411 | 20% | ||||||||||||
| Cost of goods sold, IT processing, servicing and support | 833,350 | 686,701 | 21% | 1,000,774 | 833,350 | 20% | ||||||||||||
| Selling, general and administration | 445,440 | 441,345 | 1% | 569,435 | 445,440 | 28% | ||||||||||||
| Depreciation and amortization | 117,921 | 113,549 | 4% | 146,811 | 117,921 | 24% | ||||||||||||
| Operating income | 374,700 | 260,429 | 44% | 414,301 | 374,700 | 11% | ||||||||||||
| Interest income | 49,360 | 37,386 | 32% | 52,913 | 49,360 | 7% | ||||||||||||
| Interest expense | 11,030 | 18,856 | (42% | ) | 13,477 | 11,030 | 22% | |||||||||||
| Income before income tax expense | 413,030 | 278,959 | 48% | 453,737 | 413,030 | 10% | ||||||||||||
| Income tax expense | 120,793 | 92,812 | 30% | 155,274 | 120,793 | 29% | ||||||||||||
| Net income before earnings from equity-accounted investments | 292,237 | 186,147 | 57% | 298,463 | 292,237 | 2% | ||||||||||||
| Earnings from equity-accounted investments | 762 | 565 | 35% | 32 | 762 | (96% | ) | |||||||||||
| Net income | 292,999 | 186,712 | 57% | 298,495 | 292,999 | 2% | ||||||||||||
| Less (Add) net income (loss) attributable to non-controlling interest | 7,479 | (130 | ) | nm | ||||||||||||||
| Less net income attributable to non-controlling interest | 7,118 | 7,479 | (5% | ) | ||||||||||||||
| Net income attributable to us | 285,520 | 186,842 | 53% | 291,377 | 285,520 | 2% | ||||||||||||
TheIn ZAR, the increase in revenue was primarily due to higher prepaid airtime sales, more low-margin transaction fees generated from beneficiariescardholders using the South African National Payment System, an increase in the number of UEPS-based loans,more fees generated from our new EPE and ATM offerings, an increase in the number of SASSA UEPS/ EMV cardholdersbeneficiaries paid, and a higher contribution from KSNET, and morepartially offset by fewer ad hoc terminal sales and card sales.lower lending service fees.
TheIn ZAR, the increase in cost of goods sold, IT processing, servicing and support was primarily due to higher expenses incurred from increased usage of the South African National Payment System by beneficiaries, expenses incurred to roll-out our new EPE and ATM offerings and expanding our branch network, and more prepaid airtime sold.
In ZAR, our selling, general and administration expense increased primarily due to a higher staff complement resulting from our EPE roll-out, annual salary increases for our South African employees, as well as increases in goods and services purchased from third parties.parties, partially offset by a $1.9 million gain related to the T24 acquisition.
34
Our operating income margin for third quarter of fiscal 2016 and 2015 was 19% and 2014 was 21% and 17%, respectively. We discuss the components of operating income margin under “—Results of operations by operating segment.” The increase isdecrease was primarily attributable to the higher transaction volumescost of goods sold, IT processing, servicing and support referred to above and an increase in South Africa, including prepaid airtime sales, lendingdepreciation expenses. Specifically, the majority of the expenses incurred to grow our new offerings are fixed and SASSA grants paid.we expect that these expenses will impact on our margin in the short-term until we scale these new businesses sufficiently to offset the effect of these investments.
29
DepreciationIn ZAR, depreciation and amortization were higherincreased primarily as a result of an increase in depreciation related to more terminals used to provide transaction processing in Korea which wasand the roll-out of EPE ATMs and an increase in acquisition-related intangible asset amortization resulting from the T24 transaction, all partially offset by no Eason intangible assetlower overall amortization as theseof intangible assets werethat are fully amortized at the end of June 2014.amortized.
InterestIn ZAR, interest on surplus cash increased to $3.3 million (ZAR 52.9 million) from $4.2 million (ZAR 49.4 million) from $3.4 million (ZAR 37.4 million), due primarily to higher average daily ZAR cash balances.balances and ZAR interest rates, partially offset by the lower interest earned on the USD cash reserves that we converted from ZAR through distributions from our South African subsidiary.
InterestIn USD, interest expense decreased to $0.9$0.85 million (ZAR 11.013.4 million) from $1.7$0.94 million (ZAR 18.911.0 million), due to a lower average long-term debt balanceinterest rate on our South Korean debt and a lower interest rate.debt.
Fiscal 20152016 tax expense was $9.8 million (ZAR 155.3 million) compared to $10.3 million (ZAR 120.8 million) compared to $8.5 million (ZAR 92.8 million) in fiscal 2014.2015. Our effective tax rate for fiscal 2016, was 34.2% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees) and the tax impact, including withholding taxes, of approximately $2.1 million attributable to a further distribution from our South African subsidiary, which were intended to further help reduce the impact of a weakening ZAR on our reported cash balances. Our effective tax rate for fiscal 2015, was 29.2% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees and the interest expense related to ourthe Company’s long-term South Korean borrowings). Our effective tax rate for fiscal 2014, was 33.3% and was higher than the South African statutory rate as a result of non-deductible expenses (including interest expense related to our long-term Korean borrowings and stock-based compensation charges).
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated belowbelow:
| Table 5 | In United States Dollars (US GAAP) | ||||||||||||||
| Three months ended March 31, | |||||||||||||||
| 2015 | % of | 2014 | % of | % | |||||||||||
| Operating Segment | $ ’000 | total | $ ’000 | total | change | ||||||||||
| Revenue: | |||||||||||||||
| South African transaction processing | 57,999 | 38% | 57,397 | 42% | 1% | ||||||||||
| International transaction processing | 38,311 | 25% | 35,245 | 26% | 9% | ||||||||||
| Financial inclusion and applied technologies | 66,830 | 44% | 56,226 | 41% | 19% | ||||||||||
| Subtotal: Operating segments | 163,140 | 107% | 148,868 | 109% | 10% | ||||||||||
| Intersegment eliminations | (12,019 | ) | (7% | ) | (10,742 | ) | (9% | ) | 12% | ||||||
| Consolidated revenue | 151,121 | 100% | 138,126 | 100% | 9% | ||||||||||
| Operating income (loss): | |||||||||||||||
| South African transaction processing | 13,218 | 41% | 9,137 | 38% | 45% | ||||||||||
| International transaction processing | 6,579 | 21% | 4,642 | 19% | 42% | ||||||||||
| Financial inclusion and applied technologies | 17,906 | 56% | 16,459 | 69% | 9% | ||||||||||
| Subtotal: Operating segments | 37,703 | 118% | 30,238 | 126% | 25% | ||||||||||
| Corporate/Eliminations | (5,737 | ) | (18% | ) | (6,289 | ) | (26% | ) | (9% | ) | |||||
| Consolidated operating income | 31,966 | 100% | 23,949 | 100% | 33% | ||||||||||
| Table 6 | In South African Rand (US GAAP) | |||||||||||||||||||||||||||||
| Three months ended March 31, | ||||||||||||||||||||||||||||||
| Table 5 | In U.S. Dollars (U.S. GAAP) | |||||||||||||||||||||||||||||
| 2015 | 2014 | Three months ended March 31, | ||||||||||||||||||||||||||||
| ZAR | % of | ZAR | % of | % | 2016 | % of | 2015 | % of | % | |||||||||||||||||||||
| Operating Segment | ’000 | total | ’000 | total | change | $ ’000 | total | $ ’000 | total | change | ||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||
| South African transaction processing | 679,853 | 38% | 624,153 | 42% | 9% | 50,594 | 38% | 57,999 | 38% | (13% | ) | |||||||||||||||||||
| International transaction processing | 449,074 | 25% | 383,265 | 26% | 17% | 40,588 | 30% | 38,311 | 25% | 6% | ||||||||||||||||||||
| Financial inclusion and applied technologies | 783,368 | 44% | 611,418 | 41% | 28% | 54,286 | 40% | 66,830 | 44% | (19% | ) | |||||||||||||||||||
| Subtotal: Operating segments | 1,912,295 | 107% | 1,618,836 | 109% | 18% | 145,468 | 108% | 163,140 | 107% | (11% | ) | |||||||||||||||||||
| Intersegment eliminations | (140,884 | ) | (7% | ) | (116,812 | ) | (9% | ) | 21% | (10,732 | ) | (8% | ) | (12,019 | ) | (7% | ) | (11% | ) | |||||||||||
| Consolidated revenue | 1,771,411 | 100% | 1,502,024 | 100% | 18% | 134,736 | 100% | 151,121 | 100% | (11% | ) | |||||||||||||||||||
| Operating income (loss): | ||||||||||||||||||||||||||||||
| South African transaction processing | 154,939 | 41% | 99,359 | 38% | 56% | 13,133 | 50% | 13,218 | 41% | (1% | ) | |||||||||||||||||||
| International transaction processing | 77,118 | 21% | 50,478 | 19% | 53% | 4,813 | 18% | 6,579 | 21% | (27% | ) | |||||||||||||||||||
| Financial inclusion and applied technologies | 209,891 | 56% | 178,980 | 69% | 17% | 11,469 | 44% | 17,906 | 56% | (36% | ) | |||||||||||||||||||
| Subtotal: Operating segments | 441,948 | 118% | 328,817 | 126% | 34% | 29,415 | 112% | 37,703 | 118% | (22% | ) | |||||||||||||||||||
| Corporate/Eliminations | (67,248 | ) | (18% | ) | (68,388 | ) | (26% | ) | (2% | ) | (3,224 | ) | (12% | ) | (5,737 | ) | (18% | ) | (44% | ) | ||||||||||
| Consolidated operating income | 374,700 | 100% | 260,429 | 100% | 44% | 26,191 | 100% | 31,966 | 100% | (18% | ) | |||||||||||||||||||
3035
| Table 6 | In South African Rand (U.S. GAAP) | ||||||||||||||
| Three months ended March 31, | |||||||||||||||
| 2016 | 2015 | ||||||||||||||
| ZAR | % of | ZAR | % of | % | |||||||||||
| Operating Segment | ’000 | total | ’000 | total | change | ||||||||||
| Revenue: | |||||||||||||||
| South African transaction processing | 800,321 | 38% | 679,853 | 38% | 18% | ||||||||||
| International transaction processing | 642,041 | 30% | 449,074 | 25% | 43% | ||||||||||
| Financial inclusion and applied technologies | 858,723 | 40% | 783,368 | 44% | 10% | ||||||||||
| Subtotal: Operating segments | 2,301,085 | 108% | 1,912,295 | 107% | 20% | ||||||||||
| Intersegment eliminations | (169,764 | ) | (8% | ) | (140,884 | ) | (7% | ) | 20% | ||||||
| Consolidated revenue | 2,131,321 | 100% | 1,771,411 | 100% | 20% | ||||||||||
| Operating income (loss): | |||||||||||||||
| South African transaction processing | 207,744 | 50% | 154,939 | 41% | 34% | ||||||||||
| International transaction processing | 76,134 | 18% | 77,118 | 21% | (1% | ) | |||||||||
| Financial inclusion and applied technologies | 181,422 | 44% | 209,891 | 56% | (14% | ) | |||||||||
| Subtotal: Operating segments | 465,300 | 112% | 441,948 | 118% | 5% | ||||||||||
| Corporate/Eliminations | (50,999 | ) | (12% | ) | (67,248 | ) | (18% | ) | (24% | ) | |||||
| Consolidated operating income | 414,301 | 100% | 374,700 | 100% | 11% | ||||||||||
South African transaction processing
In ZAR, the increase in segment revenuesrevenue and operating income was primarily due to higher EPE transaction revenue as a result of increased usage of our ATMs, more low-margin transaction fees generated from beneficiariescard holders using the South African National Payment System, and moreincreased inter-segment transaction processing activities. In addition, revenue fromactivities, and a modest increase in the distributionnumber of social welfare grants grew modestly during the year and was in-line with the increase in unique welfare cardholder recipients, net of removal of invalid and fraudulent beneficiaries, partially offset by the loss of MediKredit revenue as a result of the sale of that business.distributed.
Our operating income margin for the third quarter of fiscal 2016 and 2015 was 26% and 2014 was 23% and 16%, respectively, and has increasedwas higher primarily due to more higher-marginhigher EPE revenue as a result of increased ATM transactions, an increase in inter-segment transaction processing activities, the elimination of MediKredit losses and an increase in the number of beneficiaries paid in the third quarter of fiscal 2015.2016 and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System, partially offset by annual salary increases granted to our South African employees.
International transaction-based activities
Revenue increased in constant currency primarily due to higher transaction volume at KSNET during the third quarter of fiscal 2015.2016 and the inclusion of T24 from January 2016. Operating income during the yearthird quarter of fiscal 2016 was lower due to date fiscal 2015an increase in depreciation expenses at KSNET and ongoing ZAZOO start-up costs in the UK and India, but was higher due topartially offset by increase in revenue contribution from KSNET but partially offsetand a positive contribution by Zazoo start-up costs in the UKT24 and India. XeoHealth.
Operating income and operating income margin for the third quarter of fiscal 2015, was also positively impacted by a refund of approximately $1.7 million that had been paid several years ago in connection with industry-wide litigation that has now been finalized.litigation. Operating income margin for the third quarter of fiscal 2016 and 2015 was 12% and 2014 was 17% and 13%, respectively, and was higher in fiscal 2015 primarily due to the refund referred to above.respectively.
Financial inclusion and applied technologies
In ZAR, Financial inclusion and applied technologies revenue and operating income increased primarily due to higher prepaid airtime and other value-added services sales, driven by the rollout of our prepaid airtime product,and, in ZAR, an increase in the number of UEPS-based loans as we rolled out our product nationally, moreinter-segment revenues, offset by fewer ad hoc terminal and card sales and in ZAR,lower lending service fees. Operating income for the third quarter of fiscal 2016, was adversely impacted by establishment costs for Smart Life and expansion of our branch network as well as an increase in intersegment revenues. Smart Life did not contribute to operating income in fiscal 2015 and 2014 due to the FSB suspension of its license.inter-segment charges.
The South African National Credit Act, or NCA, made certain industry-wide amendments, which became effective March 13, 2015. These amendments were introduced primarily to address over-indebtedness of South African consumers and now require lenders to perform a stricter affordability assessment. We expect that compliance with the amended legislation will have a modest impact on our UEPS-based lending businesses in the fourth quarter of fiscal 2015.
Operating income margin for the Financial inclusion and applied technologies segment was 27%21% and 29%27%, respectively, during of the third quarter of fiscal 20152016 and 2014,2015, and has decreased primarily due to the saleestablishment costs for Smart Life, expansion of more low-margin prepaid airtimeour branch network, annual salary increases for our South African employees and the sale of competitively-priced financial inclusion products to address the needs of the broader market.an increase in inter-segment charges.
Corporate/ Eliminations
Our corporate expenses generally include acquisition-related intangible asset amortization; expenditure related to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors’ fees; employee and executive bonuses; stock-based compensation; legal fees; audit fees; directors and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and elimination entries.
The decrease in our36
Our corporate expenses washave decreased primarily due to the impact of the stronger USD on goods and services procured in other currencies, primarily the ZAR, the gain related to the acquisition of T24 and lower US government investigations-relatedamortization costs, partially offset by modest increases in USD denominated goods and US lawsuit expenses, audit feesservices purchased from third parties and other corporate head office-related expenses.directors’ fees.
Year to date fiscal 20152016 compared to year to date fiscal 20142015
The following factors had a significant influence on our results of operations during the year to date fiscal 20152016 as compared with the same period in the prior year:
Unfavorable impact from the strengthening of the US dollar against the ZAR:The US dollar appreciated by 8% against the ZAR during the year to date fiscal 2015, which negatively impacted our reported results;Increased contribution by KSNET:Our results were positively impacted by growth in our Korean operations;Increase in the number of SASSA grants paid:Our revenue and operating income have increased as a result of the higher number of SASSA UEPS/EMV cardholders paid during fiscal 2015 compared with 2014; andContinued growth in financial inclusion services:We continued to grow our financial inclusion services offerings during the year to date fiscal 2015, which has resulted in higher revenues and operating income from more sales of low-margin prepaid airtime and UEPS-based lending.
| • | Unfavorable impact from the strengthening of the U.S. dollar against primary functional currencies:The U.S. dollar appreciated by 26% against the ZAR and 11% against the KRW during the year to date fiscal 2016, which negatively impacted our reported results; | |
| • | Continued growth in airtime revenue and transaction fees:We continued to grow our financial inclusion services offerings during the year to date fiscal 2016, which has resulted in higher revenues and operating income, primarily from more sales of low-margin prepaid airtime and an increase in transaction fees; | |
| • | Launch of EPE and Smart Life:During the year to date fiscal 2016 we launched our EPE and Smart Life offerings, which contributed to a marginal increase in revenue in ZAR, as well as an associated increase in establishment costs for our branch network; | |
| • | Increased contribution by KSNET:Our results were positively impacted by growth in our Korean operations; and | |
| • | Tax impact of dividends from South African subsidiary:Our income tax expense includes approximately $5.0 million related to the tax impact, including withholding taxes, resulting from distributions from our South African subsidiary which helped reduce the impact of a weakened ZAR on our reported cash balances. The conversion of a significant portion of our ZAR cash reserves to USD negatively impacted our interest income due to the material difference between ZAR and USD deposit rates. |
31
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with USU.S. GAAP.
The following tables show the changes in the items comprising our statements of operations, both in USU.S. dollars and in ZAR:
| In United States Dollars | In U.S. Dollars | |||||||||||||||||
| Table 7 | (US GAAP) | (U.S. GAAP) | ||||||||||||||||
| Nine months ended March 31, | Nine months ended March 31, | |||||||||||||||||
| 2015 | 2014 | $ % | 2016 | 2015 | $ % | |||||||||||||
| $ ’000 | $ ’000 | change | $ ’000 | $ ’000 | change | |||||||||||||
| Revenue | 461,693 | 398,903 | 16% | 439,490 | 461,693 | (5% | ) | |||||||||||
| Cost of goods sold, IT processing, servicing and support | 217,274 | 187,591 | 16% | 219,316 | 217,274 | 1% | ||||||||||||
| Selling, general and administration | 118,122 | 121,916 | (3% | ) | 108,007 | 118,122 | (9% | ) | ||||||||||
| Depreciation and amortization | 30,391 | 30,245 | 0% | 29,982 | 30,391 | (1% | ) | |||||||||||
| Operating income | 95,906 | 59,151 | 62% | 82,185 | 95,906 | (14% | ) | |||||||||||
| Interest income | 11,888 | 9,993 | 19% | 11,284 | 11,888 | (5% | ) | |||||||||||
| Interest expense | 3,360 | 5,712 | (41% | ) | 2,880 | 3,360 | (14% | ) | ||||||||||
| Income before income tax expense | 104,434 | 63,432 | 65% | 90,589 | 104,434 | (13% | ) | |||||||||||
| Income tax expense | 32,156 | 22,119 | 45% | 31,306 | 32,156 | (3% | ) | |||||||||||
| Net income before earnings from equity-accounted investments | 72,278 | 41,313 | 75% | 59,283 | 72,278 | (18% | ) | |||||||||||
| Earnings from equity-accounted investments | 233 | 202 | 15% | 578 | 233 | 148% | ||||||||||||
| Net income | 72,511 | 41,515 | 75% | 59,861 | 72,511 | (17% | ) | |||||||||||
| Less (add) net income (loss) attributable to non-controlling interest | 1,690 | (12 | ) | nm | ||||||||||||||
| Less net income attributable to non-controlling interest | 1,763 | 1,690 | 4% | |||||||||||||||
| Net income attributable to us | 70,821 | 41,527 | 71% | 58,098 | 70,821 | (18% | ) | |||||||||||
37
| In South African Rand | In South African Rand | |||||||||||||||||
| Table 8 | (US GAAP) | (U.S. GAAP) | ||||||||||||||||
| Nine months ended March 31, | Nine months ended March 31, | |||||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||||
| ZAR | ZAR | ZAR % | ZAR | ZAR | ZAR % | |||||||||||||
| ’000 | ’000 | change | ’000 | ’000 | change | |||||||||||||
| Revenue | 5,182,550 | 4,140,654 | 25% | 6,226,825 | 5,182,550 | 20% | ||||||||||||
| Cost of goods sold, IT processing, servicing and support | 2,438,922 | 1,947,214 | 25% | 3,107,334 | 2,438,922 | 27% | ||||||||||||
| Selling, general and administration | 1,325,932 | 1,265,501 | 5% | 1,530,276 | 1,325,932 | 15% | ||||||||||||
| Depreciation and amortization | 341,142 | 313,947 | 9% | 424,793 | 341,142 | 25% | ||||||||||||
| Operating income | 1,076,554 | 613,992 | 75% | 1,164,422 | 1,076,554 | 8% | ||||||||||||
| Interest income | 133,444 | 103,728 | 29% | 159,875 | 133,444 | 20% | ||||||||||||
| Interest expense | 37,716 | 59,291 | (36% | ) | 40,805 | 37,716 | 8% | |||||||||||
| Income before income tax expense | 1,172,282 | 658,429 | 78% | 1,283,492 | 1,172,282 | 9% | ||||||||||||
| Income tax expense | 360,954 | 229,597 | 57% | 443,553 | 360,954 | 23% | ||||||||||||
| Net income before earnings from equity-accounted investments | 811,328 | 428,832 | 89% | 839,939 | 811,328 | 4% | ||||||||||||
| Earnings from equity-accounted investments | 2,615 | 2,097 | 25% | 8,189 | 2,615 | 213% | ||||||||||||
| Net income | 813,943 | 430,929 | 89% | 848,128 | 813,943 | 4% | ||||||||||||
| Less (add) net income (loss) attributable to non-controlling interest | 18,970 | (125 | ) | nm | ||||||||||||||
| Less net income attributable to non-controlling interest | 24,979 | 18,970 | 32% | |||||||||||||||
| Net income attributable to us | 794,973 | 431,054 | 84% | 823,149 | 794,973 | 4% | ||||||||||||
TheIn ZAR, the increase in revenue was primarily due to higher prepaid airtime sales, more low-margin transaction fees generated from beneficiariescardholders using the South African National Payment System, an increase in the number of UEPS-based loans,more fees generated from our new EPE and ATM offerings, an increase in the number of SASSA UEPS/ EMV cardholdersbeneficiaries paid, a higher contribution from KSNET and more ad hoc terminal and card sales.sales, partially offset by lower UEPS-loans fees.
The increase in cost of goods sold, IT processing, servicing and support was primarily due to higher expenses incurred from increased usage of the South African National Payment System by beneficiaries, expenses incurred to roll-out our new EPE and ATM offerings and expanding our branch network, and more prepaid airtime sold.
In ZAR, our selling, general and administration expense increased due to a higher staff complement resulting from our EPE roll-out, as well as increases in goods and services purchased from third parties.
Our operating income margin for year to date fiscal 2016 and 2015 was 19% and 2014 was 21% and 15%, respectively. We discuss the components of operating income margin under “—Results of operations by operating segment.” The increasedecrease is primarily attributable to the higher transaction volumescost of goods sold, IT processing, servicing and support referred to above and an increase in South Africa, including prepaid airtime sales, lending and SASSA grants paid.depreciation expenses.
32
DepreciationIn ZAR, depreciation and amortization were higherincreased primarily as a result of an increase in depreciation related to more terminals used to provide transaction processing in Korea which was partially offset by no Eason intangible asset amortization as these intangible assets were fully amortized atand the endroll-out of June 2014.EPE ATMs.
InterestIn ZAR, interest on surplus cash increased to $11.3 million (ZAR 159.9 million) from $11.9 million (ZAR 133.4 million) from $10.0 million (ZAR 103.7 million), due primarily to higher average daily ZAR cash balances.balances and ZAR interest rates, partially offset by the lower interest earned on the USD cash reserves that we converted from ZAR through distributions from our South African subsidiary.
Interest expense decreased to $2.9 million (ZAR 40.8 million) from $3.4 million (ZAR 37.7 million) from $5.7 million (ZAR 59.333.7 million), due to a lower average long-term debt balance on our South Korean debt and a lower interest rate.
Fiscal 20152016 tax expense was $31.3 million (ZAR 443.6 million) compared to $32.2 million (ZAR 361.0 million) compared to $22.1 million (ZAR 230.0 million) in fiscal 2014.2015. Our effective tax rate for the year to date fiscal 2016, was 34.6% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees) and the tax impact, including withholding taxes, of approximately $5.0 million attributable to distributions from our South African subsidiary. Our effective tax rate for fiscal 2015, was 30.8% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees and the interest expense related to ourthe Company’s long-term South Korean borrowings). Our effective tax rate for fiscal 2014, was 34.9% and was higher than the South African statutory rate as a result of non-deductible expenses (including interest expense related to our long-term Korean borrowings and stock-based compensation charges).
38
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated belowbelow:
| Table 9 | In United States Dollars (US GAAP) | In U.S. Dollars (U.S. GAAP) | ||||||||||||||||||||||||||||
| Nine months ended March 31, | Nine months ended March 31, | |||||||||||||||||||||||||||||
| 2015 | % of | 2014 | % of | % | 2016 | % of | 2015 | % of | % | |||||||||||||||||||||
| Operating Segment | $ ’000 | total | $ ’000 | total | change | $ ’000 | total | $ ’000 | total | change | ||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||
| South African transaction processing | 176,678 | 38% | 173,312 | 43% | 2% | 158,997 | 36% | 176,678 | 38% | (10% | ) | |||||||||||||||||||
| International transaction processing | 121,981 | 26% | 110,524 | 28% | 10% | 122,653 | 28% | 121,981 | 26% | 1% | ||||||||||||||||||||
| Financial inclusion and applied technologies | 199,558 | 43% | 143,502 | 36% | 39% | 187,332 | 43% | 199,558 | 43% | (6% | ) | |||||||||||||||||||
| Subtotal: Operating segments | 498,217 | 107% | 427,338 | 107% | 17% | 468,982 | 107% | 498,217 | 107% | (6% | ) | |||||||||||||||||||
| Intersegment eliminations | (36,524 | ) | (7% | ) | (28,435 | ) | (7% | ) | 28% | (29,492 | ) | (7% | ) | (36,524 | ) | (7% | ) | (19% | ) | |||||||||||
| Consolidated revenue | 461,693 | 100% | 398,903 | 100% | 16% | 439,490 | 100% | 461,693 | 100% | (5% | ) | |||||||||||||||||||
| Operating income (loss): | ||||||||||||||||||||||||||||||
| South African transaction processing | 39,740 | 41% | 22,726 | 38% | 75% | 38,724 | 47% | 39,740 | 41% | (3% | ) | |||||||||||||||||||
| International transaction processing | 19,671 | 21% | 15,305 | 26% | 29% | 15,596 | 19% | 19,671 | 21% | (21% | ) | |||||||||||||||||||
| Financial inclusion and applied technologies | 53,340 | 56% | 42,559 | 72% | 25% | 41,542 | 51% | 53,340 | 56% | (22% | ) | |||||||||||||||||||
| Subtotal: Operating segments | 112,751 | 118% | 80,590 | 136% | 40% | 95,862 | 117% | 112,751 | 118% | (15% | ) | |||||||||||||||||||
| Corporate/Eliminations | (16,845 | ) | (18% | ) | (21,439 | ) | (36% | ) | (21% | ) | (13,677 | ) | (17% | ) | (16,845 | ) | (18% | ) | (19% | ) | ||||||||||
| Consolidated operating income | 95,906 | 100% | 59,151 | 100% | 62% | 82,185 | 100% | 95,906 | 100% | (14% | ) | |||||||||||||||||||
| Table 10 | In South African Rand (US GAAP) | In South African Rand (U.S. GAAP) | ||||||||||||||||||||||||||||
| Nine months ended March 31, | Nine months ended March 31, | |||||||||||||||||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||
| ZAR | % of | ZAR | % of | % | ZAR | % of | ZAR | % of | % | |||||||||||||||||||||
| Operating Segment | ’000 | total | ’000 | total | change | ’000 | total | ’000 | total | change | ||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||
| South African transaction processing | 1,983,228 | 38% | 1,798,996 | 43% | 10% | 2,252,717 | 36% | 1,983,228 | 38% | 14% | ||||||||||||||||||||
| International transaction processing | 1,369,249 | 26% | 1,147,251 | 28% | 19% | 1,737,784 | 28% | 1,369,249 | 26% | 27% | ||||||||||||||||||||
| Financial inclusion and applied technologies | 2,240,059 | 43% | 1,489,565 | 36% | 50% | 2,654,176 | 43% | 2,240,059 | 43% | 18% | ||||||||||||||||||||
| Subtotal: Operating segments | 5,592,536 | 107% | 4,435,812 | 107% | 26% | 6,644,677 | 107% | 5,592,536 | 107% | 19% | ||||||||||||||||||||
| Intersegment eliminations | (409,986 | ) | (7% | ) | (295,158 | ) | (7% | ) | 39% | (417,852 | ) | (7% | ) | (409,986 | ) | (7% | ) | 2% | ||||||||||||
| Consolidated revenue | 5,182,550 | 100% | 4,140,654 | 100% | 25% | 6,226,825 | 100% | 5,182,550 | 100% | 20% | ||||||||||||||||||||
| Operating income (loss): | ||||||||||||||||||||||||||||||
| South African transaction processing | 446,085 | 41% | 235,898 | 38% | 89% | 548,653 | 47% | 446,085 | 41% | 23% | ||||||||||||||||||||
| International transaction processing | 220,809 | 21% | 158,867 | 26% | 39% | 220,969 | 19% | 220,809 | 21% | - | ||||||||||||||||||||
| Financial inclusion and applied technologies | 598,747 | 56% | 441,766 | 72% | 36% | 588,580 | 51% | 598,747 | 56% | (2% | ) | |||||||||||||||||||
| Subtotal: Operating segments | 1,265,641 | 118% | 836,531 | 136% | 51% | 1,358,202 | 117% | 1,265,641 | 118% | 7% | ||||||||||||||||||||
| Corporate/Eliminations | (189,087 | ) | (18% | ) | (222,539 | ) | (36% | ) | (15% | ) | (193,780 | ) | (17% | ) | (189,087 | ) | (18% | ) | 2% | |||||||||||
| Consolidated operating income | 1,076,554 | 100% | 613,992 | 100% | 75% | 1,164,422 | 100% | 1,076,554 | 100% | 8% | ||||||||||||||||||||
33
South African transaction processing
In ZAR, the increase in segment revenuesrevenue and operating income was primarily due to higher EPE transaction revenue as a result of increased usage of our ATMs, more low-margin transaction fees generated from beneficiariescard holders using the South African National Payment System, and moreincreased inter-segment transaction processing activities. In addition, revenue fromactivities, and a modest increase in the distributionnumber of social welfare grants grew modestly during the year and was in-line with the increase in unique welfare cardholder recipients, net of removal of invalid and fraudulent beneficiaries, partially offset by the loss of MediKredit revenue as a result of the sale of that business.distributed.
Our operating income margin for the year to date fiscal 2016 and 2015 was 24% and 2014 was 22% and 13%, respectively, and has increased primarily due to more higher-margin inter-segment transaction processing activities, the elimination of MediKredit losses and an increase in the number of beneficiaries paid in fiscal 2015.2016 and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System.
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International transaction-based activities
Revenue and operating income increased in constant currency primarily due to higher transaction volume at KSNET during the year to date fiscal 2015.2016. Operating income during the year to date fiscal 2016 was lower due to an increase in depreciation expense and ongoing ZAZOO start-up costs in the UK and India, but was partially offset by to increase in revenue contribution from KSNET and a positive contribution by XeoHealth.
Operating income and operating income margin for the year to date fiscal 2015, was positively impacted by a refund of approximately $1.7 million that had been paid several years ago in connection with industry-wide litigation. Operating income margin for the year to date fiscal 2016 and 2015 was 13% and 2014, was 16% and 14%, respectively.
Financial inclusion and applied technologies
In ZAR, Financial inclusion and applied technologies revenue and operating income increased primarily due to higher prepaid airtime and other value-added services sales, driven by the rollout of our prepaid airtime product, an increase in the number of UEPS-based loans as we rolled out our product nationally,more ad hoc terminal and card sales and, in ZAR, an increase in intersegment revenues. Fiscal 2014 operatinginter-segment revenues, offset by lower lending service fees. Operating income includes expenses relatedfor the year to the national roll-outdate fiscal 2016, was adversely impacted by establishment costs for Smart Life and expansion of our UEPS-based lending offering and the establishment of the allowance for doubtful finance loans in fiscal 2014. Smart Life did not contribute to operating income in fiscal 2015 and 2014 due to the FSB suspension of its license.branch network.
Notwithstanding the national roll-out expenses incurred in fiscal 2014, operatingOperating income margin for the Financial inclusion and applied technologies segment was 22% and 27%, respectively, during the year to date fiscal 2016 and 2015, and has decreased primarily due to 27% from 30%, primarily as a resultthe sale of more low-margin prepaid airtime and the saleestablishment costs for Smart Life and expansion of competitively-priced financial inclusion products to address the needs of the broader market.our branch network.
Corporate/ Eliminations
Our corporate expenses generally include acquisition-related intangible asset amortization; expenditure related to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors’ fees; employee and executive bonuses; stock-based compensation; legal fees; audit fees; directors and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and elimination entries.
The decrease inIn USD, our corporate expenses washave decreased primarily due to the impact of the stronger USD on goods and services procured in other currencies, primarily the ZAR, and lower US government investigations-relatedamortization costs, partially offset by modest increases in USD denominated goods and US lawsuit expenses, audit feesservices purchased from third parties and other corporate head office-related expenses.directors’ fees.
Liquidity and Capital Resources
At March 31, 2015,2016, our cash balances were $111.0$123.3 million, which comprised mainly ZAR-denominated balances of ZAR 1.2 billion798.3 million ($103.653.8 million), U.S. dollar-denominated balances of $53.2 million, KRW-denominated balances of KRW 1.69.0 billion ($1.57.9 million) and US dollar-denominated balances of $4.3 million and other currency deposits, primarily Botswana Pula,euros of $1.7$8.4 million. The increase in our cash balances from June 30, 2014,2015, was primarily due to the expansion of all of our core businesses, and to a lesser extent, topartially offset by the cash conservation resulting fromstrengthening of the saleU.S. dollar against our primary functional currencies, repurchase of loss-incurring businesses, offset byshares of our common stock, provisional tax payments, acquisitions and the scheduled Korean debt repayment in October 2014.capital expenditures.
We currently believe that our cash and credit facilities are sufficient to fund our future operations for at least the next four quarters.
We generally invest the surplus cash held by our South African operations in overnight call accounts that we maintain at South African banking institutions, and surplus cash held by our non-South African companies in the USU.S. dollar denominated money markets.market accounts. We have invested surplus cash in Korea in short-term investment accounts at Korean banking institutions.
Historically, we have financed most of our operations, research and development, working capital, capital expenditures and acquisitions through our internally generated cash. When considering whether to borrow under our financing facilities, we consider the cost of capital, cost of financing, opportunity cost of utilizing surplus cash and availability of tax efficient structures to moderate financing costs.
34
We have a short-term South African credit facility with Nedbank Limited of ZAR 400 million ($33.127.0 million)., which consists of (i) a primary amount of up to ZAR 200 million, which is immediately available, and (ii) a secondary amount of up to ZAR 200 million, which is not immediately available. The short-term facility comprisesprimary amounts comprise an overdraft facility of up to ZAR 25050 million and indirect and derivative facilities of up to ZAR 150 million, which includes letters of guarantee, letters of credit and forward exchange contracts. As of March 31, 2015,2016, we have used none of the overdraft and ZAR 137.2137.1 million ($11.39.2 million) of the indirect and derivative facilities to obtain foreign exchange contracts and to support guarantees issued by Nedbank to various third parties on our behalf. Refer to Note 12 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2014,2015, for additional information related to our short-term facilities.
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As of March 31, 2015,2016, we had outstanding long-term debt of KRW 66.469.7 billion (approximately $60.0$61.0 million translated at exchange rates applicable as of March 31, 2015)2016) under credit facilities with a group of South Korean banks. The loans bear interest at the South Korean CD rate in effect from time to time (2.12%(1.65% as of March 31, 2015)2016) plus a margin of 3.10% for one of the term loan facilities and the revolver and a margin of 2.90% for the other term loan facility. We repaid the KRW 15 billion other term loan facility in full in October 2014 in accordance with the repayment schedule.revolver. Scheduled remaining repayments of the term loans and loan under the revolving credit facility are as follows: April 2016, 2017 and 2018 (KRW 10 billion each) and October 2018 (KRW 30 billion plus all outstanding loans under our revolving credit facility). Refer to Note 913 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2015 and Note 10 to our unaudited condensed consolidated financial statements for the three and nine months ended March 31, 2015,2016, for additional information related to our long-term borrowings.
Cash flows from operating activities
Third quarter of fiscal 2015 and 20142016
Net cash provided by operating activities for the third quarter of fiscal 20152016 was $49.2 million (ZAR 778.3 million) compared to $49.3 million (ZAR 578.0 million) compared to cash provided by operating activities of $34.6 million (ZAR 376.2 million) for the third quarter of fiscal 2014.2015. Excluding the impact of interest received, interest paid under our Korean debt and taxes presented in the table below, in ZAR, the increase in cash from operating activities resulted from improved trading activity during fiscal 2015.2016.
During the third quarter of fiscal 2016, we paid South African tax of $0.1 million (ZAR 1.8 million) related to our 2016 tax year in South Africa. We paid dividend withholding taxes of $1.6 million (ZAR 25.0 million) during the third quarter of fiscal 2016. We also paid taxes totaling $2.4 million in other tax jurisdictions, primarily South Korea. We paid taxes totaling $0.1 million (ZAR 1.6 million) in South Africa during the third quarter of fiscal 2015. We also paid taxes totaling $3.0 million in other tax jurisdictions, primarily South Korea. We paid no taxes in South Africa during the third quarter of fiscal 2014. We paid provisional Korean taxes of $1.6 million related to our tax year ended December 31, 2013.
Taxes paid during the third quarter of fiscal 20152016 and 20142015 were as follows:
| Table 11 | Three months ended March 31, | Three months ended March 31, | ||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||
| $ | $ | ZAR | ZAR | $ | $ | ZAR | ZAR | |||||||||||||||||
| ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | |||||||||||||||||
| First provisional payments | 135 | - | 1,564 | - | 115 | 135 | 1,812 | 1,564 | ||||||||||||||||
| Taxation refunds received | (40 | ) | (36 | ) | (468 | ) | (400 | ) | - | (40 | ) | - | (468 | ) | ||||||||||
| Dividend withholding taxation | 1,573 | - | 25,000 | - | ||||||||||||||||||||
| Total South African taxes paid | 95 | (36 | ) | 1,096 | (400 | ) | 1,688 | 95 | 26,812 | 1,096 | ||||||||||||||
| Foreign taxes paid: primarily Korea | 2,991 | 1,606 | 36,042 | 17,330 | ||||||||||||||||||||
| Foreign taxes paid, primarily South Korea | 2,364 | 2,991 | 36,846 | 36,042 | ||||||||||||||||||||
| Total tax paid | 3,086 | 1,570 | 37,138 | 16,930 | 4,052 | 3,086 | 63,658 | 37,138 | ||||||||||||||||
We expect to pay our second provisional payments in South Africa related to our 2015 tax year in the fourth quarter of fiscal 2015.
Year to date fiscal 2015 and 20142016
Net cash provided by operating activities for the year to date fiscal 20152016 was $103.4$81.4 million (ZAR 1.2 billion) compared to cash provided by operating activities of $5.7$103.4 million (ZAR 59.1 million)1.2 billion) for the year to date fiscal 2014.2015. Excluding the impact of interest received, interest paid under our Korean debt and taxes presented in the table below, the increasedecrease in cash from operating activities resulted from the expansion of our lending book, offset by cash inflows from improved trading activity during fiscal 2015.2016.
During the year to date fiscal 2016, we paid South African tax of $16.0 million (ZAR 239.9 million) related to our 2016 tax year and $3.4 million (ZAR 46.8 million) related to prior tax years. We paid dividend withholding taxes of $4.2 million (ZAR 60.0 million) during the year to date fiscal 2016. We also paid taxes totaling $5.0 million in other tax jurisdictions, primarily South Korea. During the year to date fiscal 2015, we paid South African tax of $18.9 million (ZAR 217.2 million) related to our 2015 tax year and $2.4 million (ZAR 26.4 million) related to prior tax years. We also paid taxes totaling $7.6 million in other tax jurisdictions, primarily South Korea. During the year to date fiscal 2014, we paid South African tax of $13.3 million (ZAR 137.8 million) related to our 2014 tax year and $0.2 million (ZAR 2.4 million) related to prior tax years. We also paid provisional Korean taxes of $2.6 million related to our tax year ended December 31, 2013.
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Taxes paid during the year to date fiscal 20152016 and 20142015 were as follows:
| Table 12 | Nine months ended March 31, | Nine months ended March 31, | ||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||
| $ | $ | ZAR | ZAR | $ | $ | ZAR | ZAR | |||||||||||||||||
| ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | |||||||||||||||||
| First provisional payments | 18,910 | 13,292 | 217,241 | 137,773 | 15,956 | 18,910 | 239,939 | 217,241 | ||||||||||||||||
| Taxation paid related to prior years | 2,408 | 228 | 26,395 | 2,360 | 3,436 | 2,408 | 46,840 | 26,395 | ||||||||||||||||
| Taxation refunds received | (317 | ) | (36 | ) | (3,533 | ) | (400 | ) | (176 | ) | (317 | ) | (2,402 | ) | (3,533 | ) | ||||||||
| Dividend withholding taxation | 4,183 | - | 60,000 | - | ||||||||||||||||||||
| Total South African taxes paid | 21,001 | 13,484 | 240,103 | 139,733 | 23,399 | 21,001 | 344,377 | 240,103 | ||||||||||||||||
| Foreign taxes paid: primarily Korea | 7,638 | 2,613 | 86,857 | 27,507 | 4,975 | 7,638 | 74,602 | 86,857 | ||||||||||||||||
| Total tax paid | 28,639 | 16,097 | 326,960 | 167,240 | 28,374 | 28,639 | 418,979 | 326,960 | ||||||||||||||||
Cash flows from investing activities
Third quarter of fiscal 2015and 20142016
Cash used in investing activities for the third quarter of fiscal 2016 includes capital expenditure of $8.1 million (ZAR 127.4 million), primarily for the acquisition of payment processing terminals in Korea. In addition, we exercised our rights under the Finbond Group Limited, or Finbond, rights offer and paid approximately $8.9 million (ZAR 136.1 million) for 40,733,723 shares. We also paid approximately $1.7 million, net of cash received, for approximately 56% of T24’s ordinary shares that we did not previously own.
Cash used in investing activities for the third quarter of fiscal 2015 includes capital expenditure of $6.3 million (ZAR 74.1 million), primarily for the acquisition of payment processing terminals in Korea and the rollout of ATMs in South Africa.Korea.
Year to date fiscal 2016
Cash used in investing activities for the third quarter ofyear to date fiscal 20142016 includes capital expenditure of $4.8$28.7 million (ZAR 52.7411.5 million), primarily for the acquisition of payment processing terminals in Korea.Korea and the rollout of ATMs in South Africa. In addition, we exercised our rights under the Finbond rights offer and paid approximately $8.9 million (ZAR 136.1 million) for 40,733,723 shares. We also paid approximately $1.7 million, net of cash received, for approximately 56% of T24’s ordinary shares that we did not own.
Year to date fiscal 2015 and 2014
Cash used in investing activities for the year to date fiscal 2015 includes capital expenditure of $24.8 million (ZAR 278.9 million), primarily for the acquisition of payment processing terminals in Korea. We also received approximately $1.9 million resulting from the sale of NUETS business.
Cash used in investing activities for the year to date fiscal 2014 includes capital expenditure of $17.3 million (ZAR 178.9 million), primarily for the acquisition of payment processing terminals in Korea.
Cash flows from financing activities
Third quarter of fiscal 20152016
During the third quarter of fiscal 2016, we acquired 1,328,699 shares of our common stock for approximately $12.7 million and 2014utilized approximately $0.7 million of our Korean borrowings to pay quarterly interest due.
During the third quarter of fiscal 2015, we utilized approximately $0.8 million of our Korean borrowings to pay quarterly interest due and received approximately $0.8 million from the exercise of stock options. We also paid a dividend of $1.0 million to certain of our non-controlling interests.
Year to date fiscal 2016
During the third quarteryear to date fiscal 2016, we received approximately $3.8 million from the exercise of fiscal 2014, westock options, acquired 2,077,912 shares of our common stock for approximately $23.9 million, and utilized approximately $1.0$2.1 million of our Korean borrowings to pay quarterly interest due and received approximately $0.1 million from the exercise of stock options.due.
Year to date fiscal 2015 and 2014
During the year to date fiscal 2015, we made a scheduled Korean debt repayment of $14.1 million, repurchased BVI’s remaining 1,837,432 shares of Net1 common stock for approximately $9.2 million, received $1.4 million from BVI for 12.5% of CPS’ issued and outstanding ordinary shares and paid a dividend of $1.0 million to certain of our non-controlling interests. We also utilized approximately $3.0 million of our Korean borrowings to pay quarterly interest due and received approximately $1.8 million from the exercise of stock options during the first quarter of fiscal 2015.
During the year to date fiscal 2014, we refinanced our Korean debt and received $87 million from Korean banks. In October 2013, we used $72.6 million of these new borrowings and $14.4 million of our surplus cash to repay the $87.0 million due under our old facility. In addition, we paid the facility fees related to our new Korean borrowings of approximately $0.9 million. In January 2014, we utilized approximately $1.0 million of these new borrowings to pay quarterly interest due in Korea.
We paid approximately $2.0 million for all of the shares of KSNET we did not already own during the second quarter of fiscal 2014. We also utilized our South African short-term facility to fund our working capital requirements.
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
We expect capital spending for the fourth quarter of fiscal 20152016 to primarily include the acquisition of payment terminals for the expansion of our operations in Korea.Korea and expansion of our ATM infrastructure and branch network in South Africa.
Our historical capital expenditures for the third quarter of fiscal 20152016 and 20142015 are discussed under “—Liquidity and Capital Resources—Cash 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 March 31, 2015,2016, of $0.4$0.5 million related mainly to computer equipment.the procurement of ATMs. We expect to fund these expenditures through internally-generated funds.
Contingent Liabilities, Commitments and Contractual Obligations
The following table sets forth our contractual obligations as of March 31, 2015:2016:
| Table 13 | Payments due by Period, as of March 31, 2015 (in $ ’000s) | Payments due by Period, as of March 31, 2016 (in $ ’000s) | ||||||||||||||||||||||||||||
| Less | More | Less | More | |||||||||||||||||||||||||||
| than 1 | 1-3 | 3-5 | than 5 | than 1 | 1-3 | 3-5 | than 5 | |||||||||||||||||||||||
| Total | year | years | years | years | Total | year | years | years | years | |||||||||||||||||||||
| Long-term debt obligations (A) | 68,869 | 3,656 | 23,007 | 42,206 | - | 67,120 | 11,752 | 55,368 | - | - | ||||||||||||||||||||
| Operating lease obligations | 7,915 | 3,941 | 3,451 | 523 | - | 10,088 | 5,265 | 4,667 | 156 | - | ||||||||||||||||||||
| Purchase obligations | 7,011 | 7,011 | - | - | - | 8,204 | 8,204 | - | - | - | ||||||||||||||||||||
| Capital commitments | 403 | 403 | - | - | - | 509 | 509 | - | - | - | ||||||||||||||||||||
| Other long-term obligations (B)(C) | 20,250 | - | - | - | 20,250 | 1,708 | - | - | - | 1,708 | ||||||||||||||||||||
| Total | 104,448 | 15,011 | 26,458 | 42,729 | 20,250 | 87,629 | 25,730 | 60,035 | 156 | 1,708 | ||||||||||||||||||||
| (A) | – Includes | |
| (B) | – Includes policy holder liabilities of | |
| (C) | – We have excluded cross-guarantees in the aggregate amount of |
37
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In addition to the tables below, see Note 56 to the unaudited condensed consolidated financial statements for a discussion of market risk.
The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of March 31, 2015,2016, as a result of changes in the Korean CD.CD rate. The effect of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in each of the Korean CD rate as of March 31, 2015,2016, are shown. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
| As of March 31, 2015 | As of March 31, 2016 | |||||||||||||||||
| Table 14 | Hypothetical | Estimated annual | Estimated annual | |||||||||||||||
| change in | expected interest | expected interest | ||||||||||||||||
| Korean CD | charge after | Annual | Hypothetical | charge after | ||||||||||||||
| rate or South | hypothetical change in | expected | change in | hypothetical change in | ||||||||||||||
| Annual | Africa | Korean CD rate or | interest | Korean CD | Korean CD rate, as | |||||||||||||
| expected | overdraft | South African | charge | rate, as | appropriate | |||||||||||||
| interest | facility rate, | overdraft facility rate, | ($ ’000) | appropriate | ($ ’000) | |||||||||||||
| charge | as | as appropriate | ||||||||||||||||
| ($ ’000) | appropriate | ($ ’000) | ||||||||||||||||
| Interest on Korean long-term debt | 3,133 | 1% | 3,734 | 2,898 | 1% | 3,509 | ||||||||||||
| (1% | ) | 2,533 | (1% | ) | 2,288 | |||||||||||||
43
The following table summarizes our exchange-traded equity securities with equity price risk as of March 31, 2015.2016. The effects of a hypothetical 10% increase and a 10% decrease in market prices as of March 31, 2015,2016, is also shown. The selected 10% hypothetical change does not reflect what could be considered the best or worst case scenarios.
| As of March 31, 2015 | As of March 31, 2016 | |||||||||||||||||||||||
| Table 15 | ||||||||||||||||||||||||
| Hypothetical | Hypothetical | |||||||||||||||||||||||
| Estimated fair | Percentage | Estimated fair | Percentage | |||||||||||||||||||||
| value after | Increase | value after | Increase | |||||||||||||||||||||
| Fair | hypothetical | (Decrease) in | Fair | hypothetical | (Decrease) in | |||||||||||||||||||
| value | Hypothetical | change in price | Shareholders’ | value | Hypothetical | change in price | Shareholders’ | |||||||||||||||||
| ($ ’000) | price change | ($ ’000) | Equity | ($ ’000) | price change | ($ ’000) | Equity | |||||||||||||||||
| Exchange-traded equity securities | 7,608 | 10% | 8,369 | 0.16% | 16,249 | 10% | 17,874 | 0.34% | ||||||||||||||||
| (10% | ) | 6,847 | (0.16% | ) | (10% | ) | 14,624 | (0.34% | ) | |||||||||||||||
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of March 31, 2015.2016. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2015.2016.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2015,2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
Constitutional Court Proceedings Relating to SASSA Tender Process
See disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Update on SASSA tender process” for an update regarding the proceedings in the Constitutional Court in connection with the new SASSA tender process.
Challenge to Payment by SASSA of Additional Implementation Costs
On April 2, 2015, Corruption Watch, a South African non-profit civil society organization, filed a Notice of Motion with the High Court of South Africa, notifying the Court that it intends to apply for an order by the Court to review and set aside the decision of SASSA’s Chief Executive Officer to approve the payment to us of ZAR317 million (approximately approximately ZAR 277 million, excluding VAT). Corruption Watch claims that there was no lawful basis for the decision to make the payment to us, and that the decision was unreasonable and irrational and did not comply with South African legislation. We have been named as a respondent in the Notice of Motion. On April 17, 2015 we filed a Notice of Intention to Oppose with the Court.
As we previously disclosed, in June 2014, we received approximately ZAR 277 million, excluding VAT, from SASSA, related to the recovery of additional implementation costs we incurred during the beneficiary re-registration process in fiscal 2012 and 2013. After we signed our SASSA contract, SASSA requested that we biometrically register all social grant beneficiaries (including child grant beneficiaries), in addition to the grant recipients who were issued with the SASSA-branded UEPS/EMV smart cards. We agreed to SASSA’s request, and as a result, we performed approximately 11 million additional registrations beyond those that we were contractually required to perform in consideration for our monthly service fee. Accordingly, we claimed a cost recovery from SASSA, supported by a factual findings certificate from an independent auditing firm. SASSA agreed to pay us the ZAR 277 million as full settlement of the additional costs we incurred.
We believe that Corruption Watch’s claim is without merit and we intend to defend it vigorously. However, we cannot predict how the Court will rule on the matter.
United States securities litigation
On March 6, 2015, plaintiff filed an opposition to our motion to dismiss its complaint and we filed a reply brief on March 27, 2015. We continue to believe this lawsuit has no merit and are defending it vigorously.
Item 1A. Risk Factors
See “Item 1A RISK FACTORS” in Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014,2015, for a discussion of risk factors relating to (i) our business, (ii) operating in South Africa and other foreign markets, (iii) government regulation, and (iv) our common stock. Except as set forth below, and in “Item 1A RISK FACTORS in Part II of our Form 10-Q for the quarters ended September 30 and December 31, 2014, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014.2015.
The put right we have agreed to grant to the IFC Investors on the occurrence of certain triggering events may have adverse impacts on us.
We currently deriveOn April 11, 2016, we signed a substantial portionsubscription agreement, pursuant to which we have agreed to issue 9,984,311 shares of our revenues from our SASSA contract forcommon stock to the payment of social grants and from the provision of financial and other services to our cardholder base. SASSA has initiated a new tender process.IFC Investors. We have not yet determined whether wealso entered into a policy agreement with the IFC Investors, which will participate in the process. If either we do not participate or we participate but do not win any new contract that may be awarded, we would need to replace the lost revenue from other sources or our business would suffer significantly. If we do participate and win a new contract, the terms might be substantially inferior to our current contract.
As ordered by the South African Constitutional Court in its April 2014 ruling, SASSA initiated a new tender process for a five-year contract relating to the payment of social grants by issuing an initial RFP in October 2014. Following a detailed analysisbecome effective upon closing of the tender specifications, we concluded thatsubscription, which grants the tender specifications were not sufficiently clear regarding a number of critical points and failedIFC Investors certain rights, including the right to comply with the RFP requirements specified in the Court’s ruling and, in November 2014, we applied to the Court for an order setting aside the RFP and directing SASSA to issue a corrected RFP. Although the Court did not set aside the RFP, it did order SASSA to issue a draft amended RFP. SASSA issued amended RFPs on two separate occasions (in December 2014 and February 2015). We continued to object to deficiencies in the amended RFPs and made further applications to the Court setting forth our objections. In February 2015, SASSA applied to the Court for an extension of time to address our objections.
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In orders dated March 19 and 24, 2015, the Court ordered SASSA to effect further amendments to the RFP to address our objections. The Court ordered that, absent further objections (1) SASSA must circulate a further amended draft RFP by April 17, 2015; (2) all bids must be submitted by May 17, 2015 and (3) SASSA shall award the new tender by October 15, 2015. The Court’s April 2014 ruling does not require SASSA to award a new tender, though we expect that any decision not to make an award would be subject to judicial review and scrutiny. On April 17, 2015, SASSA issued and circulated an amended RFP to all prospective bidders. The amended RFP specifies that bidders must submit their proposals to SASSA on or before May 18, 2015.
We are currently analyzing the RFP to determine whether it is in the best interest of the Company to participate in the tender process or to focus on our other financial services businesses without being a contractor to SASSA. We have not yet made a final determination but expect to do so by the tender deadline. In any event, we cannot predict what the timing or ultimate outcome of the tender process will be, or if a new tender award will be made at all after the process is complete. If we choose not to participate in the new tender, then our current contract may be canceled in the event that SASSA awards a new contract to a third party, in which case we would lose the revenues we currently receive from our SASSA contract. In that event, we would need to replace the lost revenue with alternate sources of revenues.
As with prior SASSA tenders, any participation in the new tender, unless it is concluded promptly, will consume a substantial amount of our management’s time and attention and impact their ability to focus on other matters, including other South African and international business development activities. If we do participate in the tender process, we cannot assure you we will win a contract to continue to distribute social welfare grants nationally. If a new contract is awarded and we are not the winning bidder, we would lose the benefit of the remaining portion of our current contract. Even if we win the tender and do receive a new contract, we cannot predict the terms that such contract will contain. Any new contract we receive will likely contain pricing or other terms that would be less favorable to us than the terms of our current contract.
The Court's November 29, 2013 judgment also stated that CPS is deemed to be an “organ of state” for the purpose of the contract concluded pursuant to the previous tender process. The Court stated that, in this regard, CPS has “constitutional obligations” that go beyond its contractual obligations. It is not clear what these obligations may entail in respect of the current and any potential future government contract in South Africa. We cannot predict what the financial implications may be if we are required to continue with the provision of our services without a valid contract, or during any transitional period required for the orderly transfer of our current services to the successful bidder.
Further, in connection with the litigation challenging the award of the previous SASSA tender to us, we included our entire 2011 SASSA tender submission in the court record, which court record is in the public domain. Our previous tender submission contained competitively sensitive business information. As a result of this disclosure, our existing and future competitors have access to this information which could adversely affect our competitive position in the current tender process to the extent that such information continues to remain competitively sensitive.
Finally, if we were to be awarded one or more contracts by SASSA, an unsuccessful tenderor could seek to challenge the award, which could result in the contract being set aside or could require us to expend time and resources in an attemptrepurchase any shares we have sold to defeat any such challenge.
We are, and in the future may be, subjectIFC Investors upon the occurrence of specified triggering events, which we refer to litigation in which private parties may seek to recover, on behalf of SASSA, amounts paid to us under our SASSA contract. If such litigation were to be successful and require us to repay substantial monies to SASSA, such repayment would adversely affect our results of operations, financial position and cash flows.
On April 2, 2015, Corruption Watch, a South African non-profit civil society organization, filed a Notice of Motion with the High Court of South Africa, notifying the Court that it intends to apply for an order by the Court to review and set aside the decision of SASSA’s Chief Executive Officer to approve the payment to us of ZAR317 million. Corruption Watch claims that there was no lawful basis for the decision to make the payment to us, and that the decision was unreasonable and irrational and did not comply with South African legislation. We have been named as a respondent“put right.” Events triggering the put right relate to (1) us being the subject of a governmental complaint alleging, a court judgment finding or an indictment alleging that we (a) engaged in specified corrupt, fraudulent, coercive, collusive or obstructive practices; (b) entered into transactions with targets of economic sanctions; or (c) failed to operate our business in compliance with anti-money laundering or anti-terrorism laws; or (2) we reject a bona fide offer to acquire all of our outstanding shares at a time when we have in place or implement a shareholder rights plan, or adopt a shareholder rights plan triggered by a beneficial ownership threshold of less than twenty percent. The put price per share will be the Noticehigher of Motion. On April 17, 2015 we filed a Notice of Intention to Oppose with the Court.
As discussed in “Item 1—Legal Proceedings,” the payments being challenged by Corruption Watch represent amountsprice per share paid to us by SASSAthe IFC Investors and the volume-weighted average price per share prevailing for the costs we incurred in performing additional beneficiary registrations beyond those60 trading days preceding the triggering event, except that we were contractually required to perform underwith respect a put right triggered by rejection of a bona fide offer, the put price per share will be the highest price offered by the offeror. If a put triggering event occurs, it could adversely impact our SASSA contract. These amounts were paid in full settlement of the claim we submitted to SASSA for these additional costs. We believe that Corruption Watch’s claim is without meritliquidity and we intend to defend it vigorously. However, we cannot predict how the Court will rule on the matter.
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capital resources. In addition, the April 2014 Constitutional Court ruling ordering SASSA to re-runexistence of the tender process requires us to file with the Court, after completion of our SASSA contract, an audited statement of our expenses, income and net profit under the contract. It is conceivable that oneput right could also affect whether or moreon what terms a third parties mayparty might in the future institute litigation challengingoffer to purchase our rightcompany. Our response to retain a portionany such offer could also be complicated, delayed or otherwise influenced by the existence of the amounts we will have received from SASSA underput right.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below presents information relating to purchases of shares of our contract. We cannot predict whether any such litigation will be instituted, or if it is, whether it would be successful.common stock during the third quarter of fiscal 2016:
| Table 16 | (c) | (d) | ||||||||||
| Total number | Maximum | |||||||||||
| of shares | dollar value | |||||||||||
| purchased as | of shares that | |||||||||||
| (b) | part of | may yet be | ||||||||||
| (a) | Average price | publicly | purchased | |||||||||
| Total number | paid per | announced | under the | |||||||||
| of shares | share | plans or | plans or | |||||||||
| Period | purchased | (US dollars) | programs | programs(1) | ||||||||
| January 2016 | - | - | - | 88,814,277 | ||||||||
| February 2016 | 1,328,699 | 9.58 | 1,328,699 | 87,274,407 | ||||||||
| March 2016 | - | - | - | 83,802,119 | ||||||||
| Total | 1,328,699 | 1,328,699 |
(1) The January 2016 amount represents the then-outstanding balance of the $100 million previously authorized by our Board of Directors on August 21, 2013. On February 3, 2016, our Board of Directors approved the replenishment of this authorization to repurchase back up to an aggregate of $100 million of common stock. The authorization has no expiration date.
Any successful challenge to our right to receive and retain payments from SASSA that requires substantial repayments would adversely affect our results of operations, financial position and cash flows.45
Item 6. Exhibits
The following exhibits are filed as part of this Form 10-Q:
| Incorporated by Reference Herein | ||||||||||
| Exhibit | Included | |||||||||
| No. | Description of Exhibit | Herewith | Form | Exhibit | Filing Date | |||||
| 10.31 | Subscription Agreement, dated April 11, 2016, among the Company and the Investors | 8-K | 10.31 | April 12, 2016 | ||||||
| 10.32 | Policy Agreement, dated April 11, 2016, among the Company and the Investors | 8-K | 10.32 | April 12, 2016 | ||||||
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | ||||||||
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | ||||||||
| 32 | Certification pursuant to 18 USC Section 1350 | X | ||||||||
| 101.INS | XBRL Instance Document | X | ||||||||
| 101.SCH | XBRL Taxonomy Extension Schema | X | ||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | ||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | ||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | X | ||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X | ||||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 7, 2015.6, 2016.
41NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Serge C.P. Belamant
Serge C.P. Belamant
Chief Executive Officer, Chairman of the Board and Director
By: /s/ Herman G. Kotzé
Herman G. Kotzé
Chief Financial Officer, Treasurer and Secretary, Director
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