(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 U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission for Quarterly Reports on Form 10-Q and include all of the information and disclosures required for interim financial reporting. The results of operations for the three and sixnine months ended DecemberMarch 31, 20172018 and 2016,2017, are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented. During the three months ended December 31, 2017, the Company reclassified redeemable common stock out of total equity because redeemable common stock is required to be presented outside of permanent equity. The Company has restated these amounts in its unaudited condensed consolidated balance sheet as at June 30, 2017 and unaudited condensed consolidated statement of changes in equity for the sixnine months ended DecemberMarch 31, 2017.2018. The reclassification resulted in a decrease in total equity by approximately $107.7 million and an increase in redeemable common stock, presented outside of permanent equity, of approximately $107.7 million. This reclassification had no impact on the Company’s previously reported consolidated income, comprehensive income or cash flows.
References to the “Company” refer to Net1 and its consolidated subsidiaries, collectively, unless the context otherwise requires. References to “Net1” are references solely to Net 1 UEPS Technologies, Inc.
Recent accounting pronouncements adopted
In August 2014, the FASB issued guidance regardingDisclosure of Uncertainties about 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. The adoption of this guidance did not have a material impact on the Company’s financial statements disclosures.
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. The adoption of this guidance did not have a material impact on the Company’s financial statements.
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, and has been applied on a prospective basis. The adoption of this guidance has resulted in the reclassification of current deferred tax assets and liabilities as non-current deferred tax assets and liabilities in the unaudited condensed consolidated balance sheet as of DecemberMarch 31, 2017.2018. Prior period current deferred tax assets have not been reclassified as non-current in the unaudited condensed consolidated balance sheet as of June 30, 2017.
In March 2016, the FASB issued guidance 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. The adoption of this guidance did not have a material impact on the Company’s financial statements. The Company has elected to continue to estimate the number of forfeitures when an award is made.
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| 1. | Basis of Presentation and Summary of Significant Accounting Policies (continued) |
1. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Recent accounting pronouncements not yet adopted as of DecemberMarch 31, 20172018
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 was originally set to be effective for the Company beginning July 1, 2017, however 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 guidance is effective for the Company beginning July 1, 2018. The Company expects that this guidance may have a material impact on its financial statements and is currently evaluating the impact of this guidance on its financial statements on adoption.
In January 2016, the FASB issued guidance 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. The guidance requires changes in the fair value of the Company’s equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income. In addition, the guidance clarifies the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This guidance 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 include the recognition of assets and liabilities by lessees for those leases currently classified as operating leases. The guidance also requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for the Company beginning July 1, 2019. Early adoption is permitted. The Company expects that this guidance may have a material impact on its financial statements and is currently evaluating the impact of this guidance on its financial statements on adoption.
In June 2016, the FASB issued guidance regardingMeasurement of Credit Losses on Financial Instruments. The guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, an entity is required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. This guidance is effective for the Company beginning July 1, 2020. Early adoption is permitted beginning July 1, 2019. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In June 2016, the FASB issued guidance regardingClassification of Certain Cash Receipts and Cash Payments. The guidance is intended to reduce diversity in practice and explains how certain cash receipts and payments are presented and classified in the statement of cash flows, including beneficial interests in securitization, which would impact the presentation of the deferred purchase price from sales of receivables. This guidance is effective for the Company beginning July 1, 2018, and must be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In January 2017, the FASB issued guidance regardingClarifying the Definition of a Business.This guidance provides a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The guidance is effective for the Company beginning July 1, 2018. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In January 2017, the FASB issued guidance regardingSimplifying the Test for Goodwill Impairment.This guidance removes the requirement for an entity to calculate the implied fair value of goodwill (as part of step 2 of the current goodwill impairment test) in measuring a goodwill impairment loss. The guidance is effective for the Company beginning July 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the impact of this guidance.
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| 1. | Basis of Presentation and Summary of Significant Accounting Policies (continued) |
1. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Recent accounting pronouncements not yet adopted as of DecemberMarch 31, 20172018 (continued)
In May 2017, the FASB issued guidance regardingCompensation—Stock Compensation (Topic 718): Scope of Modification Accounting.The guidance amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance is effective for the Company beginning July 1, 2018. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
| 2. |
|
Pre-funded social welfare grants receivable represents primarily amounts pre-funded by the Company to certain merchants participating in the merchant acquiring system. The JanuaryApril 2018 payment service commenced on January 2,April 3, 2018, but the Company pre-funded certain merchants participating in the merchant acquiring systems on December 30, 2017.March 31, 2018. The July 2017 payment service commenced on July 1, 2017, but the Company pre-funded certain merchants participating in the merchant acquiring systems on the last day of June 2017.
| 3. |
|
The Company’s inventory comprised the following category as of DecemberMarch 31, 20172018 and June 30, 2017.
| December 31, | June 30, | |||||
| 2017 | 2017 | |||||
| Finished goods | $ | 12,482 | $ | 8,020 | ||
| $ | 12,482 | $ | 8,020 |
| March 31, | June 30, | ||||||
| 2018 | 2017 | ||||||
| Finished goods | $ | 11,808 | $ | 8,020 | |||
| $ | 11,808 | $ | 8,020 |
| 4. |
|
Settlement assets comprise (1) cash received from the South African government that the Company holds pending disbursement to recipient cardholders of social welfare grants and (2) cash received from customers on whose behalf the Company processes payroll payments that the Company will disburse to customer employees, payroll-related payees and other payees designated by the customer.
Settlement obligations comprise (1) amounts that the Company is obligated to disburse to recipient cardholders of social welfare grants, and (2) amounts that the Company is obligated to pay to customer employees, payroll-related payees and other payees designated by the customer.
The balances at each reporting date may vary widely depending on the timing of the receipts and payments of these assets and obligations.
| 5. | Fair value of financial instruments |
5. Fair value of financial instruments
Fair value of financial instruments
Initial recognition and measurement
Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction costs.
Risk management
The Company seeks to reducemanages its exposure to currencies other than the South African rand through a policy of matching, to the extent possible, assets and liabilities denominated in those currencies. In addition, the Company utilized financial instruments in order to economically hedge its exposure tocurrency exchange, rate and interest rate fluctuations arising from its operations. The Company is also exposed to translation, interest rate, customer concentration, credit and equity price and liquidity risks.risks as discussed below.
Currency exchange risk
The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and U.S. dollar. The Company has used forward contracts in order to limit its exposure in these transactions to fluctuations in exchange rates between the South African rand, on the one hand, and the U.S. dollar and the euro, on the other hand.
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| 5. | Fair value of financial instruments (continued) |
5. Fair value of financial instruments (continued)
Fair value of financial instruments (continued)
Risk management (continued)
Translation risk
Translation risk relates to the risk that the Company’s results of operations will vary significantly as the U.S. dollar is its reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The U.S. dollar to ZAR exchange rate has fluctuated significantly over the past three years. As exchange rates are outside the Company’s control, there can be no assurance that future fluctuations will not adversely affect the Company’s results of operations and financial condition.
Interest rate risk
As a result of its normal borrowing and lending activities, the Company’s operating results are exposed to fluctuations in interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited investments in cash equivalents and held to maturity investments and has occasionally invested in marketable securities.
Working capital finance customer concentration risk
Working capital finance customer concentration risk relates to the risk of loss that the Company would incur as a result of its concentration of working capital financing receivables. During the year ended June 30, 2017, the Company commenced marketing activities to develop and expand its working capital financing receivables base. The Company manages the risk through on-going marketing efforts to further expand its customer base as well as through regular contact with its customer to assess their need for the Company’s product.
Credit risk
Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties. The Company maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an evaluation of a potential 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 “BB+” (or its equivalent) or better, as determined by credit rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings.
Microlending credit risk
The Company is exposed to credit risk in its microlending activities, which providesprovide unsecured short-term loans to qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer and assignsassigning a “creditworthiness score”, which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses.
Equity price and liquidity risk
Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities that it holds and the risk that it may not be able to liquidate these securities. The market price of these securities may fluctuate for a variety of reasons and, consequently, the amount that the Company may obtain in a subsequent sale of these securities may significantly differ from the reported market value.
Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an extended period of time without influencing the exchange traded price, or at all.
Financial instruments
The following section describes the valuation methodologies the Company uses to measure its significant financial assets and liabilities at fair value.
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5. Fair value of financial instruments (continued)
Financial instruments (continued)
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology would apply to Level 1 investments. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would be included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect 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.
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| 5. | Fair value of financial instruments (continued) |
Financial instruments (continued)
Asset measured at fair value using significant unobservable inputs – investment in Cell C
The Company's Level 3 asset represents an investment of 75,000,000 class “A” shares in Cell C (Pty) Limited (“Cell C”), a leading mobile telecoms provider in South Africa (refer to Note 6). The Company has designated such shares as available for sale investments. Cell C shares are not listed on an exchange and there is no readily determinable market value for the shares. The Company has developed an adjusted EV/EBITDA multiple valuation model in order to determine the fair value of the Cell C shares. The primary inputs to the valuation model are Cell C’s adjusted EBITDA for the 12 months ended December 31, 2017, of ZAR 3.7 billion ($309.0 million, translated at exchange rates applicable as of March 31, 2018), an EBITDA multiple andof 7.20, Cell C’s net external debt.debt of ZAR 8.2 billion ($691.6 million, translated at exchange rates applicable as of March 31, 2018) and a marketability discount of 10% as Cell C is not yet listed. The EBITDA multiple was determined based on an analysis of Cell C’s peer group, which comprises the primary mobile operators (Vodacom MTN and Telkom)MTN) in the South African marketplace. The fair value of Cell C utilizing the adjusted EV/EBITDA valuation model developed by the Company is sensitive to the following inputs: (i) the Company’s determination of adjusted EBITDA (ii) the EBITDA multiple used and (iii) the marketability discount used. Utilization of different inputs, or changes to these inputs, may result in significant higher or lower fair value measurement.
The fair value of the Cell C shares as of DecemberMarch 31, 2017,2018, represented approximately 12%15% of the Company’s total assets, including these shares. The Company expects to hold these shares for an extended period of time and it is not concerned with short-term equity price volatility with respect to these shares provided that the underlying business, economic and management characteristics of the company remain sound.
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 “BB+“” (or equivalent) or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair value (Level 2). The Company has no derivatives that require fair value measurement under Level 1 or 3 of the fair value hierarchy.
The Company had no outstanding foreign exchange contracts as of DecemberMarch 31, 20172018 and June 30, 2017, respectively.
The following table presents the Company’s assets measured at fair value on a recurring basis as of DecemberMarch 31, 2017,2018, according to the fair value hierarchy:
| Quoted | ||||||||||||
| price in | ||||||||||||
| active | Significant | |||||||||||
| markets for | other | Significant | ||||||||||
| identical | observable | unobservable | ||||||||||
| assets | inputs | inputs | ||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||
| Assets | ||||||||||||
| Investment in Cell C | $ | - | $ | - | $ | 161,695 | $ | 161,695 | ||||
| Related to insurance business: | ||||||||||||
| Cash and cash equivalents (included in other long-term assets) | 664 | - | - | $ | 664 | |||||||
| Fixed maturity investments (included in cash and cash equivalents) | 7,458 | - | - | 7,458 | ||||||||
| Other | - | 40 | - | 40 | ||||||||
| Total assets at fair value | $ | 8,122 | $ | 40 | $ | 161,695 | $ | 169,857 |
| Quoted price in | Significant | ||||||||||||
| active markets | other | Significant | |||||||||||
| for identical | observable | unobservable | |||||||||||
| assets | inputs | inputs | |||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||
| Assets | |||||||||||||
| Investment in Cell C | $ | - | $ | - | $ | 206,970 | $ | 206,970 | |||||
| Related to insurance business: | |||||||||||||
| Cash and cash equivalents (included in other long-term assets) | 701 | - | - | 701 | |||||||||
| Fixed maturity investments (included in cash and cash equivalents) | 9,230 | - | - | 9,230 | |||||||||
| Other | - | 40 | - | 40 | |||||||||
| Total assets at fair value | $ | 9,931 | $ | 40 | $ | 206,970 | $ | 216,941 |
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| 5. | Fair value of financial instruments (continued) |
5. Fair value of financial instruments (continued)
Financial instruments (continued)
The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2017, according to the fair value hierarchy:
| Quoted | ||||||||||||
| Price in | ||||||||||||
| Active | Significant | |||||||||||
| Markets for | Other | Significant | ||||||||||
| Identical | Observable | Unobservable | ||||||||||
| Assets | Inputs | Inputs | ||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||
| Assets | ||||||||||||
| Related to insurance business: | ||||||||||||
| Cash and cash equivalents (included in other long-term assets) | $ | 627 | $ | - | $ | - | $ | 627 | ||||
| Fixed maturity investments (included in cash and cash equivalents) | 5,160 | - | - | 5,160 | ||||||||
| Other | - | 37 | - | 37 | ||||||||
| Total assets at fair value | $ | 5,787 | $ | 37 | $ | - | $ | 5,824 |
| Quoted Price | Significant | ||||||||||||
| in Active | Other | Significant | |||||||||||
| Markets for | Observable | Unobservable | |||||||||||
| Identical Assets | Inputs | Inputs | |||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||
| Assets | |||||||||||||
| Related to insurance business: | |||||||||||||
| Cash and cash equivalents (included in other long-term assets) | $ | 627 | $ | - | $ | - | $ | 627 | |||||
| Fixed maturity investments (included in cash and cash equivalents) | 5,160 | - | - | 5,160 | |||||||||
| Other | - | 37 | - | 37 | |||||||||
| Total assets at fair value | $ | 5,787 | $ | 37 | $ | - | $ | 5,824 |
There have been no transfers in or out of Level 3 during the three and sixnine months ended DecemberMarch 31, 20172018 and 2016,2017, 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 assetsasset exceeds its fair value and the excess is determined to be other-than-temporary. The Company has not recorded any impairment charges during the reporting periods presented herein.
| 6. | Equity-accounted investments and other long-term assets |
6. Equity-accounted investments and other long-term assets
Equity-accounted investments
The Company’s ownership percentage in its equity-accounted investments as of DecemberMarch 31, 20172018 and June 30, 2017, was as follows:
| December 31, | June 30, | |||||
| 2017 | 2017 | |||||
| DNI-4PL (Pty) Ltd (“DNI”) | 45% | - | ||||
| Bank Frick & Co AG (“Bank Frick”) | 30% | - | ||||
| Finbond Group Limited (“Finbond”) | 27% | 26% | ||||
| KZ One Limited (formerly One Credit Limited) (“KZ One”) | 25% | 25% | ||||
| SmartSwitch Namibia (Pty) Ltd (“SmartSwitch Namibia”) | 50% | 50% | ||||
| Walletdoc Proprietary Limited (“Walletdoc”) | 20% | 20% |
| March 31, | June 30, | ||||||
| 2018 | 2017 | ||||||
| DNI-4PL (Pty) Ltd (“DNI”) | 49% | - | |||||
| Bank Frick & Co AG (“Bank Frick”) | 35% | - | |||||
| Finbond Group Limited (“Finbond”) | 26% | 26% | |||||
| OneFi Limited (formerly KZ One) (“OneFi”) | 25% | 25% | |||||
| SmartSwitch Namibia (Pty) Ltd (“SmartSwitch Namibia”) | 50% | 50% | |||||
| Walletdoc Proprietary Limited (“Walletdoc”) | 20% | 20% |
On July 27, 2017, the Company subscribed for 44,999,999 ordinary A shares in DNI, representing a 45% voting and economic interest in DNI, for a subscription price of ZAR 945.0 million ($72.0 million) in cash. On March 9, 2018, the Company subscribed for an additional 4,000,000 ordinary A shares in DNI for a subscription price of ZAR 89.3 million ($7.5 million), in cash, which increased its voting and economic interest in DNI as of March 31, 2018, to 49%.
On March 9, 2018, the Company agreed to subscribe for an additional 6,000,000 ordinary A shares in DNI for an aggregate subscription price of ZAR 126.0 million ($10.7 million, translated at exchange rates applicable as of March 31, 2018), which will increase its voting and economic interest to 55% in DNI. The subscription is subject to certain conditions, including obtaining South African Competition Commission approval. On March 9, 2018, the Company provided DNI with an interest-free loan of ZAR 126.0 million ($10.6 million) which is repayable at the earlier of June 30, 2018, or within twenty days of the 6,000,000 ordinary A share subscription agreement (i) becoming unconditional, (ii) lapsing because the Competition Commission prohibits the subscription, or (iii) the agreement is cancelled for any reason. The loan is included in accounts receivable, net, as of March 31, 2018, on the Company’s unaudited condensed consolidated balance sheet. As described in Note 10, on March 9, 2018, the Company obtained financing to partially fund the acquisition of 4,000,000 ordinary A DNI shares and to provide the loan to DNI.
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| 6. | Equity-accounted investments and other long-term assets (continued) |
Equity-accounted investments (continued)
Under the terms of the Company’s agreements with DNI,July 27, 2017, agreement, the Company is requiredagreed to pay to DNI an additional amount of up to ZAR 360360.0 million ($29.1 million, translated at the foreign exchange rates applicable as of December 31, 2017)30.4 million), in cash, subject to the achievement of certain performance targets by DNI. In connection with the subscription agreements executed in March 2018, the Company agreed to increase the total additional amount from up to ZAR 360.0 million to up to ZAR 380.0 million ($32.1 million) following the purchase of the additional 4,000,000 shares and further agreed to increase the total additional amount from up to ZAR 380.0 million to up to ZAR 400.0 million ($33.8 million) if the Company subscribes for the additional 6,000,000 shares. Therefore the maximum additional amount that is payable is ZAR 400.0 million if all subscriptions are completed. The Company has not accrued for any of this contingent consideration as of DecemberMarch 31, 2017.2018. Net1 SA has pledged, among other things, its entire equity interest in DNI as security for the South African facilities described in Note 10 used to partially fund the acquisition10. All amounts denominated in ZAR have been translated at exchange rates applicable as of Cell C.
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6. Equity-accounted investments and other long-term assets (continued)
Equity-accounted investments (continued)March 31, 2018.
On October 2, 2017, the Company acquired a 30% interest in Bank Frick, a fully licensed bank based in Balzers, Liechtenstein, from the Kuno Frick Family Foundation (“Frick Foundation”) for approximately CHF 39.8 million ($40.9 million) in cash. On January 26,February 9, 2018, the parties entered into an addendum to the Bank Frick shareholders agreement pursuant to which the Company agreed to purchasepurchased an additional 5% in Bank Frick from the Frick Foundation for CHF 10.4 million ($10.711.1 million) and the Frick Foundation agreed to contributecontributed approximately CHF 3.8 million ($3.94.1 million) to Bank Frick to facilitate the development of Bank Frick’s Fintech and blockchain businesses. The Company has an option, exercisable until October 2, 2019, to acquire an additional 35% interest in Bank Frick.
Bank Frick provides a complete suite of banking services, with one of its key strategic pillars being the provision of payment services and funding of financial technology opportunities. Bank Frick holds acquiring licenses from both Visa and MasterCard and operates a branch in London. The Company and Bank Frick have jointly identified several funding opportunities, including for the Company’s card issuing and acquiring and transaction processing activities as well as new opportunities in cryptocurrencyblockchain and blockchain.crypto-currencies. The investment in Bank Frick has the potential to provide the Company with a stable, long-term and strategic relationship with a fully-licensed bank.
As of DecemberMarch 31, 2017,2018, the Company owned 205,483,967 shares in Finbond. Finbond is listed on the Johannesburg Stock Exchange and its closing price on DecemberMarch 29, 2017,2018, the last trading day of the quarter, was R3.39R4.00 per share. The aggregatemarket value of the Company’s holding in Finbond on DecemberMarch 31, 20172018 was R696.6ZAR 821.9 million ($56.369.5 million translated at exchange rates applicable as of DecemberMarch 31, 2017)2018). On July 13, 2017, the Company acquired an additional 3.6 million shares in Finbond for approximately ZAR 11.2 million ($0.8 million). On July 17, 2017, the Company, pursuant to its election, received an additional 4,361,532 shares in Finbond as a capitalization share issue in lieu of a dividend.
On October 7, 2016, the Company provided a loan of ZAR 139.2 million ($10.0 million, translated at the foreign exchange rates applicable on the date of the loan) to Finbond in order to partially finance Finbond’s expansion strategy in the United States. The loan is included in accounts receivable, net, on the Company’s unaudited condensed consolidated balance sheet as of December 31, 2017 and June 30, 2017. Interest on the loan is payable quarterly in arrears and is based on the London Interbank Offered Rate (“LIBOR”) in effect from time to time plus a margin of 12.00%. The LIBOR rate was 1.4874%2.31175% on December 31, 2017. March 29, 2018.
The loan was initially set to mature at the earlier of Finbond concluding a rights offer or February 28, 2017, but the agreement was subsequently amended to extend the repayment date to on or before February 28, 2018, or such later date as may be mutually agreed by the parties in writing. The Company hashad the right to elect for the loan to be repaid in either Finbond ordinary shares, including through a rights offering, (in accordance with an agreed mechanism) or in cash. The Company mustis required to make a repayment election within 180 days after the repayment date otherwise the repayment election will automatically default to repayment in ordinary shares. Finbond has undertakenundertook to perform all necessary steps reasonably required to effect the issuance of shares to settle the repayment of the loan if that option is elected by the Company.
In March 2018, the parties amended the agreement to extend the repayment date from February 28, 2018 to August 31, 2018, and to finalize certain matters related to the rights offering mechanism and determining the maximum number of shares that Finbond would issue to parties participating in a rights offering. On March 23, 2018, Finbond publicly announced that it had commenced a rights offering process and that the proceeds of the offering would be used to settle certain loans, including the loan due to the Company. The loan is included in equity accounted investments as of March 31, 2018, and accounts receivable, net, as of June 30, 2017, on the Company’s unaudited condensed consolidated balance sheet. The rights offering closed on April 20, 2018. The Company hasagreed to underwrite the Finbond rights offer up to an amount of 55,585,514 shares and from April 23, 2018, now owns 261,069,481 Finbond shares, representing approximately 27.6% of Finbond’s issued and outstanding ordinary shares after the rights offering.
The Company provided a credit facility of up to $10 million in the form of convertible debt to KZ One,OneFi, of which $2 million had beenwas drawn as of DecemberMarch 31, 20172018 and June 30, 2017. In April 2018, an additional $1.0 million was drawn under the credit facility.
13
| 6. | Equity-accounted investments and other long-term assets (continued) |
Equity-accounted investments (continued)
Summarized below is the movement in equity-accounted investments during the sixnine months ended DecemberMarch 31, 2017:2018:
| DNI | Bank Frick | Finbond | Other(1) | Total | |||||||||||
| Investment in equity: | |||||||||||||||
| Balance as of June 30, 2017 | $ | - | $ | - | $ | 18,961 | $ | 6,742 | $ | 25,703 | |||||
| Acquisition of shares | 72,001 | 40,892 | 1,941 | - | 114,834 | ||||||||||
| Stock-based compensation | - | - | (207 | ) | - | (207 | ) | ||||||||
| Comprehensive income (loss): | 1,911 | 322 | 874 | 95 | 3,202 | ||||||||||
| Other comprehensive loss | - | - | (227 | ) | - | (227 | ) | ||||||||
| Equity accounted earnings (loss) | 1,911 | 322 | 1,101 | 95 | 3,429 | ||||||||||
| Share of net income (loss) | 3,240 | 487 | 1,931 | 95 | 5,753 | ||||||||||
| Amortization of acquired intangible assets | (1,845 | ) | (219 | ) | - | - | (2,064 | ) | |||||||
| Deferred taxes on acquired intangible assets | 516 | 54 | - | - | 570 | ||||||||||
| Dilution resulting from corporate transactions | - | - | (830 | ) | - | (830 | ) | ||||||||
| Dividends received | (1,765 | ) | - | (1,096 | ) | (400 | ) | (3,261 | ) | ||||||
| Foreign currency adjustment(2) | 4,369 | (169 | ) | 1,134 | (381 | ) | 4,953 | ||||||||
| Balance as of December 31, 2017 | $ | 76,516 | $ | 41,045 | $ | 21,607 | $ | 6,056 | $ | 145,224 |
13
6. Equity-accounted investments and other long-term assets (continued)
Equity-accounted investments (continued)
| DNI | Bank Frick | Finbond | Other(1) | Total | |||||||||||
| Investment in loans: | |||||||||||||||
| Balance as of June 30, 2017 | $ | - | $ | - | $ | - | $ | 2,159 | $ | 2,159 | |||||
| Foreign currency adjustment(2) | - | - | - | 9 | 9 | ||||||||||
| Balance as of December 31, 2017 | $ | - | $ | - | $ | - | $ | 2,168 | $ | 2,168 | |||||
| Equity | Loans | Total | |||||||||||||
| Carrying amount as of: | |||||||||||||||
| June 30, 2017 | $ | 25,703 | $ | 2,159 | $ | 27,862 | |||||||||
| December 31, 2017 | $ | 145,224 | $ | 2,168 | $ | 147,392 |
| Bank | ||||||||||||||||
| DNI | Frick | Finbond | Other(1) | Total | ||||||||||||
| Investment in equity: | ||||||||||||||||
| Balance as of June 30, 2017 | $ | - | $ | - | $ | 18,961 | $ | 6,742 | $ | 25,703 | ||||||
| Acquisition of shares | 79,541 | 51,949 | 1,941 | - | 133,431 | |||||||||||
| Stock-based compensation | - | - | (207 | ) | - | (207 | ) | |||||||||
| Comprehensive income (loss): | 5,202 | 975 | 874 | 111 | 7,162 | |||||||||||
| Other comprehensive loss | - | - | (227 | ) | - | (227 | ) | |||||||||
| Equity accounted earnings (loss) | 5,202 | 975 | 1,101 | 111 | 7,389 | |||||||||||
| Share of net income (loss) | 6,868 | 1,234 | 1,931 | 111 | 10,144 | |||||||||||
| Amortization of acquired intangible assets | (2,315 | ) | (342 | ) | - | - | (2,657 | ) | ||||||||
| Deferred taxes on acquired intangible assets | 649 | 83 | - | - | 732 | |||||||||||
| Dilution resulting from corporate transactions | - | - | (830 | ) | - | (830 | ) | |||||||||
| Dividends received | (1,765 | ) | (1,946 | ) | (1,096 | ) | (400 | ) | (5,207 | ) | ||||||
| Foreign currency adjustment(2) | 7,917 | 639 | 2,127 | (489 | ) | 10,194 | ||||||||||
| Balance as of March 31, 2018 | $ | 90,895 | $ | 51,617 | $ | 22,600 | $ | 5,964 | $ | 171,076 | ||||||
| Investment in loans: | ||||||||||||||||
| Balance as of June 30, 2017 | $ | - | $ | - | $ | - | $ | 2,159 | $ | 2,159 | ||||||
| Transfer from accounts receivable, net | - | - | 11,772 | - | 11,772 | |||||||||||
| Foreign currency adjustment(2) | - | - | - | 16 | 16 | |||||||||||
| Balance as of March 31, 2018 | $ | - | $ | - | $ | 11,772 | $ | 2,175 | $ | 13,947 | ||||||
| Equity | Loans | Total | ||||||||||||||
| Carrying amount as of: | ||||||||||||||||
| June 30, 2017 | $ | 25,703 | $ | 2,159 | $ | 27,862 | ||||||||||
| March 31, 2018 | $ | 171,076 | $ | 13,947 | $ | 185,023 |
(1) Includes KZ One,OneFi, SmartSwitch Namibia and Walletdoc;
(2) The foreign currency adjustment represents the effects of the fluctuations of the South African rand, Nigerian naira and the Namibian dollar, andagainst the U.S. dollar on the carrying value.
Other long-term assets
Summarized below is the breakdown of other long-term assets as of DecemberMarch 31, 2017,2018, and June 30, 2017:
| December 31, | June 30, | |||||
| 2017 | 2017 | |||||
| Investment in 15% of Cell C (Pty) Limited (“Cell C”), at fair value(1) | $ | 161,695 | $ | - | ||
| Investment in 12% of One MobiKwik Systems Private Limited (“MobiKwik”), at cost | 27,598 | 26,317 | ||||
| Total equity investments | 189,293 | 26,317 | ||||
| Investment in 7.625% of Cedar Cellular Investment 1 (RF) (Pty) Ltd 8.625% notes due in 2022 | 9,182 | - | ||||
| Total held to maturity investments | 9,182 | - | ||||
| Long-term portion of payments to agents in South Korea amortized over the contract period | 20,512 | 17,290 | ||||
| Policy holder assets under investment contracts (Note 8) | 664 | 627 | ||||
| Reinsurance assets under insurance contracts Note 8) | 212 | 191 | ||||
| Other long-term assets | 5,600 | 5,271 | ||||
| Total other long-term assets | $ | 225,463 | $ | 49,696 |
(1) The notes to the unaudited condensed consolidated financial statements included in the Company’s Form 10-Q for the three months ended September 30, 2017, stated that the Cell C investment was carried at cost rather than at fair value. As of September 30, 2017, the fair value of the investment in Cell C approximated its cost.
| March 31, | June 30, | ||||||
| 2018 | 2017 | ||||||
| Investment in 15% of Cell C (Pty) Limited (“Cell C”), at fair value | $ | 206,970 | $ | - | |||
| Investment in 12% of One MobiKwik Systems Private Limited (“MobiKwik”), at cost | 28,391 | 26,317 | |||||
| Total equity investments | 235,361 | 26,317 | |||||
| Investment in 7.625% of Cedar Cellular Investment 1 (RF) (Pty) Ltd 8.625% notes due in 2022 | 9,769 | - | |||||
| Total held to maturity investments | 9,769 | - | |||||
| Long-term portion of payments to agents in South Korea amortized over the contract period | 19,447 | 17,290 | |||||
| Policy holder assets under investment contracts (Note 8) | 701 | 627 | |||||
| Reinsurance assets under insurance contracts Note 8) | 224 | 191 | |||||
| Other long-term assets | 5,683 | 5,271 | |||||
| Total other long-term assets | $ | 271,185 | $ | 49,696 |
On August 2, 2017, the Company, through its subsidiary, Net1 Applied Technologies South Africa Proprietary Limited (“Net1 SA”), purchased 75,000,000 class “A” shares of Cell C for an aggregate purchase price of ZAR 2.0 billion ($151.0 million) in cash. The Company funded the transaction through a combination of cash and the facilities described in Note 14 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2017. Net1 SA has pledged, among other things, its entire equity interest in Cell C as security for the South African facilities described in Note 10 used to partially fund the acquisition of Cell C.
14
| 6. | Equity-accounted investments and other long-term assets (continued) |
Other long-term assets (continued)
The Company has signed a subscription agreement with MobiKwik, which is India’s largest independent mobile payments network, with over 65 million users and 2.0two million merchants. Pursuant to the subscription agreement, the Company agreed to make an equity investment of up to $40.0 million in MobiKwik over a 24 month period. The Company made an initial $15.0 million investment in August 2016 and a further $10.6 million investment in June 2017, under this subscription agreement. As of June 30, 2017, the Company owned approximately 13.5% of MobiKwik. In August 2017, MobiKwik raised additional funding through the issuance of additional shares to a new shareholder at a 90% premium to the Company’s investments and the Company’s percentage ownership was diluted to 12.0%., which also represents the Company’s ownership as of March 31, 2018. In addition, through a technology agreement, the Company’s Virtual Card technology will be integrated across all MobiKwik wallets in order to provide ubiquity across all merchants in India, and as part of the Company’s continued strategic relationship, a number of our other products including our digital banking platform, are expected to be deployed by MobiKwik over the next year.
In December 2017, the Company purchased, for cash, $9.0 million of notes, with a face value of $20.5 million, issued by Cedar Cellular Investment 1 (RF) (Pty) Ltd (“Cedar Cellular”), a Cell C shareholder, representing 7.625% of the issuance. The investment in the notes was made in connection with the Cell C investment discussed above. The notes bear interest semi-annually at 8.625% per annum on the face value and interest is payable in cash or deferred, at Cedar Cellular’s election, for payment on the maturity date. The notes mature on August 2, 2022. The notes are secured by all of Cedar Cellular’s investment in Cell C (59,000,000 class “A” shares) and the fair value of the Cell C shares pledged exceeds the carrying value of the notes as of DecemberMarch 31, 2017.2018. The notes are listed on The International Stock Exchange. The Company has elected to treat the investment in the notes as held to maturity securities.
14
6. Equity-accounted investments and other long-term assets (continued)
Available for sale and held to maturity investments (continued)
Other long-term assets (continued)
Summarized below are the components of the Company’s available for sale and held to maturity investments as of DecemberMarch 31, 2017:2018:
| Unrealized | Unrealized | |||||||||||
| holding | holding | Carrying | ||||||||||
| Cost basis | gains | losses | value | |||||||||
| Available for sale: | ||||||||||||
| Investment in Cell C | $ | 161,695 | $ | - | $ | - | $ | 161,695 | ||||
| Held to maturity: | ||||||||||||
| Investment in Cedar Cellular notes | 9,000 | 182 | - | 9,182 | ||||||||
| Total | 170,695 | $ | - | $ | - | $ | 170,695 |
| Unrealized | Unrealized | ||||||||||||
| holding | holding | Carrying | |||||||||||
| Cost basis | gains | losses | value | ||||||||||
| Available for sale: | |||||||||||||
| Investment in Cell C | $ | 169,127 | $ | 37,843 | $ | - | $ | 206,970 | |||||
| Held to maturity: | |||||||||||||
| Investment in Cedar Cellular notes | 9,000 | 769 | - | 9,769 | |||||||||
| Total | $ | 178,127 | $ | 38,612 | $ | - | $ | 216,739 |
The Company had no available for sale or held to maturity investments as of June 30, 2017.
Contractual maturities of held to maturity investments
Summarized below are the contractual maturities of the Company’s held to maturity investment as of DecemberMarch 31, 2017:2018:
| Cost | Estimated | |||||
| basis | fair value | |||||
| Due in one year or less | $ | - | $ | - | ||
| Due in one year through five years | 9,000 | 9,182 | ||||
| Due in five years through ten years | - | - | ||||
| Due after ten years | - | - | ||||
| Total | $ | 9,000 | $ | 9,182 |
| Cost | Estimated | ||||||
| basis | fair value | ||||||
| Due in one year or less | $ | - | $ | - | |||
| Due in one year through five years | 9,000 | 9,769 | |||||
| Due in five years through ten years | - | - | |||||
| Due after ten years | - | - | |||||
| Total | $ | 9,000 | $ | 9,769 |
| 7. | Goodwill and intangible assets, net |
7. Goodwill and intangible assets, net
Goodwill
Summarized below is the movement in the carrying value of goodwill for the sixnine months ended DecemberMarch 31, 2017:2018:
| Accumulated | Carrying | ||||||||
| Gross value | impairment | value | |||||||
| Balance as of June 30, 2017 | $ | 188,833 | $ | - | $ | 188,833 | |||
| Foreign currency adjustment(1) | 10,662 | - | 10,662 | ||||||
| Balance as of December 31, 2017 | $ | 199,495 | $ | - | $ | 199,495 |
| Accumulated | Carrying | |||||||||
| Gross value | impairment | value | ||||||||
| Balance as of June 30, 2017 | $ | 188,833 | $ | - | $ | 188,833 | ||||
| Impairment of goodwill | - | (19,865 | ) | (19,865 | ) | |||||
| Foreign currency adjustment(1) | 13,566 | - | 13,566 | |||||||
| Balance as of March 31, 2018 | $ | 202,399 | $ | (19,865 | ) | $ | 182,534 |
(1) – Represents the effects of the fluctuations betweenof the South African rand, euro and the Korean won, andagainst the U.S. dollar on the carrying value.
15
| 7. | Goodwill and intangible assets, net (continued) |
Goodwill (continued)
Goodwill has been allocated to the Company’s reportable segments as follows:
| South | Financial | |||||||||||
| African | International | inclusion and | ||||||||||
| transaction | transaction | applied | Carrying | |||||||||
| processing | processing | technologies | value | |||||||||
| Balance as of June 30, 2017 | $ | 23,131 | $ | 140,570 | $ | 25,132 | $ | 188,833 | ||||
| Foreign currency adjustment(1) | 1,282 | 8,310 | 1,070 | 10,662 | ||||||||
| Balance as of December 31, 2017 | $ | 24,413 | $ | 148,880 | $ | 26,202 | $ | 199,495 |
| South | Financial | ||||||||||||
| African | International | inclusion and | |||||||||||
| transaction | transaction | applied | Carrying | ||||||||||
| processing | processing | technologies | value | ||||||||||
| Balance as of June 30, 2017 | $ | 23,131 | $ | 140,570 | $ | 25,132 | $ | 188,833 | |||||
| Impairment of goodwill | - | (19,865 | ) | - | (19,865 | ) | |||||||
| Foreign currency adjustment(1) | 2,404 | 9,155 | 2,007 | 13,566 | |||||||||
| Balance as of March 31, 2018 | $ | 25,535 | $ | 129,860 | $ | 27,139 | $ | 182,534 |
(1) – Represents the effects of the fluctuations betweenof the South African rand, euro and the Korean won, andagainst the U.S. dollar on the carrying value.
15Impairment loss
The Company assesses the carrying value of goodwill for impairment annually, or more frequently, whenever events occur and circumstances change indicating potential impairment. The Company performs its annual impairment test as at June 30 of each year. During the three and nine months ended March 31, 2018, the Company recognized an impairment loss of approximately $19.9 million related to goodwill allocated to the Masterpayment business within its international transaction processing operating segment as a result of changes to the operating model of Masterpayment. During the second quarter of fiscal 2018, the Company re-evaluated the operating performance and ongoing viability of Masterpayment’s working capital financing and supply chain solutions offering and determined to exit this portion of its business. While the Company believed that it could scale this offering in the medium to long-term by focusing on customers and industries outside Masterpayment’s initial target market, this standalone offering did not fit the Company’s strategy of providing payment solutions and working capital to small and medium-sized merchants. In order to focus on the Company’s stated international strategy, the Company decided to wind-down the traditional working capital finance book issued to non-payment solutions customers. During the third quarter of fiscal 2018, the Company evaluated Masterpayment’s business strategy and following the wind-down referred to above, it has determined that Masterpayment is unlikely to deliver the financial results or cash flows previously anticipated. The Company and two of Masterpayment’s senior managers have agreed, by mutual consent, that with effect from the end of March 2018, the managers terminated their employment with Masterpayment in order to dedicate themselves to new professional tasks.
In order to determine the amount of goodwill impairment, the estimated fair value of the Company’s Masterpayment business was allocated to the individual fair value of the assets and liabilities of Masterpayment as if it had been acquired in a business combination, which resulted in the implied fair value of the goodwill. The allocation of the fair value of Masterpayment required the Company to make a number of assumptions and estimates about the fair value of assets and liabilities where the fair values were not readily available or observable.
A further deterioration in the international transaction processing operating segment, or in any other of the Company’s businesses, may lead to additional impairments in future periods.
16
| 7. | Goodwill and intangible assets, net (continued) |
7. Goodwill and intangible assets, net (continued)
Intangible assets, net
Carrying value and amortization of intangible assets
Summarized below is the carrying value and accumulated amortization of the intangible assets as of DecemberMarch 31, 20172018 and June 30, 2017:
| As of December 31, 2017 | As of June 30, 2017 | |||||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||||
| carrying | Accumulated | carrying | carrying | Accumulated | carrying | |||||||||||||
| value | amortization | value | value | amortization | value | |||||||||||||
| Finite-lived intangible assets: | ||||||||||||||||||
| Customer relationships | $ | 105,365 | $ | (75,089 | ) | $ | 30,276 | $ | 99,209 | $ | (65,595 | ) | $ | 33,614 | ||||
| Software and unpatented technology | 35,227 | (33,587 | ) | 1,640 | 33,273 | (31,112 | ) | 2,161 | ||||||||||
| FTS patent | 3,098 | (3,098 | ) | - | 2,935 | (2,935 | ) | - | ||||||||||
| Exclusive licenses | 4,506 | (4,506 | ) | - | 4,506 | (4,506 | ) | - | ||||||||||
| Trademarks | 7,361 | (5,486 | ) | 1,875 | 6,972 | (4,759 | ) | 2,213 | ||||||||||
| Total finite-lived intangible assets | 155,557 | (121,766 | ) | 33,791 | 146,895 | (108,907 | ) | 37,988 | ||||||||||
| Indefinite-lived intangible assets: | ||||||||||||||||||
| Financial institution license | 813 | - | 813 | 776 | - | 776 | ||||||||||||
| Total indefinite-lived intangible assets | 813 | - | 813 | 776 | - | 776 | ||||||||||||
| Total intangible assets | $ | 156,370 | $ | (121,766 | ) | $ | 34,604 | $ | 147,671 | $ | (108,907 | ) | $ | 38,764 | ||||
| As of March 31, 2018 | As of June 30, 2017 | ||||||||||||||||||
| Gross | Net | Gross | Net | ||||||||||||||||
| carrying | Accumulated | carrying | carrying | Accumulated | carrying | ||||||||||||||
| value | amortization | value | value | amortization | value | ||||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||||
| Customer relationships | $ | 106,620 | $ | (78,746 | ) | $ | 27,874 | $ | 99,209 | $ | (65,595 | ) | $ | 33,614 | |||||
| Software and unpatented | |||||||||||||||||||
| technology | 35,265 | (34,242 | ) | 1,023 | 33,273 | (31,112 | ) | 2,161 | |||||||||||
| FTS patent | 3,240 | (3,240 | ) | - | 2,935 | (2,935 | ) | - | |||||||||||
| Exclusive licenses | 4,506 | (4,506 | ) | - | 4,506 | (4,506 | ) | - | |||||||||||
| Trademarks | 7,493 | (5,799 | ) | 1,694 | 6,972 | (4,759 | ) | 2,213 | |||||||||||
| Total finite-lived intangible assets | 157,124 | (126,533 | ) | 30,591 | 146,895 | (108,907 | ) | 37,988 | |||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||
| Financial institution license | 837 | - | 837 | 776 | - | 776 | |||||||||||||
| Total indefinite-lived intangible assets | 837 | - | 837 | 776 | - | 776 | |||||||||||||
| Total intangible assets | $ | 157,961 | $ | (126,533 | ) | $ | 31,428 | $ | 147,671 | $ | (108,907 | ) | $ | 38,764 | |||||
Aggregate amortization expense on the finite-lived intangible assets for the three months ended DecemberMarch 31, 20172018 and 2016,2017, was approximately $2.9$3.0 million and $3.6$3.7 million, respectively. Aggregate amortization expense on the finite-lived intangible assets for the sixnine months ended DecemberMarch 31, 20172018 and 2016,2017, was approximately $5.8$8.8 million and $6.5$10.2 million, respectively.
Future estimated annual amortization expense for the next five fiscal years and thereafter, assuming exchange rates that prevailed on DecemberMarch 31, 2017,2018, is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a result of acquisitions, changes in useful lives, exchange rate fluctuations and other relevant factors.
| Fiscal 2018 | $ | 12,838 | |
| Fiscal 2019 | 11,369 | ||
| Fiscal 2020 | 10,653 | ||
| Fiscal 2021 | 4,582 | ||
| Fiscal 2022 | 81 | ||
| Thereafter | 330 | ||
| Total future estimated annual amortization expense | $ | 39,853 |
| Fiscal 2018 | $ | 12,915 | ||
| Fiscal 2019 | 11,445 | |||
| Fiscal 2020 | 10,727 | |||
| Fiscal 2021 | 4,620 | |||
| Fiscal 2022 | 85 | |||
| Thereafter | 345 | |||
| Total future estimated annual amortization expense | $ | 40,137 |
| 8. | Reinsurance assets and policyholder liabilities under insurance and investment contracts |
8. Reinsurance assets and policyholder liabilities under insurance and investment contracts
Reinsurance assets and policyholder liabilities under insurance contracts
Summarized below is the movement in reinsurance assets and policyholder liabilities under insurance contracts during the six months ended December 31, 2017:nine
| Reinsurance | Insurance | |||||
| assets(1) | contracts(2) | |||||
| Balance as of June 30, 2017 | $ | 191 | $ | (1,611 | ) | |
| Increase in policyholder benefits under insurance contracts | (355 | ) | (4,932 | ) | ||
| Claims and policyholders’ benefits under insurance contracts | 366 | 4,884 | ||||
| Foreign currency adjustment(3) | 10 | (89 | ) | |||
| Balance as of December 31, 2017 | $ | 212 | $ | (1,748 | ) |
| Reinsurance | Insurance | ||||||
| assets(1) | contracts(2) | ||||||
| Balance as of June 30, 2017 | $ | 191 | $ | (1,611 | ) | ||
| Increase in policyholder benefits under insurance contracts | 1,276 | (7,881 | ) | ||||
| Claims and policyholders’ benefits under insurance contracts . | (1,263 | ) | 7,691 | ||||
| Foreign currency adjustment(3) | 20 | (168 | ) | ||||
| Balance as of March 31, 2018 | $ | 224 | $ | (1,969 | ) |
(1) Included in other long-term assets.
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(2) Included in other long-term liabilities. 17
Reinsurance assets and policyholder liabilities under insurance contracts (continued) The Company has agreements with reinsurance companies in order to limit its losses from The Company determines its reserves for policy benefits under its life insurance products using a model which estimates claims incurred that have not been reported at the balance sheet date. This model includes best estimate assumptions of experience plus prescribed margins, as required in the markets in which these products are offered, namely South Africa. The best estimate assumptions include those assumptions related to mortality, morbidity and claim reporting delays, and the main assumptions used to calculate the reserve for policy benefits include (i) mortality and morbidity assumptions reflecting the company’s most recent experience and (ii) claim reporting delays reflecting Company specific and industry experience. The values of matured guaranteed endowments were increased by late payment interest (net of the asset management fee and allowance for tax on investment income). Assets and policyholder liabilities under investment contracts Summarized below is the movement in assets and policyholder liabilities under investment contracts during the
(1) Included in other long-term assets.
The Company does not offer any investment products with guarantees related to capital or returns.
Summarized below are the Company’s available short-term facilities and the amounts utilized as of
(1) Utilized amount included in short-term facilities on the unaudited condensed consolidated balance sheets. United States On January 29, 2018, the Company obtained a $10.0 million overdraft facility from Bank Frick. The interest rate on the facilities is 4.50% plus 3-month US Dollar LIBOR and interest is payable quarterly commencing on March 31, 2018. The 3-month US Dollar LIBOR rate was 2.31175% on March 29, 2018. The facility has no fixed term, however, it may be terminated by either party with six weeks written notice. The facility is secured by a pledge of the Company’s investment in Bank Frick. As of March 31, 2018, the Company had utilized approximately $3.4 million of this facility. 18
Europe The Company
South Africa The aggregate amount of the Company’s short-term South African credit facility with Nedbank Limited was ZAR 400 million ($ As of As of each of
South Africa The Company’s South African long-term facility agreement is described in Note 14 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2017. As of On July 26, 2017, the Company utilized ZAR 1.25 billion (approximately $92.2 million) of its South African long-term facility to partially fund the acquisition of 15% of Cell C. On March 9, 2018, the Company utilized ZAR 84.0 million (approximately $7.1 million) of its new ZAR 210 million South African long-term facility to partially fund the acquisition of a further 4.0% in DNI and the balance of the facility to extend a ZAR 126.0 million (approximately $10.6 million) loan to DNI (refer to Note 6). Principal repayments The Company paid a non-refundable
South Korea The South Korean senior secured loan facility is described in Note 14 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2017. On July 29, 2017, the Company utilized approximately KRW 0.3 billion ($0.3 million) of its Facility C revolving credit facility under the Company’s South Korean long-term facility agreement to pay interest due on the Company’s South Korean senior secured loan facility. On October 20, 2017, the Company made an unscheduled repayment of $16.6 million and settled the full outstanding balance, including interest, related to these borrowings. Interest expense incurred during the three months ended
The following table presents a reconciliation between the number of shares, net of treasury, presented in the unaudited condensed consolidated statement of changes in equity during the
Common stock repurchases Executed under share repurchase authorizations The Company did not repurchase any of its shares during the three and In February 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. On June 29, 2016, the Company adopted a Rule 10b5-1 trading plan for the purpose of repurchasing approximately $50 million of its common stock, which was included within the original share repurchase authorization. During the
The table below presents the change in accumulated other comprehensive (loss) income per component during the
There were no reclassifications from accumulated other comprehensive loss to comprehensive (loss) income during the three and
Options The following table summarizes stock option activity for the
No stock options were awarded during the three and
Stock option and restricted stock activity (continued) Options (continued) These options have an exercise price range of $7.35 to $24.46. The following table presents stock options that are exercisable as of
No stock options became exercisable during the three months ended Restricted stock The following table summarizes restricted stock activity for the
The August 2017 grants The 326,000 shares of restricted stock will only vest if the recipient is employed by the Company on a full-time basis on August 23, 2020. The 52,594 shares of restricted stock awarded to non-employee directors will only vest if the recipient is a director on August 23, 2018. The 22,817 shares of restricted stock vest in two tranches, 11,409 will vest on March 1, 2019, and 11,408 will vest on March 1, 2020, subject to the Chief Financial Officer’s continued employment. 22
Stock option and restricted stock activity (continued) Restricted stock (continued) Market Conditions - Restricted Stock Granted in August 2017 The 210,000 shares of restricted stock awarded to executive officers in August 2017 are subject to time-based and performance-based (a market condition) vesting conditions and vest in full only on the date, if any, that the following conditions are satisfied:
The VWAP levels and vesting percentages related to such levels are as follows:
These 210,000 shares of restricted stock are effectively forward starting knock-in barrier options with multi-strike prices of zero. The fair value of these shares of restricted stock was calculated utilizing a Monte Carlo simulation model which was developed for the purpose of the valuation of these shares. For each simulated share price path, the market share price condition was evaluated to determine whether or not the shares would vest under that simulation. A standard Geometric Brownian motion process was used in the forecasting of the share price instead of a “jump diffusion” model, as the share price volatility was more stable compared to the highly volatile regime of previous years. Therefore, the simulated share price paths capture the idiosyncrasies of the observed Company share price movements. In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the final vested value on maturity is the share price on vesting date. The value of the grant is the average of the discounted vested values. The Company used an expected volatility of 44.0%, an expected life of approximately three years, a risk-free rate ranging between 1.275% to 1.657% and no future dividends in its calculation of the fair value of the restricted stock. The estimated expected volatility was calculated based on the Company’s 30 day VWAP share price using the exponentially weighted moving average of returns. Performance Conditions - Restricted Stock Granted in August 2016 In August 2016 the Company awarded 350,000 shares of restricted stock to executive officers. In May 2017, the Company agreed to accelerate the vesting of 200,000 of these shares of restricted stock granted to the Company’s former Chief Executive Officer.
At levels of 2019 Fundamental EPS greater than $2.60 and less than $3.00, the number of shares that will vest will be determined by linear interpolation relative to 2019 Fundamental EPS of $2.80. Any shares that do not vest in accordance with the above-described conditions will be forfeited. All shares of restricted stock have been valued utilizing the closing price of shares of the Company’s common stock quoted on The Nasdaq Global Select Market on the date of grant. Performance Conditions - Restricted Stock Granted in August 2015 In August 2015 the Company awarded 301,537 shares of restricted stock to executive officers and employees. These shares of restricted stock are subject to time-based and performance-based vesting conditions. In order for any of the shares to vest, the recipient must remain employed by the Company on a full-time basis on the date that it files its Annual Report on Form 10-K for the fiscal year ended June 30, 2018. If that condition is satisfied, then the shares will vest based on the level of Fundamental EPS the Company achieves for the fiscal year ended June 30, 2018 (“2018 Fundamental EPS”), as follows:
Restricted stock (continued) Performance Conditions - Restricted Stock Granted in August 2015 (continued) 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.
During the three and Vesting of all non-employee director shares issued prior to June 30, 2017 Grants of restricted stock to non-employee directors made during fiscal 2017, as well as those grants made in prior years, originally vested over a three-year period. After the end of fiscal 2017, the Company’s board consulted with Pay Governance, an independent compensation consultant, and determined that one-year vesting of restricted stock grants is a more common compensation practice for independent directors and therefore, amended the terms of outstanding awards to vest one-year after grant. As a result of this amendment, 61,995 shares of restricted stock held by the non-employee directors as of June 30, 2017, were fully-vested. Forfeiture of restricted stock awarded in August and November 2014 that did not achieve targeted market conditions During the The fair value of restricted stock vesting during the Stock-based compensation charge and unrecognized compensation cost The Company recorded a stock-based compensation charge during each of the three months ended
Stock-based compensation charge and unrecognized compensation cost (continued) The Company recorded a stock-based compensation charge (reversal) during the
The stock-based compensation charges have been allocated to selling, general and administration based on the allocation of the cash compensation paid to the relevant employees. As of As of
The Company has issued redeemable common stock which is redeemable at an amount other than fair value. Redemption of a class of common stock at other than fair value increases or decreases the carrying amount of the redeemable common stock and is reflected in basic earnings per share using the two-class method. There were no redemptions of common stock, or adjustments to the carrying value of the redeemable common stock during the three and 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 Diluted earnings per share have been calculated to give effect to the number of shares of additional common stock that would have been outstanding if the potential dilutive instruments had been issued in each period. Stock options are included in the calculation of diluted earnings per share utilizing the treasury stock method and are not considered to be participating securities, as the stock options do not contain non-forfeitable dividend rights.
The calculation of diluted earnings per share includes the dilutive effect of a portion of the restricted stock granted to employees in August 2014, November 2014, August 2015, August 2016, The following table presents net income attributable to Net1 (income from continuing operations) and the share data used in the basic and diluted earnings per share computations using the two-class method:
Options to purchase
The following table presents supplemental cash flow disclosures for the three and
Treasury shares, at cost included in the Company’s condensed consolidated balance sheet as of June 30, 2016, includes 47,056 shares of the Company’s common stock acquired for approximately $0.5 million which were paid for on July 1, 2016. The liability for this payment was included in accounts payable on the Company’s condensed consolidated balance sheet as of June 30, 2016. The payment of approximately $0.5 million is included in acquisition of treasury stock in the Company’s condensed consolidated statement of cash flows for the
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, 2017. The reconciliation of the reportable segments revenue to revenue from external customers for the three months ended
The reconciliation of the reportable segments revenue to revenue from external customers for the
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. 27
The reconciliation of the reportable segments measure of profit or loss to income before income taxes for the three and
The following tables summarize segment information that is prepared in accordance with GAAP for the three and
The segment information as reviewed by the chief operating decision maker does not include a measure of segment assets per segment as all of the significant assets are used in the operations of all, rather than any one, of the segments. The Company does not have dedicated assets assigned to a particular operating segment. Accordingly, it is not meaningful to attempt an arbitrary allocation and segment asset allocation is therefore not presented. It is impractical to disclose revenues from external customers for each product and service or each group of similar products and services.
Income tax in interim periods For the purposes of interim financial reporting, the Company determines the appropriate income tax provision by first applying the effective tax rate expected to be applicable for the full fiscal year to ordinary income. This amount is then adjusted for the tax effect of significant unusual For the three and For the three and nine months ended March 31, 2017, the tax charge was calculated using the expected effective tax rate for the year. The Company’s effective tax rate for the three and
New U.S. Tax Legislation On December 22, 2017, the Tax Cuts and Jobs Act (the The Company is currently analyzing the impact of these changes; therefore, an estimate of the full impact on deferred tax assets and liabilities, income tax expense, net income and other affected accounts is not yet available. The Company has a June year end and therefore it will use a blended rate of 28.10% for its tax year ending June 30, 2018, in the U.S. Certain of the Company’s deferred tax assets and liabilities which it expects will be utilized/ reversed during the period ended June 30, 2018, have been re-measured at this blended rate and those deferred taxes that the Company believes will only be utilized/ reversed in subsequent tax years, have been remeasured at 21%. The impact of the change in the tax rate on the Company’s deferred taxes included in income tax expense during the The TCJA also requires a U.S. shareholder of a specified foreign corporation to include a deemed repatriation of foreign earnings as part of the transition to a territorial tax system; however, the Company does not currently believe that it has a deemed repatriation transition tax liability. Uncertain tax positions There were no significant changes in the Company’s uncertain tax positions during the three and 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
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 The Company has not recognized any obligation related to these counter-guarantees in its consolidated balance sheet as of Contingencies Challenge to Payment by SASSA of Additional Implementation Costs As In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced a legal proceeding in the On February 22, 2018, the matter was heard by the Gauteng Division, Pretoria of the High Court of South Africa (“High Court”). On March 23, 2018, the High Court ordered that the June 15, 2012 variation agreement between SASSA and CPS be reviewed and set aside. CPS was ordered to refund ZAR 317.0 million to SASSA, plus interest from June 2014 to date of payment. On April 4, 2018, CPS filed an application seeking leave to appeal the whole order and judgment of the High Court with the High Court because it believes that the High Court erred in its application of the law and/or in fact in its findings. On April 25, 2018, the High Court rejected the application seeking leave to appeal. CPS is in the process of filing an application seeking leave to appeal the whole order and judgment of the High Court with the Supreme Court of Appeal. The Company
The Company is subject to a variety of other insignificant claims and suits that arise from time to time in the ordinary course of business. Management currently believes that the resolution of these other matters, individually or in the aggregate, will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.
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, 2017, and the unaudited condensed consolidated financial statements and the accompanying notes included in this Form 10-Q. Forward-looking statements Some of the statements in this Form 10-Q constitute forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our 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, 2017. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially. We undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law. You should read this Form 10-Q and the documents that we reference herein and the documents we have filed as exhibits hereto and thereto and which we have filed with the United States Securities and Exchange Commission completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Recent Developments SASSA Update and Transition
The Constitutional Court further ordered that we may approach the National Treasury to investigate and
In an affidavit filed
our contract when it expires on September 30,
We Progress of financial inclusion initiatives in South Africa In June 2015, we began the rollout of EPE, our business-to-consumer, or B2C, offering in South Africa. At In order for us to address the sizeable opportunity for EPE and related financial inclusion services in South Africa, in fiscal 2016, we Our efforts have resulted in an increased rate in the number of EPE accounts opened, the amount of loans disbursed and the number of insurance policies sold. We have opened approximately 335,000 EPE accounts during the last three months and we will have additional capacity to further increase our activities when our staff members and infrastructure currently dedicated to the SASSA contract become available for this initiative when our contract with SASSA ends. During the 32 The graph below presents the growth of the number of EPE cards and Smart Life policies:
The investments in Cell C and DNI are consistent with our approach of leveraging our significant and established Refer also Note
In January Bank Frick 33 We are approaching the
Refer also Note 6 to our unaudited condensed consolidated financial statements for additional financial information regarding Bank Frick and International Payments Group We completed the re-organization of
India On April 19, 2018, MobiKwik launched its virtual MobiKwik Visa Exclusive card utilizing our mobile virtual card, or MVC technology. As of Critical Accounting Policies Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires 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. Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially may result in materially different results under different assumptions and conditions.
34 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 unaudited condensed consolidated financial statements. Recent accounting pronouncements not yet adopted as of Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of
Currency Exchange Rate Information Actual exchange rates The actual exchange rates for and at the end of the periods presented were as follows:
Translation exchange rates for financial reporting purposes We are required to translate our results of operations from ZAR and KRW to U.S. dollars on a monthly basis. Thus, the average rates used to translate this data for the three and
Results of operations The discussion of our consolidated overall results of operations is based on amounts as reflected in our unaudited condensed consolidated financial statements, which are prepared in accordance with U.S. GAAP. We analyze our results of operations both in U.S. dollars, as presented in the consolidated financial statements, and supplementally in ZAR, because ZAR is the functional currency of the entities which contribute the majority of our profits and is the currency in which the majority of our transactions are initially incurred and measured. Due to the significant impact of currency fluctuations between the U.S. dollar and ZAR on our reported results and because we use the U.S. dollar as our reporting currency, we believe that the supplemental presentation of our results of operations in ZAR is useful to investors to understand the changes in the underlying trends of our business. Fiscal 2018 includes the results of Pros Software and Masterpayment Financial Services (formerly known as C4U Our operating segment revenue presented in “—Results of operations by operating segment” represents total revenue per operating segment before inter-segment eliminations. Reconciliation between total operating segment revenue and revenue presented in our unaudited condensed consolidated financial statements is included in Note 16 to those statements.
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.
The following factors had a significant influence on our results of operations during the
Consolidated overall results of operations This discussion is based on the amounts prepared in accordance with U.S. GAAP. The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:
In ZAR, the decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer prepaid airtime 38 The increase in selling, general and administration expense was primarily due to
Depreciation and amortization decreased primarily due to During the third quarter of fiscal 2018, we reviewed for impairment the goodwill identified and recognized pursuant to the Masterpayment and Masterpayment Financial Services acquisitions in April 2016 and November 2017, respectively, due to uncertainty surrounding the timing and amount of future net cash inflows following changes in the business strategy. As a consequence of this review, we recognized an impairment loss of approximately $19.9 million related to the entire carrying value of goodwill acquired. Our operating income margin for
Interest expense increased to Fiscal 2018 tax expense was Earnings from equity-accounted investments increased primarily due to the inclusion of our
Results of operations by operating segment The composition of revenue and the contributions of our business activities to operating income are illustrated below:
South African transaction processing The increase in segment revenue was primarily due to the continued growth in the number of EPE accounts as well as higher Our operating income margin for the International transaction-based activities Segment revenue was higher during the third quarter of fiscal 2018
Operating (loss) income margin for the
Financial inclusion and applied technologies In ZAR, segment revenue decreased primarily due to fewer prepaid airtime and other value added services sales, Operating income margin for the Financial inclusion and applied technologies segment was Corporate/Eliminations Our corporate expenses generally include acquisition-related intangible asset amortization; expenses incurred related to acquisitions and investments pursued; expenditure related to compliance with 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; Our corporate expenses have decreased primarily due to lower transaction-related expenditures
The following factors had a significant influence on our results of operations during the
Consolidated overall results of operations This discussion is based on the amounts prepared in accordance with U.S. GAAP. The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:
In ZAR, the decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer prepaid airtime and ad hoc terminal sales, which was partially offset by increases in goods and services purchased from third parties, higher expenses incurred due to increased usage of the South African National Payment System by beneficiaries, and higher expenses incurred to operate our EPE and ATM offerings.
Our selling, general and administration expense increased primarily due to an allowance for doubtful working capital finance receivables of $7.8 million, the impact of October 2017 annual salary increases for our South African employees, an increase in our allowance for doubtful finance loans receivable, Depreciation and amortization decreased primarily due to During the year to date fiscal 2018, we recognized an impairment loss of approximately $19.9 million related to the entire carrying value of goodwill acquired in the Masterpayment and Masterpayment Financial Services acquisitions. Refer also “—Third quarter of fiscal 2018 compared to third quarter of fiscal 2017— Consolidated overall results of operations.” Our operating income margin for In ZAR, interest on surplus cash decreased to Interest expense increased to Fiscal 2018 tax expense was Earnings from equity-accounted investments increased significantly primarily due to the inclusion of our
Results of operations by operating segment The composition of revenue and the contributions of our business activities to operating income are illustrated below:
South African transaction processing The increase in segment revenue was primarily due to higher EPE transaction revenue as a result of increased usage of our ATMs, increased inter-segment transaction processing activities and a modest increase in the number of social welfare grants distributed. Operating income decreased primarily due to an increase in inter-segment charges, the impact of annual salary increases granted to our South African employees in October 2017 and increases in goods and services purchased from third parties, partially offset by higher EPE transaction revenue as a result of increased usage of our ATMs, increased inter-segment transaction processing activities and a modest increase in the number of social welfare grants distributed. Our operating income margin for the 44 International transaction-based activities Segment revenue was Operating income margin for the year to date fiscal 2018 and 2017 was (11%) and 9%, respectively. Excluding the Mastertrading allowance for doubtful working capital finance receivables, the impairment loss
and the indirect taxes refund received, segment operating income and margin were $10.6 million and 8% respectively. Operating income and margin for the
Financial inclusion and applied technologies Financial inclusion and applied technologies revenue decreased primarily due to fewer prepaid airtime and other value added services sales, as well as lower ad hoc terminal sales, partially offset by increased volumes in our insurance businesses, and an increase in inter-segment revenues. Operating income was also impacted by these factors as well as an increase in the allowance for doubtful finance loans receivable resulting from a commensurate increase in our lending book Operating income margin for the Financial inclusion and applied technologies segment was 25% and 24% during the Corporate/Eliminations Our corporate expenses have Liquidity and Capital Resources At We currently believe that our cash and credit facilities are sufficient to fund our future operations for at least the next four quarters. We generally invest the surplus cash held by our South African operations in overnight call accounts that we maintain at South African banking institutions, and surplus cash held by our non-South African companies in U.S. dollar denominated money market accounts. We have invested surplus cash in Korea in short-term investment accounts at Korean banking institutions. Historically, we have financed most of our operations, research and development, working capital, and capital expenditures, as well as acquisitions and We have a short-term South African credit facility with Nedbank of ZAR 400 million ($ As of 45 We
As of Cash flows from operating activities
Net cash provided by operating activities for the During the Taxes paid during the
Net cash provided by operating activities for the During the
Taxes paid during the
Cash flows from investing activities
Cash used in investing activities for the Cash used in investing activities for the Year to
Cash used in investing activities for the Cash used in investing activities for the Cash flows from financing activities
During the During the
During the 47 During the
Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Capital Expenditures We expect capital spending for the Our Contingent Liabilities, Commitments and Contractual Obligations The following table sets forth our contractual obligations as of
Item 3. Quantitative and Qualitative Disclosures About Market Risk In addition to the tables below, see Note 5 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
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 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
Part II. Other Information Item 1. Legal Proceedings Constitutional Court order regarding extension of contract with SASSA for six months for cash payment Further to the South African Constitutional Court’s March 17, 2017 order regarding the continued payment of social grants after the original expiration of our SASSA contract and the directives related to such order, SASSA and certain other parties, including the independent panel of experts appointed by the Constitutional Court, have made various submissions to the Constitution Court. Argument was heard on March 6, 2018 and on March 23, 2018, the Constitutional Court issued an order that SASSA and CPS have a constitutional obligation to pay social welfare grants and that the contract between SASSA and CPS, for the payment of social grants to beneficiaries who are paid in cash (i.e. those grant recipients who receive their grants at pay points), be extended for a further six months to September 30, 2018. The Constitutional Court’s order provides for the payment of these grants under the extended contract’s terms and conditions. The Constitutional Court permitted CPS to request National Treasury to evaluate and recommend the price to be charged by CPS for the payment of grants in cash under the extended contract. National Treasury submitted its recommendations to the Constitutional Court on April 30, 2018, proposing fee levels that were materially lower than we had requested, but significantly higher than the current fee levels. We are in the process of submitting a responding affidavit to the Constitutional Court but until it makes an order in this matter we do not have certainty around our compensation for providing this service. The Constitutional Court included public accountability provisions in its March 2018 order that impact CPS directly. These provisions are similar to those included in the Constitutional Court’s April 2014 and March 2017 orders and require CPS to provide SASSA with an independently audited statement of expenses incurred, income received and profit earned under the contract. SASSA is also required to obtain an independent audit of the audited information provided by CPS. Furthermore, the Constitutional Court instructed SASSA to send this audited information to National Treasury for its approval prior to submission to the Constitutional Court. The Constitutional Court also included public accountability provisions in its March 2018 order that impact the Minister of Social Development and SASSA. These provisions are similar to those included in the Constitutional Court’s March 2017 order and require the Minister and SASSA to file reports with the Constitutional Court at the end of every month, commencing in April 2018 and ending in August 2018, regarding the implementation of the Constitutional Court’s order. The Minister and SASSA are also required to immediately report and explain any material changes, and the consequences of such changes, to the circumstances included in the reports previously submitted to the Constitutional Court. The Constitutional Court also ordered SASSA to ensure that the payment method determined by it must (i) adequately safeguard beneficiaries’ personal data obtained during the payment process and ensure that such data remains private and not used for any purpose other than the payment of grants; and (ii) preclude a contracting party from inviting beneficiaries to “opt-in” to share confidential information for the marketing of goods and services. The independent panel of experts appointed by the Constitutional Court was ordered to (i) evaluate the implementation of the cash payment of social grants from the date of the order until September 2018, (ii) evaluate the steps proposed and taken by SASSA for any competitive bidding process or any other processes aimed at the appointment of a new contract or contracts for the cash payment of social grants by SASSA, (iii) evaluate the steps proposed or taken by SASSA for SASSA itself to administer and pay grants in the future, and (iv) file reports with the Constitutional Court, by the 15th of each month from May 2018 to September 2018, related to the period from April 1, 2018 to the date of each report, describing the steps that the panel has taken to evaluate the matters referred to in (i) through (iii) above, the results of their evaluation and any recommendations. On February 6, 2018, CPS applied to the Constitutional Court requesting clarity on whether CPS may participate in any future SASSA tender processes. On February 23, 2018, the Constitutional Court ordered that CPS may participate in the new SASSA tender process, which commenced in December 2017. Challenge to payment by SASSA of additional implementation costs As we previously disclosed, in June 2014, we received approximately ZAR 277.0 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 the award of the tender, SASSA requested that we biometrically register all social grant beneficiaries (including child grant beneficiaries) and collect additional information for each child grant recipient. We agreed to SASSA’s request and, as a result, we performed approximately 11.0 million additional registrations beyond those that we contracted to register for the quoted service fee. Accordingly, we sought reimbursement from SASSA, supported by a factual findings certificate from an independent auditing firm. SASSA agreed to pay us the ZAR 277.0 million as full settlement of the additional costs we incurred. 50 In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced a legal proceeding in the High Court of South Africa seeking an order by the Court to review and set aside the decision of SASSA’s Chief Executive Officer to approve a payment to us of ZAR 317.0 million (approximately ZAR 277 million, excluding VAT) and directing us to repay the aforesaid amount, plus interest. Corruption Watch claimed that there was no lawful basis to make the payment to us, and that the decision was unreasonable and irrational and did not comply with South African legislation. We were named as a respondent in this legal proceeding. On February 22, 2018, the matter was heard by the Gauteng Division, Pretoria of the High Court of South Africa, or High Court. On March 23, 2018, the High Court ordered that the June 15, 2012 variation agreement between SASSA and CPS be reviewed and set aside. CPS was ordered to refund ZAR 317.0 million to SASSA, plus interest from June 2014 to date of payment. On April 4, 2018, we filed an application seeking leave to appeal the whole order and judgment of the High Court with the High Court because we believe that the High Court erred in its application of the law and/or in fact in its findings. On April 25, 2018, the High Court rejected the application seeking leave to appeal. CPS is in the process of filing an application seeking leave to appeal the whole order and judgment of the High Court with the Supreme Court of Appeal. However, we cannot predict whether leave to appeal will be granted or if granted, how the Supreme Court of Appeal would rule on the matter. Litigation As we previously disclosed, each of SASSA and the Black Sash Trust, On September 29, 2017, the Supreme Court referred the petitions to oral argument. The record of appeal has been filed and SASSA and the Black Sash We believe that NCR application for the cancelation of Moneyline’s registration as a credit provider Our appeal of the November 27, 2015, High Court ruling in this matter was initially scheduled to be heard on December 6, 2017, however, the matter was subsequently removed from the roll and a new hearing date has not been set. If we are successful, it will dispose of the application. If we do not prevail, then the National Credit Regulator’s, or NCR’s, application will be set down before the Consumer Tribunal for argument on the main issues raised by the 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, 2017, 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, 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, 2017. Unless CPS secures a guaranteed minimum monthly payment for the services it provides under the SASSA contract which at least covers its operational costs, CPS will operate at a loss and may not have the financial resources to continue its business, which would likely have a material adverse effect on our results of operations, financial position and cash flows. On March 23, 2018, the Constitutional Court ordered that SASSA and CPS have a constitutional obligation to pay social welfare grants and that the contract between SASSA and CPS for the payment of social grants to beneficiaries who are paid in cash, be extended for six months to September 30, 2018. The Constitutional Court’s order provides for the payment of grants under the expiring contract’s terms and conditions, augmented by certain additional terms and conditions. CPS paid all approximately 11 million social welfare grant recipients, including those grants paid in cash, via a Grindrod Bank account under its expired contract. The March 2018 Constitutional Court order
51 In the same order, the Constitutional Court permitted CPS to request National Treasury to evaluate and recommend the price to be charged by CPS for the payment of grants in cash under the extended contract. National Treasury submitted its recommendations to the Constitutional We have been ordered by the High Court to repay to SASSA certain reimbursed implementation costs. We are appealing this decision, but if we are unsuccessful and are ultimately required to repay substantial monies to SASSA, such repayment would adversely affect our results of operations, financial position and cash flows. In March On February 22, 2018, the matter was heard by the Gauteng Division, Pretoria of the High Court of South Africa. On March 23, 2018, the High Court ordered that the June 15, 2012 variation agreement between SASSA and CPS be reviewed and set aside. CPS was ordered to refund ZAR 317.0 million to SASSA, plus interest from June 2014 to date of payment. On April 4, 2018, we filed an application seeking leave to appeal the whole order and In addition, in an April 2014 ruling, the Constitutional Court ordered SASSA to re-run the tender process and required us to file with the Court, after completion of our SASSA contract in March 2017, an audited statement of our expenses, income and net profit under the contract. The March 2018 Constitutional Court order contains a similar requirement that we file an audited statement of our expenses, income and net profit within 30 days of the completion of the contract. We expect to file the required information with the Constitutional Court 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. We may not achieve the expected benefits from our recent Cell C and DNI investments. We have recently invested more than $230 million, in aggregate, to acquire a 15% interest in Cell C Proprietary Limited and a 49% interest in DNI-4PL Contracts Proprietary Limited (“DNI”). We believe that there are potential synergies that we can derive from each of these transactions, including the integration of certain of our service offerings with those of Cell C and DNI. However, we may not realize some or any of the benefits we expect to achieve from these investments. Attempting to integrate these service offerings may be disruptive to us, and we may not be able to integrate these offerings successfully. Even if we are able to achieve this integration, our customers may not use these services to the extent that we expect they will. Any such failure could adversely impact our business or the businesses of Cell C and DNI, which could, in turn, reduce the value of our investments in them. Additionally, attempting to integrate Cell C’s and DNI’s offerings with our own may adversely impact our other business and operational relationships. Our inability to achieve the expected synergies from the Cell C and DNI transactions may have a material adverse effect on 52 Item 6. Exhibits The following exhibits are filed as part of this Form 10-Q:
53 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
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