(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
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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”("GAAP") and the rules and regulations of the United States Securities and Exchange Commission for Quarterly Reports on Form 10-Q and include all of the information and disclosures required for interim financial reporting. The results of operations for the three and nine months ended March 31, 20182019 and 2017,2018, 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-K10-K/A for the fiscal year ended June 30, 2017.2018. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented. 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 nine months ended March 31, 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”"Company" refer to Net1 and its consolidated subsidiaries, collectively, unless the context otherwise requires. References to “Net1”"Net1" are references solely to Net 1 UEPS Technologies, Inc. Recent accounting pronouncements adoptedRestatement of prior year balances contained in financial statements and related notes for the three and nine months ended March 31, 2018
In August 2014, As previously reported and more fully described in Note 1 to the FASB issued guidance regardingDisclosure of Uncertainties about an Entity’s Abilityconsolidated financial statements contained in the Form 10-K/A filed on December 6, 2018, the Company restated its 2018 consolidated financial statements, to Continue as a Going Concern. This guidance requires an entity to perform interimcorrectly classify and annual assessmentsrecord the change in fair value of its abilityinvestment in Cell C in the statement of operations rather than in other comprehensive income as originally presented due to continue as a going concern within one yearthe election 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.fair value option on acquisition. 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 (marketCell C investment was acquired 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,August 2017, and has been applied on a prospective basis. The adoption of this guidance has resulted inits fair value increased by $37,843 during the reclassification of current deferred tax assetsthree and liabilities as non-current deferred tax assets and liabilities innine months ended March 31, 2018. Accordingly, the unaudited condensed consolidated balance sheet asfinancial statements for the three and nine months ended March 31, 2018, have also been restated with the effect of increasing income before tax by $37,843, income tax expense by $8,477 and net income by $29,366 and decreasing total comprehensive income by $29,366.
The Company also identified and corrected other insignificant misstatements in its consolidated statement of cash flows for the three and nine months ended March 31, 2018. Prior period current deferred tax assets have not been reclassified as non-currentThis decreased net cash provided by operating activities by $300 with a corresponding increase in net cash provided by investing activities but had no effect on 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 publicnet (decrease) increase in cash, cash equivalents and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement ofrestricted 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.three months and nine months ended March 31, 2018.
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1. | Basis of Presentation and Summary of Significant Accounting Policies (continued)
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Recent accounting pronouncements not yet adopted as of March 31, 2018 In May 2014, the FASBFinancial Accounting Standards Board ("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 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 defersdeferred the required implementation date specified inRevenue from Contracts with Customers to December 2017. Public companies may electwere permitted to adopt the standard along the original timeline. The guidance isbecame effective for the Company beginning July 1, 2018. The Company expects thatelected the modified retrospective transition method upon adoption of this guidance. The adoption of this guidance maydid not have a material impact on itsthe Company’s financial statements, and is currently evaluatingexcept for the impact of this guidance on its financial statements on adoption.additional footnote disclosures provided. 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 isbecame effective for the Company beginning July 1, 2018, and early adoption is not permitted, with certain exceptions.2018. The amendments are required to be applied by means of a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently assessing the impactadoption of this guidance did not have a material impact on the Company’s financial statements. 8
1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Recent accounting pronouncements adopted (continued) Equity securities are measured at fair value. The Company may elect to measure equity securities without readily determinable fair values at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We perform a qualitative assessment on a quarterly basis and recognize an impairment loss if there are sufficient indicators that the fair value of the equity security is less than carrying value. There were no changes in the fair value of our equity securities recorded during the three and nine months ended March 31, 2019. Changes in fair value will be recorded in our condensed consolidated statement of operations in future periods within a caption titled "changes in fair value of equity securities". In June 2016, the FASB issued guidance 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 became effective for the Company beginning July 1, 2018, and must be applied retrospectively. The Company has elected to classify distributions received from equity method investees using the nature of the distribution approach. This election requires the Company to evaluate each distribution received on the basis of the source of the payment and classify the distribution as either operating cash inflows or investing cash inflows. The adoption of this guidance did not have a material impact on the Company’s financial statements disclosure.and the Company was not required to make any retrospective adjustments. 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 became effective for the Company beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial statements. In January 2017, the FASB issued guidance 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 has elected to early adopt this guidance beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial statements. In May 2017, the FASB issued guidance 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 became effective for the Company beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial statements. In June 2018, the FASB issued guidance regardingImprovements to Non-employee Share-Based Payment Accounting. The guidance simplifies the accounting for share-based payments granted to non-employees for goods and services and aligns the guidance for these share-based payments with guidance applicable to accounting for share-based payments granted to employees. The guidance is effective for the Company beginning July 1, 2019. Early adoption is permitted. The Company has elected to early adopt this guidance beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial statements. Recent accounting pronouncements not yet adopted as of March 31, 2019 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. 9
1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Recent accounting pronouncements not yet adopted as of March 31, 2019 (continued) 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.and related disclosures. In June 2016,August 2018, the FASB issued guidance regardingClassification of Certain Cash Receipts and Cash PaymentsDisclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement.. The guidance is intendedmodifies the disclosure requirements related 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.fair value measurement. This guidance is effective for the Company beginning July 1, 2018, and must be applied retrospectively.2020. 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 Definition2. Acquisition and disposal of controlling interest in DNI
2018 acquisition The Company’s acquisition of a Business.This guidance providescontrolling interest in DNI-4PL Contracts Proprietary Limited ("DNI") is described in Note 3 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018. During the three and nine months ended March 31, 2019, the Company determined that certain customer relationships of $7.0 million should not have been separately identified and recorded as intangible assets because there were no separately identified cash flows related to these customer relationships. These customer relationships, net of deferred taxes of $2 million, should been recorded as a more robust framework to use in determining when a setcomponent of assets and activitiesgoodwill. During the three months ended March 31, 2019, the Company determined that DNI is a business. Becausediscontinued operation. The table below presents the current definitionDNI balances included on the Company’s consolidated balance sheet as of a business is interpreted broadlyJune 30, 2018, as well as the amended preliminary purchase price allocation ("PPA") of the DNI acquisition, translated at the foreign exchange rates applicable on the date of acquisition: | | | DNI – discontinued operation | | | | | as of June 30, 2018 | | | | | Initial | | | | | | | | Amended | | | | | DNI PPA | | | | Amendment | | | | DNI PPA | | | Current assets of discontinued operation: | $ | 22,482 | | | $ | - | | | $ | 22,482 | | | Cash and cash equivalents | | 2,979 | | | | - | | | | 2,979 | | | Accounts receivable (Note 4) | | 16,235 | | | | - | | | | 16,235 | | | Finance loans receivable (Note 4) | | 742 | | | | - | | | | 742 | | | Inventory (Note 5) | | 2,526 | | | | - | | | | 2,526 | | | Long-term assets of discontinued operation: | | 241,729 | | | | (1,951 | ) | | | 239,778 | | | Property, plant and equipment | | 1,317 | | | | - | | | | 1,317 | | | Equity-accounted investment (Note 8) | | 339 | | | | - | | | | 339 | | | Goodwill (Note 9) | | 114,161 | | | | 5,017 | | | | 119,178 | | | Intangible assets (Note 9) | | 104,003 | | | | (6,968 | ) | | | 97,035 | | | Deferred tax assets | | 561 | | | | - | | | | 561 | | | Other long-term assets (Note 8) | | 21,348 | | | | - | | | | 21,348 | | | Current liabilities of discontinued operation: | | (20,914 | ) | | | - | | | | (20,914 | ) | | Accounts payables | | (13,949 | ) | | | - | | | | (13,949 | ) | | Other payables | | (6,349 | ) | | | - | | | | (6,349 | ) | | Current portion of long-term borrowings (Note 11) | | (616 | ) | | | - | | | | (616 | ) | | Long-term liabilities of discontinued operation: | | (37,412 | ) | | | 1,951 | | | | (35,461 | ) | | Other long-term liabilities | | (8,291 | ) | | | - | | | | (8,291 | ) | | Deferred tax liabilities | | (29,121 | ) | | | 1,951 | | | | (27,170 | ) | | Fair value of assets and liabilities on acquisition | $ | 205,885 | | | $ | - | | | $ | 205,885 | |
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2. Acquisition and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the usedisposal of reasonable judgment. The amendments provide more consistencycontrolling interest 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.DNI (continued) 2018 acquisition (continued) The Company is currently assessingrecorded intangible asset amortization, deferred taxes and non-controlling interest entries related to these customer relationships that should have been included in goodwill during the six months ended December 31, 2018. The Company has reversed these entries during the three and nine months ended March 31, 2019. The table below presents the impact of this guidancereversal of these entries on the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019 and the caption in which the impact is included: | | | Three and | | | | | nine months | | | | | ended | | | | | March 31, | | | | | 2019 | | | Reversal of intangible asset amortization - decrease depreciation and amortization | $ | 506 | | | Deferred tax impact related to reversal of intangible asset amortization - decrease income tax benefit | | 142 | | | Increase in non-controlling interest | $ | 164 | |
2019 disposal of a controlling interest in DNI Transaction to sell 17% during the three and nine months ended March 31, 2019 On February 28, 2019, the Company through its financial statements disclosure. In January 2017,wholly owned subsidiary, Net1 Applied Technologies South Africa Proprietary Limited ("Net1 SA"), entered into a transaction with JAA Holdings Proprietary Limited, a limited liability private company duly incorporated in the FASB issued guidance regardingSimplifyingRepublic of South Africa, and PK Gain Investment Holdings Proprietary Limited, a limited liability private company duly incorporated in the Test for Goodwill Impairment.This guidance removesRepublic of South Africa, in terms of which Net1 SA reduced its shareholding in DNI from 55% to 38%. The transaction closed on March 31, 2019. The parties used a cashless settlement process on closing, refer to Note 16. Net1 SA used the requirementproceeds from the sale of the DNI shares to settle its ZAR 400 million ($27.6 million, translated at exchange rates applicable as of March 31, 2019) obligation to DNI to subscribe for an entityadditional share as part of the contingent consideration settlement process.
As of March 31, 2019, the Company owned 38% of the voting and economic rights of DNI. The Company accounted for its 38% investment in DNI using the equity method, refer to calculateNote 8. The Company no longer controls DNI and deconsolidated its investment in DNI effective March 31, 2019. In April 2019, the Company’s management approved and commenced a process to sell its retained interest in DNI, which includes the transactions described above. Transaction to sell 8% in May 2019 (subsequent to March 31, 2019) On May 3, 2019, Net1 SA entered into a transaction with FirstRand Bank Limited, acting through its Rand Merchant Bank division ("RMB"), in terms of which Net1 SA further reduced its shareholding in DNI from 38% to 30% through the sale of 7,605,235 ordinary "A" shares in DNI for a transaction consideration of ZAR 215.0 million ($14.8 million, translated at exchange rates applicable as of March 31, 2019) (the "RMB Disposal"). The parties used a cashless settlement process on closing. The transaction closed on May 3, 2019, and the Company used the proceeds from the sale of these DNI shares and ZAR 15.0 million of its existing cash reserves to settle its outstanding long-term borrowings of ZAR 230.0 million in full, refer to Note 11. On May 3, 2019, Net1 SA entered into an agreement pursuant to which it granted a call option to DNI to acquire Net1 SA’s remaining 30% interest in DNI. The option expires on December 31, 2019, but may be exercised at any time prior to expiration. The option strike price is calculated as ZAR 2.827 billion ($195.2 million, translated at exchange rates applicable as of March 31, 2019) less any special distribution made by DNI multiplied by Net1 SA’s retained interest (i.e. assuming no special distribution, the strike price for the 30% retained interest is ZAR 859.3 million, or $59.3 million, translated at exchange rates applicable as of March 31, 2019). The call option may be split into smaller denominations, but Net1 SA cannot be left with less than 20% unless the whole remaining interest is disposed of. DNI may nominate another party to exercise the call option in the place of DNI, provided that the nominated party acquires call options representing at least 2.5% of DNI’s voting and participation interests. 11
2. Acquisition and disposal of controlling interest in DNI (continued) 2019 disposal of a controlling interest in DNI (continued) The table below presents the impact of the deconsolidation of DNI and the calculation of the net loss recognized on deconsolidation: | | | | | | | | | Equity method | | | | | | | | | | | | | | investment as of | | | | | | | | | | | | | | March 31, 2019 | | | | | | | | | | | | | | (Refer also Note 8) | | | | | | | | | | | | | | 8% | | | | | | | | | | | | | | | | | retained | | | | | | | | | | | | | | | | | interest | | | | | | Attributed | | | | | | | | | | | sold in | | | 30% | | | to non- | | | | | | | | 17% | | | May | | | retained | | | controlling | | | | | Total | | | sold | | | 2019 | | | interest | | | interest | | | Fair value of consideration received | $ | 27,626 | | $ | 27,626 | | $ | - | | $ | - | | $ | - | | | Fair value of retained interest of 30% in DNI(1) | | 74,195 | | | - | | | 14,849 | | | 59,346 | | | - | | | Carrying value of non-controlling interest | | 88,934 | | | - | | | - | | | - | | | 88,934 | | | Subtotal | | 190,755 | | | 27,626 | | | 14,849 | | | 59,346 | | | 88,934 | | | Less: carrying value of DNI, comprising | | 195,895 | | | 34,311 | | | 14,540 | | | 58,110 | | | 88,934 | | | Cash and cash equivalents | | 2,114 | | | 354 | | | 158 | | | 633 | | | 969 | | | Accounts receivable, net | | 24,577 | | | 4,116 | | | 1,841 | | | 7,358 | | | 11,262 | | | Finance loans receivable, net | | 1,030 | | | 173 | | | 77 | | | 308 | | | 472 | | | Inventory | | 893 | | | 149 | | | 66 | | | 268 | | | 410 | | | Property, plant and equipment, net | | 1,265 | | | 212 | | | 95 | | | 379 | | | 579 | | | Equity-accounted investments (Note 8) | | 242 | | | 41 | | | 19 | | | 72 | | | 110 | | | Goodwill (Note 9) | | 113,003 | | | 18,924 | | | 8,466 | | | 33,834 | | | 51,779 | | | Intangible assets, net | | 80,769 | | | 13,526 | | | 6,051 | | | 24,183 | | | 37,009 | | | Deferred income taxes | | 28 | | | 5 | | | 2 | | | 8 | | | 13 | | | Other long-term assets | | 26,553 | | | 4,447 | | | 1,989 | | | 7,950 | | | 12,167 | | | Accounts payable | | (5,186 | ) | | (868 | ) | | (389 | ) | | (1,553 | ) | | (2,376 | ) | | Other payables(2) | | (16,484 | ) | | (2,760 | ) | | (1,235 | ) | | (4,936 | ) | | (7,553 | ) | | Income taxes payable | | (2,482 | ) | | (416 | ) | | (186 | ) | | (743 | ) | | (1,137 | ) | | Deferred income taxes | | (22,083 | ) | | (3,698 | ) | | (1,654 | ) | | (6,612 | ) | | (10,119 | ) | | Long-term debt (Note 11) | | (10,150 | ) | | (1,700 | ) | | (760 | ) | | (3,039 | ) | | (4,651 | ) | | Released from accumulated other comprehensive income – foreign currency translation reserve (Note 13) | | 1,806 | | | 1,806 | | | - | | | - | | | - | | | Loss recognized on disposal, before tax, comprising | | (5,140 | ) | | (6,685 | ) | | 309 | | | 1,236 | | | - | | | Related to sale of 17% of DNI | | (6,685 | ) | | (6,685 | ) | | - | | | - | | | | | | Related to fair value adjustment of retained interest in 38% of DNI | | 1,545 | | | - | | | 309 | | | 1,236 | | | | | | Taxes related to gain recognized on disposal(3) | | - | | | 505 | | | (3,836 | ) | | 3,331 | | | | | | Loss recognized on disposal, after tax | $ | (5,140 | ) | $ | (7,190 | ) | $ | 4,145 | | $ | (2,095 | ) | | | |
(1) The fair value of the retained interest in 38% of DNI of $74.2 million ($14.9 million plus $59.3 million has been calculated using the implied fair value of goodwill (as partDNI pursuant to the RMB Disposal and has been calculated as ZAR 215.0 million divided by 7. 605235% multiplied by 38%, translated to dollars at the March 31, 2019, rate of step 2exchange. The fair value of the current goodwill impairment test)retained interest in measuring a goodwill impairment loss. The guidanceDNI is effective forincluded in equity-accounted investment on the Company beginning July 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the impact of this guidance. 8
1. | Basis of Presentation and Summary of Significant Accounting Policies (continued)
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Recent accounting pronouncements not yet adoptedunaudited condensed consolidated balance sheet as of March 31, 20182019.
(2) Other payables include a short-term loan of ZAR 60.5 million ($4.2 million, translated at exchange rates applicable as of March 31, 2019) due to the Company and included in accounts receivable, net on the Company’s unaudited condensed consolidated balance sheet as of March 31, 2019. The loan is repayable in full on or before June 30, 2019. Interest on the loan is charged at the South African prime rate.
(3) Amounts presented are net of a valuation allowance provided. The disposal of DNI results in a capital loss for tax purposes of approximately $1.5 million and the Company has provided a valuation allowance of $1.5 million against this capital loss because it does not have any capital gains to offset against this amount. On an individual basis, the transaction to dispose of 17% of DNI resulted in a capital gain of $0.5 million and the re-measurement of the retained 38% interest has resulted in a capital loss of $2.0 million ($5.3 million (8% transaction) less $3.3 million (30% transaction)). The valuation allowance of $1.5 million has been provided against the $5.3 million, for a net amount presented in the table above of $3.8 million ($5.3 million less $1.5 million).
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2. Acquisition and disposal of controlling interest in DNI (continued) In May 2017,Discontinued operation
The Company has determined that the FASB issued guidance regardingCompensation—Stock Compensation (Topic 718): Scopedisposal of Modification Accounting.The guidance amends the scope of modification accounting for share-based payment arrangements and provides guidanceits controlling interest in DNI represents a discontinued operation because it represents a strategic shift that will have a major effect on the typesCompany’s operations and financial results as a result of changesthe sale of a significant portion of its investment in DNI. The facts and circumstances leading to the terms or conditionsdisposal of share-based payment awardsa controlling interest are described above. The loss related to which an entity would be requiredthe disposal of a controlling interest in DNI is presented above. DNI was allocated to apply modification accounting under Accounting Standards Codification 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions,Company’s financial inclusion and classificationapplied technologies operating segment and the amortization of intangible assets identified and recognized related to the DNI acquisition were allocate to corporate/eliminations. The impact of the awards aredisposal of a controlling interest on the same immediately beforeCompany’s operating segments is presented in Note 18. The Company retains a continuing involvement in DNI through its 38% interest in DNI (refer above and to Note 8). The Company expects to retain an interest in DNI for less than 12 months. As disclosed above, the Company sold an 8% interest in DNI in May 2019, and has entered into an agreement under which it has provided a call option to DNI to repurchase the remaining 30% interest in DNI. The Company did not record any earnings under the equity method related to its retained 38% investment in DNI during the three and nine months ended March 31, 2019. The Company has not presented revenues and expenses between the Company and DNI, and cash inflows or outflows from or to DNI after the modification. The guidance is effective fordisposal transaction because the Company beginning July 1, 2018. Early adoption is permitted.closed the transaction to sell a controlling interest in DNI on March 31, 2019. The Company is currently assessingtable below presents the impact of this guidancethe deconsolidation of DNI on certain major captions to the Company’s unaudited condensed consolidated statement of operations and unaudited condensed consolidated statement of cash flows for three and nine months ended March 31, 2019 and 2018, that have not been separately presented on those statements: | | | DNI | | | | | Three months ended | | | Nine months ended | | | | | March 31, | | | March 31, | | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | Unaudited condensed consolidated statement of operations Discontinued: | | | | | | | | | | | | | | Revenue | $ | 17,842 | | $ | - | | $ | 56,337 | | $ | - | | | Cost of goods sold, IT processing, servicing and support | | 7,502 | | | - | | | 27,667 | | | - | | | Selling, general and administration | | 1,935 | | | - | | | 4,295 | | | - | | | Depreciation and amortization | | 2,427 | | | - | | | 8,026 | | | - | | | Impairment loss | | 5,305 | | | - | | | 5,305 | | | - | | | Operating income | | 673 | | | - | | | 11,044 | | | - | | | Interest income | | 208 | | | - | | | 707 | | | - | | | Interest expense | | 396 | | | - | | | 812 | | | - | | | Net income before tax | | (4,655 | ) | | - | | | 5,799 | | | - | | | Income tax expense | | 146 | | | - | | | 3,124 | | | - | | | Net income before earnings from equity-accounted investments | | (4,801 | ) | | - | | | 2,675 | | | - | | | Earnings from equity-accounted investments(1)(2) | $ | 73 | | $ | 3,291 | | $ | 15 | | $ | 5,202 | | | Unaudited condensed consolidated statement of cash flows Discontinued: | | | | | | | | | | | | | | Total net cash (used in) provided by operating activities(3) | | $(393 | ) | $ | - | | $ | 6,635 | | $ | 1,765 | | | Total net cash (used in) provided by investing activities | | $(319 | ) | $ | - | | | $(516 | ) | $ | - | |
(1) Earnings from equity-accounted investments for the three and nine months ended March 31, 2019, represents earnings attributed to equity-accounted investment owned by DNI and included in the Company’s results as a result of the consolidation of DNI.
(2) Earnings from equity-accounted investments for the three and nine months ended March 31, 2018, represents DNI earnings (net of amortization of acquired intangibles and related deferred tax) attributed to the Company as a result of the Company using the equity method to account for its financial statements disclosure.investment in DNI during the period.
(3) Total net cash (used in) provided by operating activities for the three and nine months ended March 31, 2018, represent dividends received from DNI during these periods. 2. | Pre-funded social welfare grants receivable
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3. Pre-funded social welfare grants receivable Pre-funded social welfare grants receivable represents primarily amounts pre-funded by the Company to certain merchants participating in the merchant acquiring system. The AprilCompany’s contract with the South African Social Security Agency expired on September 30, 2018, payment service commenced on April 3, 2018, butand therefore the Company pre-funded certain merchants participating in the merchant acquiring systems on March 31, 2018.no longer pre-funds social welfare grants. The July 20172018 payment service commenced on July 1, 2017,2018 but the Company pre-funded certain merchants participating in the merchant acquiring systems on the last day of June 2017.2018. 13
4. Accounts receivable, net and other receivables and finance loans receivable, net Accounts receivable, net and other receivables The Company’s accounts receivable, net, and other receivables as of March 31, 2019, and June 30, 2018, is presented in the table below: | | | | March 31, | | | | | | June 30, | | | | | | | 2019 | | | | | | 2018 | | | | Accounts receivable, trade, net | | $ | 25,098 | | | | | $ | 40,268 | | | | Accounts receivable, trade, gross | | | 26,155 | | | | | | 41,369 | | | | Allowance for doubtful accounts receivable, end of period | | | 1,057 | | | | | | 1,101 | | | | Beginning of year | | | 1,101 | | | | | | 1,255 | | | | Reversed to statement of operations | | | (2 | ) | | | | | - | | | | Charged to statement of operations | | | 3,053 | | | | | | (47 | ) | | | Utilized | | | (3,020 | ) | | | | | 642 | | | | Deconsolidated as a result of transaction in Note 2 | | | (38 | ) | | | | | (776 | ) | | | Foreign currency adjustment | | | (37 | ) | | | | | 27 | | | | Current portion of payments to agents in South Korea amortized over the contract period | | | 17,366 | | | | | | 21,971 | | | | Payments to agents in South Korea amortized over the contract period. | | | 29,080 | | | | | | 39,553 | | | | Less: Payments to agents in South Korea amortized over the contract period included in other long-term assets (Note 8) | | | 11,714 | | | | | | 17,582 | | | | Loan provided to Finbond | | | 1,036 | | | | | | 1,107 | | | | Loan provided to DNI (Note 2) | | | 4,180 | | | | | | - | | | | Other receivables | | | 32,470 | | | | | | 30,102 | | | | Total accounts receivable, net | | $ | 80,150 | | | | | $ | 93,448 | | |
Finance loans receivable, net The Company’s finance loans receivable, net, as of March 31, 2019, and June 30, 2018, is presented in the table below: | | | | March 31, | | | | | | June 30, | | | | | | | 2019 | | | | | | 2018 | | | | Microlending finance loans receivable, net | | $ | 19,735 | | | | | $ | 57,504 | | | | Microlending finance loans receivable, gross | | | 22,964 | | | | | | 61,743 | | | | Allowance for doubtful microlending finance loans receivable, end of period | | | 3,229 | | | | | | 4,239 | | | | Beginning of year | | | 4,239 | | | | | | 3,717 | | | | Charged to statement of operations | | | 27,955 | | | | | | 4,348 | | | | Utilized | | | (28,756 | ) | | | | | (3,588 | ) | | | Foreign currency adjustment | | | (209 | ) | | | | | (238 | ) | | | Working capital finance receivable, net | | | 5,482 | | | | | | 3,959 | | | | Working capital finance receivable, gross | | | 18,274 | | | | | | 16,123 | | | | Allowance for doubtful working capital finance receivable, end of period | | | 12,792 | | | | | | 12,164 | | | | Beginning of year | | | 12,164 | | | | | | 3,752 | | | | Charged to statement of operations | | | 632 | | | | | | 8,415 | | | | Foreign currency adjustment | | | (4 | ) | | | | | (3 | ) | | | Total finance loans receivable, net | | $ | 25,217 | | | | | $ | 61,463 | | |
(1) Other finance loans receivable have been deconsolidated as of March 31, 2019, pursuant to the DNI disposition described in Note 2. During the three and nine months ended March 31, 2019, the Company recorded an increase in its allowance for doubtful microlending finance loans receivable of approximately $0.1 million and $27.9 million, respectively. This high level of allowance related to the non-funding of accounts for a portion of the EPE customer base as a result of the auto-migration of the customer base to the South Africa Post Office account offering during the three months ended December 31, 2018. During the three and nine months ended March 31, 2019, the Company utilized $24.2 million and $28.8 million, respectively, against the allowance for doubtful microlending finance loans receivable. 14
5. Inventory The Company’s inventory comprised the following category as of March 31, 20182019, and June 30, 2017.2018. | | | | March 31, | | | June 30, | | | | | | 2018 | | | 2017 | | | | Finished goods | $ | 11,808 | | $ | 8,020 | | | | | $ | 11,808 | | $ | 8,020 | |
4. | Settlement assets and settlement obligations
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| | | March 31, | | | June 30, | | | | | 2019 | | | 2018 | | | Finished goods | $ | 7,861 | | $ | 10,361 | | | | $ | 7,861 | | $ | 10,361 | |
6. Settlement assets and settlement obligations Settlement assets comprise (1) cash received from the South African government that the Company holds pending disbursement to recipient cardholders of social welfare grants (2) cash received from credit card companies (as well as other types of payment services) which have business relationships with merchants selling goods and (2)services via the internet that are the Company’s customers and on whose behalf it processes the transactions between various parties, and (3) 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, (2) amounts that the Company is obligated to disburse to merchants selling goods and (2)services via the internet that are the Company’s customers and on whose behalf it processes the transactions between various parties and settles the funds from the credit card companies to the Company’s merchant customers, and (3) 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
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7. Fair value of financial instruments Initial recognition and measurement Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction costs. Risk management The Company manages its exposure to currency exchange, translation, interest rate, customer concentration, credit and equity price and liquidity risks as discussed below. Currency exchange risk The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and U.S. dollar. The Company has used forward contracts in order to limit its exposure in these transactions to fluctuations in exchange rates between the South African rand ("ZAR"), on the one hand, and the U.S. dollar and the euro, on the other hand. 9
5. | Fair value of financial instruments (continued)
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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. 15
7. Fair value of financial instruments (continued) Risk management (continued) Credit risk (continued) 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, South Korean and European financial institutions that have a credit rating of “BB+”"B" (or its equivalent) or better, as determined by credit rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings. Microlending credit risk The Company is exposed to credit risk in its microlending activities, which provide unsecured short-term loans to qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer and assigning a “creditworthiness score”"creditworthiness score", which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses. Equity price and liquidity risk Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities that it holds and the risk that it may not be able to liquidate these securities. The market price of these securities may fluctuate for a variety of reasons and, consequently, the amount that the Company may obtain in a subsequent sale of these securities may significantly differ from the reported market value. Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an extended period of time without influencing the exchange traded price, or at all. Financial instruments The following section describes the valuation methodologies the Company uses to measure its significant financial assets and liabilities at fair value. In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology would apply to Level 1 investments. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would be included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. Investments valued using such techniques are included in Level 3 investments. 10
5. | Fair value of financial instruments (continued)
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Financial instruments (continued)
Asset measured at fair value using significant unobservable inputs – investment in Cell C The Company'sCompany’s Level 3 asset represents an investment of 75,000,000 class “A”"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.Africa. The Company has developed an adjusted EV/EBITDA multiple valuation model in order to determine the fair value of its investment in the Cell C shares. The primary inputs to the valuation model areas of March 31, 2019, were Cell C’s adjusted EBITDA for the 12 monthsyear ended December 31, 2017,2018, of ZAR 3.73.5 billion ($309.0242.6 million, translated at exchange rates applicable as of March 31, 2018)2019), an EBITDA multiple of 7.20,6.40; Cell C’s net adjusted external debt of ZAR 8.29.4 billion ($691.6648.9 million, translated at exchange rates applicable as of March 31, 2018)2019); and a marketability discount of 10% as Cell C is not yet listed.currently listed, but has publicly stated its intention to list. The primary inputs to the valuation model as of June 30, 2018, were Cell C’s annualized adjusted EBITDA for the 11 months ended June 30, 2018, of ZAR 3.9 billion ($284.8 million, translated at exchange rates applicable as of June 30, 2018), an EBITDA multiple of 6.75, Cell C’s net external debt of ZAR 8.8 billion ($641.1 million, translated at exchange rates applicable as of June 30, 2018) and a marketability discount of 10%. The EBITDA multiple was determined based on an analysis of Cell C’s peer group, which comprises the primaryeight African and emerging market mobile operators (Vodacom and MTN) in the South African marketplace.telecommunications operators. The fair value of Cell C utilizing the adjusted EV/EBITDA valuation model developed by the Company is sensitive to the following inputs: (i) the Company’s determination of adjusted EBITDAEBITDA; (ii) the EBITDA multiple usedused; and (iii) the marketability discount used. Utilization of different inputs, or changes to these inputs, may result in significantsignificantly higher or lower fair value measurement. 16
Fair value of financial instruments (continued) Financial instruments (continued) Asset measured at fair value using significant unobservable inputs – investment in Cell C (continued) The following table presents the impact of a 0.50 increase and 0.50 decrease to the EBITDA multiple used in the Cell C valuation on the March 31, 2019, carrying value of the Company’s Cell C investment (all amounts translated at exchange rates applicable as of March 31, 2019): | | | Sensitivity for | | | | | fair value of | | | | | Cell C investment | | | EBITDA multiple of 5.90 times | $ | 105,601 | | | EBITDA multiple of 6.40 times | | 121,941 | | | EBITDA multiple of 6.90 times | $ | 138,347 | |
The fair value of the Cell C shares as of March 31, 2018,2019, represented approximately 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. Liability measured at fair value using significant unobservable inputs – DNI contingent consideration The salient terms of the Company’s investment in DNI is described in Note 3 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018. Under the terms of its subscription agreements with DNI, the Company agreed to pay to DNI an additional amount of up to ZAR 400.0 million ($27.6 million, translated at exchange rates applicable as of March 31, 2019), in cash, subject to the achievement of certain performance targets by DNI. The Company expected to pay the additional amount during the first quarter of the year ended June 30, 2020, and recorded an amount of ZAR 373.6 million ($27.2 million), in long-term liabilities as of June 30, 2018, which amount represented the present value of the ZAR 400.0 million to be paid (amounts translated at the exchange rate applicable as of June 30, 2018, respectively). As described in Note 2 and Note 16, the Company settled the ZAR 400 million due to DNI as of March 31, 2019. The Company recorded accreted interest during three and nine months ended March 31, 2019, of $1.0 million and $1.8 million (ZAR 14.4 million and ZAR 26.4 million, translated at the applicable average exchange rates during the periods specified), respectively. 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+”"B" (or equivalent) or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair value (Level 2). The Company has no derivatives that require fair value measurement under Level 1 or 3 of the fair value hierarchy. The Company’s outstanding foreign exchange contracts are as follows as of March 31, 2019: | | Fair market | | | Notional amount | Strike price | value price | Maturity | | USD 420,000 | ZAR 15.5704 | ZAR 14.5150 | April 26, 2019 |
The Company had no outstanding foreign exchange contracts as of March 31, 2018 and June 30, 2017, respectively.2018. 17
Fair value of financial instruments (continued) Financial instruments (continued) The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2018,2019, according to the fair value hierarchy: | | | | Quoted price in | | | Significant | | | | | | | | | | | | active markets | | | other | | | Significant | | | | | | | | | for identical | | | observable | | | unobservable | | | | | | | | | assets | | | inputs | | | inputs | | | | | | | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | | | | Assets | | | | | | | | | | | | | | | Investment in Cell C | $ | - | | $ | - | | $ | 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 | |
| | | 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 | $ | - | | $ | - | | $ | 121,941 | | $ | 121,941 | | | Related to insurance business: | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash (included in other long-term assets) | | 596 | | | - | | | - | | | 596 | | | Fixed maturity investments (included in cash and cash equivalents) | | 4,620 | | | - | | | - | | | 4,620 | | | Other | | - | | | 420 | | | - | | | 420 | | | Total assets at fair value | $ | 5,216 | | $ | 420 | | $ | 121,941 | | $ | 127,577 | | | Liabilities | | | | | | | | | | | | | | Foreign exchange contracts | | - | | | 31 | | | - | | | 31 | | | Total liabilities at fair value | $ | - | | $ | 31 | | $ | - | | $ | 31 | |
11
5. | Fair value of financial instruments (continued)
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Financial instruments (continued)
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2017,2018, according to the fair value hierarchy: | | | | 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 | |
| | | Quoted price in | | | Significant | | | | | | | | | | | active markets | | | other | | | Significant | | | | | | | | for identical | | | observable | | | unobservable | | | | | | | | assets | | | inputs | | | inputs | | | | | | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | | | Assets | | | | | | | | | | | | | | Investment in Cell C | $ | - | | $ | - | | $ | 172,948 | | $ | 172,948 | | | Related to insurance business: | | | | | | | | | | | | | | Cash and cash equivalents (included in other long-term assets) | | 610 | | | - | | | - | | | 610 | | | Fixed maturity investments (included in cash and cash equivalents) | | 8,304 | | | - | | | - | | | 8,304 | | | Other | | - | | | 18 | | | - | | | 18 | | | Total assets at fair value | $ | 8,914 | | $ | 18 | | $ | 172,948 | | $ | 181,880 | | | Liabilities | | | | | | | | | | | | | | DNI contingent consideration | $ | - | | $ | - | | $ | 27,222 | | $ | 27,222 | | | Total liabilities at fair value | $ | - | | $ | - | | $ | 27,222 | | $ | 27,222 | |
There have been no transfers in or out of Level 3 during the three and nine months ended March 31, 20182019 and 2017,2018, respectively. Assets18
Fair value of financial instruments (continued) Financial instruments (continued) Summarized below is the movement in the carrying value of assets and liabilities measured at fair value on a nonrecurringrecurring basis, and categorized within Level 3, during the nine months ended March 31, 2019: | | | Carrying value | | | Assets | | | | | Balance as at June 30, 2018 | $ | 172,948 | | | Loss on fair value re-measurements | | (42,099 | ) | | Foreign currency adjustment(1) | | (8,908 | ) | | Balance as of March 31, 2019 | $ | 121,941 | | | Liabilities | | | | | Balance as at June 30, 2018 | $ | 27,222 | | | Accretion of interest | | 1,848 | | | Settlement of contingent consideration (Note 2 and Note 16) | | (27,626 | ) | | Foreign currency adjustment(1) | | (1,444 | ) | | Balance as of March 31, 2019 | $ | - | |
(1) The foreign currency adjustment represents the effects of the fluctuations of the South African rand and the U.S. dollar on the carrying value. Summarized below is the movement in the carrying value of assets and liabilities measured at fair value on a recurring basis, and categorized within Level 3, during the nine months ended March 31, 2018: | | | Carrying value | | | Assets | | | | | Acquisition of investment in Cell C | $ | 151,003 | | | Gain on fair value re-measurements | | 37,843 | | | Foreign currency adjustment(1) | | 18,124 | | | Balance as of March 31, 2018 | $ | 206,970 | |
(1) The Company measures its assetsforeign currency adjustment represents the effects of the fluctuations of the South African rand and the U.S. dollar on the carrying value. Assets measured at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The Company has no liabilities that are measured at We measure equity investments without readily determinable fair valuevalues 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 assetsthese investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when 8. Equity-accounted investments and other long-term assets Refer to Note 9 to the cost ofCompany’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the asset exceedsyear ended June 30, 2018, for additional information regarding its fair valueequity-accounted investments and the excess is determined to be other-than-temporary. The Company has not recorded any impairment charges during the reporting periods presented herein.other long-term assets. 6. | Equity-accounted investments and other long-term assets
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Equity-accounted investments The Company’s ownership percentage in its equity-accounted investments as of March 31, 20182019 and June 30, 2017,2018, was as follows: | | | | 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% | |
| | March 31, | June 30, | | | 2019 | 2018 | | Bank Frick & Co AG ("Bank Frick") | 35% | 35% | | DNI | 38% | - | | Finbond Group Limited ("Finbond") | 29% | 29% | | OneFi Limited (formerly KZ One) ("OneFi") | 25% | 25% | | SmartSwitch Namibia (Pty) Ltd ("SmartSwitch Namibia") | 50% | 50% | | V2 Limited ("V2") | 50% | - | | Walletdoc Proprietary Limited ("Walletdoc") | 20% | 20% |
On July 27, 2017, the19
8. Equity-accounted investments and other long-term assets (continued) Equity-accounted investments (continued) DNI The Company subscribed for 44,999,999 ordinary A sharesconsolidated DNI up until March 31, 2019, as disclosed in DNI, representingNote 2. The Company has retained a 45% voting and economic38% interest in DNI and uses the equity method to account 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.
12
6. | Equity-accounted investments and other long-term assets (continued)
|
Equity-accounted investments (continued)
Under the terms of the July 27, 2017, agreement, the Company agreed to pay to DNI an additional amount of up to ZAR 360.0 million ($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 March 31, 2018. Net1 SA pledged, among other things, its entire equity interest in DNI as security for the South African facilities described in Note 10. All amounts denominated in ZAR have been translated at exchange rates applicable as of 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 February 9, 2018, the Company purchased an additional 5% in Bank Frick from the Frick Foundation for CHF 10.4 million ($11.1 million) and the Frick Foundation contributed approximately CHF 3.8 million ($4.1 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 blockchain and crypto-currencies. The investment in Bank Frickit has the potentialability to provideexert significant influence over the Company with a stable, long-termoperations of DNI through its shareholding and strategic relationship with a fully-licensed bank.board representation.
Finbond As of March 31, 2018,2019, the Company owned 205,483,967267,672,032 shares in Finbond. Finbond is listed on the Johannesburg Stock Exchange and its closing price on March 29, 2018,31, 2019, the last trading day of the quarter, was R4.00R4.69 per share. The market value of the Company’s holding in Finbond on March 31, 20182019, was ZAR 821.9 million1.3 billion ($69.586.7 million translated at exchange rates applicable as of March 31, 2018)2019). 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, 2017,11, 2018, the Company, pursuant to its election, received an additional 4,361,5326,602,551 shares in Finbond as a capitalization share issue in lieu of a dividend. V2 Limited On October 7, 2016,4, 2018, the Company providedacquired a loan of ZAR 139.2 million ($10.0 million, translated at the foreign exchange rates applicable on the date of the loan) to Finbond50% voting and economic interest in order to partially finance Finbond’s expansion strategy in the United States. Interest on the loan is payable quarterly in arrears and is based on the London Interbank Offered Rate (“LIBOR”V2 Limited ("V2") in effect from time to time plus a margin of 12.00% . The LIBOR rate was 2.31175% on 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.for $2.5 million. The Company had the righthas committed to elect for the loan to be repaid in either Finbond ordinary shares, including throughprovide V2 with a rights offering, (in accordance with an agreed mechanism) or in cash. The Company is required to makefurther equity contribution of $2.5 million and a repayment election within 180 days after the repayment date otherwise the repayment election will automatically default to repayment in ordinary shares. Finbond undertook to perform all necessary steps reasonably required to effect the issuanceworking capital facility 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$5.0 million, which are both subject to the rights offering mechanism and determining the maximum numberachievement 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 agreed 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.pre-defined objectives.
The Company provided a credit facility of up to $10 million in the form of convertible debt to OneFi, of which $2 million was drawn as of March 31, 2018 and June 30, 2017. In April 2018, an additional $1.0 million was drawn under the credit facility.
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6. | Equity-accounted investments and other long-term assets (continued)
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Equity-accounted investments (continued)
Summarized below is the movement in equity-accounted investments and loans provided to equity-accounted investments during the nine months ended March 31, 2018:2019: | | | | | | | 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 | |
| | | | | | Bank | | | | | | | | | | | | | | DNI | | | Frick | | | Finbond | | | Other(1) | | | Total | | | Investment in equity: | | | | | | | | | | | | | | | | | Balance as of June 30, 2018 | $ | - | | $ | 48,129 | | $ | 30,958 | | $ | 6,092 | | $ | 85,179 | | | Re-measurement of 8% of DNI (Note 2) | | 14,849 | | | - | | | - | | | - | | | 14,849 | | | Re-measurement of 30% of DNI (Note 2) | | 59,346 | | | - | | | - | | | - | | | 59,346 | | | Acquisition of shares | | - | | | - | | | 1,920 | | | 2,989 | | | 4,909 | | | Stock-based compensation | | - | | | - | | | 77 | | | - | | | 77 | | | Comprehensive income (loss): | | - | | | (1,895 | ) | | 7,305 | | | (318 | ) | | 5,092 | | | Other comprehensive income | | - | | | - | | | 5,430 | | | - | | | 5,430 | | | Equity accounted earnings (loss) | | - | | | (1,895 | ) | | 1,875 | | | (318 | ) | | (338 | ) | | Share of net income | | - | | | 616 | | | 1,852 | | | (318 | ) | | 2,150 | | | Amortization of acquired intangible assets | | - | | | (562 | ) | | - | | | - | | | (562 | ) | | Deferred taxes on acquired intangible assets | | - | | | 135 | | | - | | | - | | | 135 | | | Dilution resulting from corporate transactions | | - | | | - | | | 23 | | | - | | | 23 | | | Other | | - | | | (2,084 | ) | | - | | | - | | | (2,084 | ) | | Dividends received | | - | | | - | | | (1,920 | ) | | (454 | ) | | (2,374 | ) | | Return on investment | | - | | | - | | | - | | | (284 | ) | | (284 | ) | | Deconsolidation of DNI (Note 2) | | - | | | - | | | - | | | (242 | ) | | (242 | ) | | Foreign currency adjustment(2) | | - | | | (228 | ) | | (1,921 | ) | | (50 | ) | | (2,199 | ) | | Balance as of March 31, 2019 | $ | 74,195 | | $ | 46,006 | | $ | 36,419 | | $ | 7,733 | | $ | 164,353 | | | Investment in loans: | | | | | | | | | | | | | | | | | Balance as of June 30, 2018 | $ | - | | $ | - | | $ | - | | $ | 3,152 | | $ | 3,152 | | | Foreign currency adjustment(2) | | - | | | - | | | - | | | (8 | ) | | (8 | ) | | Balance as of March 31, 2019 | $ | - | | $ | - | | $ | - | | $ | 3,144 | | $ | 3,144 | | | | | | | | | | | Equity | | | Loans | | | Total | | | Carrying amount as of: | | | | | | | | | | | | | | | | | June 30, 2018 | | | | | | | $ | 85,179 | | $ | 3,152 | | | | | | Continuing | | | | | | | $ | 84,840 | | $ | 3,152 | | $ | 87,992 | | | Discontinued (Note 2) | | | | | | | $ | 339 | | $ | - | | $ | 339 | | | March 31, 2019 | | | | | | | $ | 164,353 | | $ | 3,144 | | $ | 167,497 | |
(1) Includes primarily OneFi, SmartSwitch Namibia, V2 and Walletdoc;
(2) The foreign currency adjustment represents the effects of the fluctuations of the South African rand, Swiss franc, Nigerian naira and Namibian dollar, againstand the U.S. dollar on the carrying value.
20
8. Equity-accounted investments and other long-term assets (continued) Other long-term assets Summarized below is the breakdown of other long-term assets as of March 31, 2018,2019, and June 30, 2017:2018: | | | | 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 | |
| | | March 31, | | | | June 30, | | | | | 2019 | | | | 2018 | | | | | | | | | | | | Total equity investments | $ | 148,934 | | | $ | 199,865 | | | Investment in 15% of Cell C, at fair value (Note 7) | | 121,941 | | | | 172,948 | | | Investment in 13% of MobiKwik(1) | | 26,993 | | | | 26,917 | | | Total held to maturity investments | | 6,992 | | | | 10,395 | | | Investment in 7.625% of Cedar Cellular Investment 1 (RF) (Pty) Ltd 8.625% notes | | 6,992 | | | | 10,395 | | | Long-term portion of payments to agents in South Korea amortized over the contract period | | 11,714 | | | | 17,582 | | | Policy holder assets under investment contracts (Note 10) | | 596 | | | | 610 | | | Reinsurance assets under insurance contracts (Note 10) | | 644 | | | | 633 | | | Other long-term assets | | 6,023 | | | | 5,947 | | | Total other long-term assets | $ | 174,903 | | | $ | 235,032 | |
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)
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Other long-term assets (continued)
(1) The Company has signeddetermined that MobiKwik does not have readily determinable fair value and has therefore elected to record this investment at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a subscription agreement with MobiKwik, which is India’s largest independent mobile payments network, with over 65 million users and two million merchants. Pursuant to the subscription agreement, the Company agreed to make an equitysimilar investment of up to $40.0 millionthe same issuer. The Company accounted for its investment 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. Asat cost as of June 30, 2017,2018. During the nine months ended March 31, 2019, the Company paid $1.1 million to subscribe for additional shares in MobiKwik. As of March 31, 2019, the Company owned approximately 13.5%13% 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.MobiKwik’s issued share capital. 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 March 31, 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.
Summarized below are the components of the Company’s available for saleequity securities without readily determinable fair value and held to maturity investments as of March 31, 2018:2019: | | | | | | | 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 | |
| | | | | | Unrealized | | | Unrealized | | | | | | | | | | | holding | | | holding | | | Carrying | | | | | Cost basis | | | gains | | | losses | | | value | | | Equity securities: | | | | | | | | | | | | | | Investment in MobiKwik | $ | 26,993 | | $ | - | | $ | - | | $ | 26,993 | | | Held to maturity: | | | | | | | | | | | | | | Investment in Cedar Cellular notes | | 6,992 | | | - | | | - | | | 6,992 | | | Total | $ | 33,985 | | $ | - | | $ | - | | $ | 33,985 | |
The Company had no available for sale or Summarized below are the components of the Company’s held to maturity investments as of June 30, 2017.2018:
| | | | | | Unrealized | | | Unrealized | | | | | | | | Cost | | | holding | | | holding | | | Carrying | | | | | basis(1) | | | gains(1) | | | losses | | | value | | | Held to maturity: | | | | | | | | | | | | | | Investment in Cedar Cellular notes | $ | 10,395 | | $ | - | | $ | - | | $ | 10,395 | | | Total | $ | 10,395 | | $ | - | | $ | - | | $ | 10,395 | |
(1) An amount of $1.4 million attributed to interest recognized under the Cedar Cellular note was incorrectly included in the unrealized holding gains column as of June 30, 2018, and has been reclassified to the cost basis column. The Company recognized interest income of $0.6 million, related to the Cedar Cellular notes during each of the three months ended March 31, 2019 and 2018, respectively. The Company recognized interest income of $2.0 million and $0.8 million, related to the Cedar Cellular notes during the nine months ended March 31, 2019 and 2018, respectively. Interest on this investment will only be paid, at Cedar Cellular’s election, on maturity in August 2022. The Company’s effective interest rate on the Cedar Cellular note is 24.82% as of March 31, 2019. 21
8. Equity-accounted investments and other long-term assets (continued) Other long-term assets (continued) The Company does not expect to recover the entire amortized cost basis of the Cedar Cellular notes due to a reduction in the amount of future cash flows expected to be collected from the debt security. The Company does not expect to generate any cash flows from the debt security prior to the maturity date in August 2022, and expects to recover approximately $16.0 million at maturity. The Company has calculated the present value of the expected cash flows to be collected from the debt security by discounting these cash flows at the interest rate implicit in the security upon acquisition (at a rate of 24.82%). The present value of the expected cash flows of $7.0 million is less than the amortized cost basis recorded of $9.6 million (before the March 2019 impairment for the three months ended March 31, 2019) and $12.4 million (before the cumulative 2019 impairments for the nine months ended March 31, 2019). Accordingly, the Company recorded an other-than-temporary impairment related to a credit loss of $2.6 million and $5.4 million during the three and nine months ended March 31, 2019, respectively. The impairment of $2.6 million and $5.4 million is included in interest income, net of impairment in the unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019, respectively. Contractual maturities of held to maturity investments Summarized below areis the contractual maturitiesmaturity of the Company’s held to maturity investment as of March 31, 2018:2019: | | | | 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
|
| | | | | | Estimated | | | | | Cost | | | fair | | | | | basis | | | value(1) | | | Due in one year or less | $ | - | | $ | - | | | Due in one year through five years | | 6,992 | | | 6,992 | | | Due in five years through ten years | | - | | | - | | | Due after ten years | | - | | | - | | | Total | $ | 6,992 | | $ | 6,992 | |
Goodwill
Summarized below is the movement in the carrying (1) The estimated fair value of goodwill for the Cedar Cellular note has been calculated utilizing the Company’s portion of the security provided to the Company by Cedar Cellular, namely, Cedar Cellular’s investment in Cell C.
9. Goodwill and intangible assets, net Goodwill Impairment loss Three and nine months ended March 31, 2018: | | | | | | | 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 of the South African rand, euro and the Korean won, against the U.S. dollar on the carrying value.2019
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7. | Goodwill and intangible assets, net (continued)
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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 | | | | 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 of the South African rand, euro and the Korean won, against the U.S. dollar on the carrying value.
Impairment loss
The Company assesses the carrying value of goodwill for impairment annually, or more frequently, whenever events occur and circumstances change indicating potential impairment. The Company performs its annual impairment test as atof June 30 of each year. The Company did not recognize an impairment loss during the three months ended March 31, 2019. During the second quarter of fiscal 2019, the Company performed an impairment analysis and during the nine months ended March 31, 2019, the Company recognized an impairment loss of approximately $8.2 million, of which approximately $7.0 million related to goodwill allocated to its International Payment Group ("IPG") business within its international transaction processing operating segment and $1.2 million related to goodwill within its South African transaction processing operating segment. Given the consolidation and restructuring of IPG over the period to December 31, 2018, several business lines were terminated or meaningfully reduced, resulting in lower than expected revenues, profits and cash flows. IPG’s new business initiatives are still in their infancy, and it is expected to generate lower cash flows than initially forecast. In order to determine the amount of goodwill impairment, the estimated fair value of the Company’s IPG business assets and liabilities were compared to the carrying value of the IPG’s assets and liabilities. The Company used a discounted cash flow model in order to determine the fair value of IPG. The allocation of the fair value of IPG required the Company to make a number of assumptions and estimates about the fair value of assets and liabilities where the fair values were not readily available or observable. Based on this analysis, the Company determined that the carrying value of IPG’s assets and liabilities exceeded their fair value at the reporting date. In the event that there is a deterioration in the South African transaction processing and the international transaction processing operating segment, or in any other of the Company’s businesses, this may lead to additional impairments in future periods. 22
9. Goodwill and intangible assets, net (continued) Goodwill (continued) Impairment loss (continued) Three and nine months ended March 31, 2018 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 Company used a discounted cash flow model in order to determine the fair value of Masterpayment. 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 Summarized below is the movement in the international transaction processingcarrying value of goodwill for the nine months ended March 31, 2019:
| | | Gross | | | | Accumulated | | | | Carrying | | | | | value | | | | impairment | | | | value | | | Balance as of June 30, 2018 | $ | 304,013 | | | $ | (20,773 | ) | | $ | 283,240 | | | Continuing | | 189,852 | | | | (20,773 | ) | | | 169,079 | | | Discontinued (Note 2) | | 114,161 | | | | - | | | | 114,161 | | | Impairment of goodwill | | - | | | | (8,191 | ) | | | (8,191 | ) | | Amendment to DNI preliminary purchase price allocation (Note 2) | | 5,017 | | | | - | | | | 5,017 | | | Deconsolidation of DNI (Note 2) | | (113,003 | ) | | | - | | | | (113,003 | ) | | Foreign currency adjustment(1) | | (10,730 | ) | | | 166 | | | | (10,564 | ) | | Balance as of March 31, 2019 | $ | 185,297 | | | $ | (28,798 | ) | | $ | 156,499 | |
(1) – the foreign currency adjustment represents the effects of the fluctuations between the South African rand, the Euro and the Korean won, and the U.S. dollar on the carrying value. Goodwill has been allocated to the Company’s reportable segments as follows: | | | South | | | | | | | | Financial | | | | | | | | | African | | | | International | | | | inclusion and | | | | | | | | | transaction | | | | transaction | | | | applied | | | | Carrying | | | | | processing | | | | processing | | | | technologies | | | | value | | | Balance as of June 30, 2018 | $ | 20,946 | | | $ | 123,948 | | | $ | 138,346 | | | $ | 283,240 | | | Continuing | | 20,946 | | | | 123,948 | | | | 24,185 | | | | 169,079 | | | Discontinued (Note 2) | | - | | | | - | | | | 114,161 | | | | 114,161 | | | Impairment of goodwill | | (1,180 | ) | | | (7,011 | ) | | | - | | | | (8,191 | ) | | Amendment to DNI preliminary purchase price allocation (Note 2) | | - | | | | - | | | | 5,017 | | | | 5,017 | | | Deconsolidation of DNI (Note 2) | | - | | | | - | | | | (113,003 | ) | | | (113,003 | ) | | Foreign currency adjustment(1) | | (1,083 | ) | | | (2,349 | ) | | | (7,132 | ) | | | (10,564 | ) | | Balance as of March 31, 2019 | $ | 18,683 | | | $ | 114,588 | | | $ | 23,228 | | | $ | 156,499 | |
(1) – the foreign currency adjustment represents the effects of the fluctuations between the South African rand, the Euro and the Korean won, and the U.S. dollar on the carrying value. 23
9. Goodwill and intangible assets, net (continued) Intangible assets Impairment loss The Company identified and recognized certain customer relationships as part of its acquisition of DNI, which included relationships related to an agreement with Cell C under which DNI shared in revenues earned by Cell C from other mobile telecommunications network renting ("tenant rentals") certain Cell C infrastructure that was constructed utilizing funding provided by DNI. Cell C expected to utilize the funding provided by DNI to construct 1,000 towers. Cell C recently entered into a roaming arrangement with another South African mobile telecommunications network provider which will extend its network coverage. Cell C utilized funding from DNI to construct approximately 22% of the towers that it had originally estimated to complete, however, the conclusion of the roaming arrangement has resulted in Cell C halting the construction of further network infrastructure. The Company expects DNI to earn fewer tenant rentals than initially planned due to the lower number of towers constructed. During the three and nine months ended March 31, 2019, the Company updated the discounted cash flow model used to calculate the fair value of the customer relationships acquired on acquisition of DNI to assess the impact of the lower number of towers on its projected cash flows from the tenant rentals customer relationship. The lower number of towers has significantly reduced the projected cash flows earned from tenant rentals which resulted in a lower fair value attributed to the customer relationship. The Company compared the updated fair value of the customer relationship to the carrying amount and determined that the customer relationship is impaired. The Company has recorded an impairment loss of $5.3 million in the impairment loss caption on its unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019. The customer relationship was not allocated to an operating segment orand the impairment loss is included in any othercorporate/eliminations. The economics of the Company’s businesses, may leadtenant rentals arrangement between DNI and Cell C was excluded from the performance targets agreed between DNI and the Company because the arrangement was outside of DNI’s core business. DNI continues to additional impairments in future periods.perform above expectations and as of March 31, 2019, the Company believes that there are no other impairment indicators related to any of the other DNI intangible assets identified. 16
7. | Goodwill and intangible assets, net (continued)
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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 March 31, 20182019 and June 30, 2017:2018: | | | | 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 | |
| | | As of March 31, 2019 | | | As of June 30, 2018 | | | | | Gross | | | | | | Net | | | Gross | | | | | | Net | | | | | carrying | | | Accumulated | | | carrying | | | carrying | | | Accumulated | | | carrying | | | | | value | | | amortization | | | value | | | value | | | amortization | | | value | | | Finite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | Customer relationships(1) | $ | 97,481 | | | ($83,377 | ) | $ | 14,104 | | $ | 100,421 | | $ | (76,237 | ) | $ | 24,184 | | | Software and unpatented technology(1) | | 32,272 | | | (32,076 | ) | | 196 | | | 33,121 | | | (32,342 | ) | | 779 | | | FTS patent | | 2,646 | | | (2,646 | ) | | - | | | 2,792 | | | (2,792 | ) | | - | | | Exclusive licenses | | 4,506 | | | (4,506 | ) | | - | | | 4,506 | | | (4,506 | ) | | - | | | Trademarks and brands(1) | | 6,776 | | | (6,119 | ) | | 657 | | | 6,962 | | | (5,589 | ) | | 1,373 | | | Total finite-lived intangible assets | | 143,681 | | | (128,724 | ) | | 14,957 | | | 147,802 | | | (121,466 | ) | | 26,336 | | | Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | Financial institution license | | 762 | | | - | | | 762 | | | 793 | | | - | | | 793 | | | Total indefinite-lived intangible assets | | 762 | | | - | | | 762 | | | 793 | | | - | | | 793 | | | Total intangible assets | $ | 144,443 | | $ | (128,724 | ) | $ | 15,719 | | $ | 148,595 | | $ | (121,466 | ) | $ | 27,129 | |
(1) Intangible assets acquired as part of the DNI acquisition in June 2018 have been deconsolidated and are excluded from the March 31, 2019, balances, refer to Note 2. Aggregate amortization expense on the finite-lived intangible assets for the three months ended March 31, 20182019 and 2017,2018, was approximately $3.0$6.1 million and $3.7$3.0 million, respectively. Aggregate amortization expense on the finite-lived intangible assets for the nine months ended March 31, 20182019 and 2017,2018, was approximately $8.8$18.3 million and $10.2$8.8 million, respectively. 24
9. Goodwill and intangible assets, net (continued) Intangible assets (continued) Carrying value and amortization of intangible assets (continued) Future estimated annual amortization expense for the next five fiscal years and thereafter, assuming exchange rates that prevailed on March 31, 2018,2019, 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 | $ | 12,915 | | | | 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
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| Fiscal 2019(1) | $ | 21,631 | | | Fiscal 2020 | | 7,810 | | | Fiscal 2021 | | 2,833 | | | Fiscal 2022 | | 69 | | | Fiscal 2023 | | 69 | | | Thereafter | | 211 | | | Total future estimated annual amortization expense | $ | 32,623 | |
(1) Estimated annual amortization expense for fiscal 2019 includes amortization of DNI acquired intangible assets from July 1, 2018, until deconsolidation on March 31, 2019. 10. 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 nine months ended March 31, 2019: | | | | 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.| | | Reinsurance | | | Insurance | | | | | assets(1) | | | contracts(2) | | | Balance as of June 30, 2018 | $ | 633 | | $ | (2,032 | ) | | Increase in policyholder benefits under insurance contracts | | 67 | | | (5,940 | ) | | Claims and policyholders’ benefits under insurance contracts. | | (22 | ) | | 6,427 | | | Foreign currency adjustment(3) | | (34 | ) | | 106 | | | Balance as of March 31, 2019 | $ | 644 | | $ | (1,439 | ) |
(2) Included in other long-term liabilities.
(3) Represents the effects of the fluctuations between the ZAR against
| (1) | Included in other long-term assets. | | (2) | Included in other long-term liabilities. | | (3) | Represents the effects of the fluctuations between the ZAR and the U.S. dollar. 17
8. | Reinsurance assets and policyholder liabilities under insurance and investment contracts (continued)
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Reinsurance assets and policyholder liabilities under insurance contracts (continued)
The Company has agreements with reinsurance companies in order to limit its losses from certain insurance contracts, however, if the reinsurer is unable to meet its obligations, the Company retains the liability. The Company determines its reserves for policypolicyholder benefits under its life insurance products using a model which estimates claims incurred that have not been reported and total present value of disability claims-in-payment at the balance sheet date. This model includesallows for best estimate assumptions ofbased on experience (where sufficient) plus prescribed margins, as required in the markets in which these products are offered, namely South Africa. The best estimate assumptions include 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 (netMost of the asset management feedisability claims-in-payment reserve is reinsured and allowance for taxthe reported values were based on investment income).the reserve held by the relevant reinsurer. Assets and policyholder liabilities under investment contracts Summarized below is the movement in assets and policyholder liabilities under investment contracts during the nine months ended March 31, 2018:2019: | | | | | | | Investment | | | | | | Assets(1) | | | contracts(2) | | | | Balance as of June 30, 2017 | $ | 627 | | $ | (627 | ) | | | Increase in policyholder benefits under investment contracts | | 9 | | | (9 | ) | | | Foreign currency adjustment(3) | | 65 | | | (65 | ) | | | Balance as of March 31, 2018 | $ | 701 | | $ | (701 | ) |
| | | Assets(1) | | | Investment contracts(2) | | | Balance as of June 30, 2018 | $ | 610 | | $ | (610 | ) | | Increase in policyholder benefits under investment contracts | | 18 | | | (18 | ) | | Foreign currency adjustment(3) | | (32 | ) | | 32 | | | Balance as of March 31, 2019 | $ | 596 | | $ | (596 | ) |
| (1) | Included in other long-term assets. | | (2) | Included in other long-term liabilities. | | (3) | Represents the effects of the fluctuations between the ZAR and the U.S. dollar. |
(1) Included in other long-term assets.
(2) Included in other long-term liabilities.
(3) Represents the effects of the fluctuations between the ZAR against the U.S. dollar.
The Company does not offer any investment products with guarantees related to capital or returns. 9. | Short-term credit facilities
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Summarized below are the Company’s available short-term facilities and the amounts utilized as of March 31, 2018 and June 30, 2017, all amounts below were translated at the exchange rates applicable as of the date presented:
| | | | March 31, 2018 | | | June 30, 2017 | | | | | | Available | | | Utilized | | | Available | | | Utilized | | | | | | | | | | | | | | | | | | | United States: | | | | | | | | | | | | | | | Bank Frick(1) | $ | 10,000 | | $ | 3,400 | | $ | - | | $ | - | | | | Europe: | | | | | | | | | | | | | | | Bank Frick(1) | | - | | | - | | | 66,579 | | | 16,579 | | | | South Africa: | | | | | | | | | | | | | | | Nedbank Limited | | 33,800 | | | 9,136 | | | 30,600 | | | 10,000 | | | | Overdraft facility(1) | | 21,100 | | | - | | | 19,109 | | | - | | | | Indirect and derivative facilities (Note 18) | $ | 12,700 | | $ | 9,136 | | $ | 11,491 | | $ | 10,000 | |
(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.
1825
9. | Short-term credit facilities (continued)
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Europe11. Borrowings
South Africa The Company had obtained EUR 40.0 million and CHF 20 million revolving overdraft facilities from Bank Frick during the year ended June 30, 2017. The Company assigned all claims against amounts due from Masterpayment customers, which have been financed from the CHF 20 million facility, plus all secondary rights and preferential rights as collateral for this facility to Bank Frick. Masterpayment was required to open a primary business account with Bank Frick and this account was pledged to Bank Frick as collateral for the EUR 40 million facility. Net1 stood as guarantor for both of these facilities. The facilities were settled in full in January 2018 and were terminated in February 2018. As of June 30, 2017, the Company had utilized approximately CHF 15.9 million ($16.6 million) of the CHF 20 million facility and had not utilized any of the EUR 40 million facility. All amountsbelow have been translated at exchange rates applicable as of the dates specified. July 2017 Facilities, as amended, comprising a short-term facility and long-term borrowings Long-term borrowings – Facilities A, B, C and D The Company’s South African amended July 2017 Facilities agreement is described in Note 14 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2017.2018. The carrying value of these long-term borrowings as of March 31, 2019, was ZAR 229.1 million ($15.8 million), net of deferred fees of ZAR 0.9 million ($0.1 million), and the carrying amount approximated its fair value. Interest on these term loans was payable on the last business day of March, June, September and December of each year and on the final maturity date based on the Johannesburg Interbank Agreed Rate ("JIBAR") in effect from time to time plus a margin of 2.75%. The JIBAR has been set at 7.15% for the period to June 29, 2019, in respect of the loans provided under the South African long-term facilities agreement. The next principal repayment of ZAR 151.3 million ($10.6 million, translated at exchange rates applicable as of March 31, 2019) was scheduled to be paid on June 29, 2019, however the Company settled the outstanding amount of ZAR 230.0 million ($15.9 million, translated at exchange rates applicable as of March 31, 2019) in full on May 3, 2019, utilizing a combination of existing cash reserves and through the sale of DNI shares as discussed in Note 2. Short-term facility - Facility E On September 26, 2018, Net1 SA further amended its amended July 2017 Facilities agreement with RMB to include an overdraft facility ("Facility E") of up to ZAR 1.5 billion ($103.6 million) to fund the Company’s ATMs. Interest on the overdraft facility is payable on the last day of each month and on the final maturity date based on the South AfricaAfrican prime rate less a margin of 1.00%. The overdraft facility is up for review on September 26, 2019. The overdraft facility amount utilized must be repaid in full within one month of utilization and at least 90% of the amount utilized must be repaid with 25 days. The overdraft facility is secured by a pledge by Net1 SA of, among other things, cash and certain bank accounts utilized in the Company’s ATM funding process, the cession of an insurance policy with Senate Transit Underwriters Managers Proprietary Limited, any rights and claims Net1 SA has against Grindrod Bank Limited, and, in March 2019, the Company also agreed to provide RMB with the cession of a Company U.S. dollar denominated bank account. The Company paid a non-refundable origination fee of approximately ZAR 3.8 million ($0.3 million) in October 2018. As at March 31, 2019, the Company had utilized approximately ZAR 1.1 billion ($72.8 million translated at exchange rates applicable as of March 31, 2019) of this overdraft facility. This ZAR 1.5 billion overdraft facility may only be used to fund ATMs and therefore the overdraft utilized and converted to cash to fund the Company’s ATMs is considered restricted cash. The prime rate on March 31, 2019, was 10.25%. TheNedbank facility, comprising short-term facilities
On February 28, 2019, the aggregate amount of the Company’s short-term facility with Nedbank Limited was reduced from ZAR 700 million to ZAR 450 million, as a result of the reduction of the general banking facility from ZAR 300 million to ZAR 50 million. As of March 31, 2019, the aggregate amount of the Company’s short-term South African credit facility with Nedbank Limited was ZAR 400450.0 million ($33.831.1 million) and consists of (i) a primary amount of up to ZAR 200450 million ($16.9 million,31.1 million) and (ii) a secondary amount, of up to ZAR 200 million ($16.9 million).which has been temporarily withdrawn as discussed below. The primary amount comprises an overdraft facility of (i) up to ZAR 300 million ($20.7 million), which is further split into (a) a ZAR 250.0 million ($17.3 million) overdraft facility which may only be used to fund ATMs used at pay points and (b) a ZAR 50 million ($4.23.4 million) general banking facility and (ii) indirect and derivative facilities of up to ZAR 150 million ($12.710.4 million), which include letters of guarantee,guarantees, letters of credit and forward exchange contracts. AllThe ZAR 250.0 million component of the primary amount may only be used to fund ATMs and therefore this component of the primary amount utilized and converted to cash to fund our ATMs is considered restricted cash. The short-term facility provides Nedbank with the right to set off funds held in certain identified Company bank accounts with Nedbank against any amounts denominated in ZAR and translated at exchange rates applicable as of March 31, 2018. owed to Nedbank under the facility. As of March 31, 2018,2019, the Company had total funds of $4.2 million in bank accounts with Nedbank which have been set off against $5.6 million drawn under the Nedbank facility, for a net amount drawn under the facility of $1.4 million. As of March 31, 2019, the interest rate on the overdraft facility was 8.85% 9.10%. The Company has ceded its investment in Cash Paymaster Services Proprietary Limited (“CPS”("CPS"), a South African subsidiary, as well as all of its rights, title and interest in an insurance policy issued by Fidelity Risk Proprietary Limited as security for its repayment obligations under the facility. A commitment fee of 0.35% per annum is payable on the monthly unutilized amount of the overdraft portion of the short-term facility. The Company is required to comply with customary non-financial covenants, including, without limitation, covenants that restrict its ability to dispose of or encumber its assets, incur additional indebtedness or engage in certain business combinations. 26
11. Borrowings (continued) Nedbank facility, comprising short-term facilities (continued) As of each of March 31, 2018 and June 30, 2017, respectively,2019, the Company had nothas utilized anyapproximately ZAR 81.4 million ($5.6 million) of its ZAR 250 million overdraft facility to fund ATMs and utilized none of its ZAR 50 million general banking facility and temporary facility. As of March 31, 2019 and June 30, 2018, the Company had utilized approximately ZAR 96.7 million ($6.7 million) and ZAR 108.0 million ($9.1 million, translated at exchange rates applicable as7.9 million), respectively, of March 31, 2018) of its ZAR 150 million indirect and derivative facilities of ZAR 150 million to enable the bank to issue guarantees, including stand-by letters of credit and forward exchange contracts, in order for the Company to honor its obligations to third parties requiring such guarantees (refer to Note 18)20). As of June 30, 2017, the Company had utilized approximately ZAR 130.5 million ($10.0 million, translated at exchange rates applicable as of June 30, 2017) of its ZAR 150 million indirect and derivative facilities. South Africa2018 Facility, a long-term borrowing (a DNI facility)
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-K10-K/A for the year ended June 30, 2017. As of March 31, 2018, $75.5 million was outstanding under2018. DNI is the Company’s South African long-termprimary party to this facility agreement, and the carrying amount of thethese long-term borrowings approximated fair value. On March 8, 2018, the Company amended its South African long-term facility to include an additional term loan of up to ZAR 210.0 million (approximately $17.8 million translated at exchange rates applicablehave been deconsolidated as of March 31, 2018). This loan matures on March 31, 2020.2019, following the transaction referred to in Note 2. Interest on the ZAR 210 million term loanrevolving credit facility is payable on the last day of March, June, September and December of each year and on the final maturity datequarterly based on the Johannesburg Interbank Agreed Rate (“JIBAR”)JIBAR in effect from time to time plus a margin of 2.75%. The JIBAR has been set at 6.867% for the period to June 29, 2018, in respect of the loans provided under the South African long-term facilities agreement. 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 of the facilities are due in twelve quarterly installments commencing on September 29, 2017 and the Company has made scheduled repayments of ZAR 562.5 million ($44.4 million) during the nine months ended March 31, 2018. The next scheduled principal payment will be made on June 29, 2018. The amount to be paid will be either (i) ZAR 324.0 million ($27.4 million) if the Company is unable to proceed with its acquisition of a further 6% in DNI or (ii) ZAR 213.8 million ($18.1 million) if the Company concludes its investment, all amounts translated at exchange rates applicable as of March 31, 2018.
The Company paid a non-refundable origination fee of approximately ZAR 6.32.0 million ($0.60.1 million) in August 2017 and a non-refundable origination fee of ZAR 2.4 million ($0.2 million) in March 2018. Interest expense incurred during the three and nine months ended March 31, 2019. United States, a short-term facility On September 14, 2018, the Company renewed its $10.0 million overdraft facility from Bank Frick and on February 4, 2019, the Company increased the overdraft facility to $20.0 million. The interest rate on the facilities is 4.50% plus 3-month US dollar LIBOR and interest is payable on a quarterly basis. The 3-month US dollar LIBOR rate was $1.9 million and $5.5 million, respectively. During the three and nine months ended2.59975% on March 31, 2018, $0.12019. 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, 2019, the Company had utilized approximately $8.9 million and $0.3 million, respectively, of prepaid facility fees were amortized.this facility. 19
10. | Long-term borrowings (continued)
|
South Korea, comprising long-term borrowings The Company’s South Korean senior secured loan facility is described in Note 14 to the Company’sits audited consolidated financial statements included in its Annual Report on Form 10-K10-K/A for the year ended June 30, 2017.2018. 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. This facility is no longer available. South Korea, a short-term facility The Company obtained a one year KRW 10 billion ($10.0 million) short-term overdraft facility from Hana Bank, a South Korean bank, in January 2019. The interest rate on the facilities is 1.984% plus the 3-month CD rate. The CD rate as of March 31, 2019 was 1.87%. The facility expires in January 2020, however can be renewed. The facility is unsecured with no fixed repayment terms. As of March 31, 2019, the Company had not utilized this facility. 27
11. Borrowings (continued) Movement in short-term credit facilities Summarized below are the Company’s short-term facilities as of March 31, 2019, and the movement in the Company’s short-term facilities from as of June 30, 2018 to as of March 31, 2019: | | | | | | | | | | | United | | | | South | | | | | | | | | South Africa | | | | States | | | | Korea | | | | | | | | | Amended | | | | | | | | Bank | | | | | | | | | | | | | July 2017 | | | | Nedbank | | | | Frick | | | | Hana | | | | Total | | | Short-term facilities as of March 31, 2019: | $ | 103,599 | | | $ | 31,080 | | | $ | 20,000 | | | $ | 8,792 | | | $ | 163,471 | | | Overdraft | | - | | | | 3,453 | | | | 20,000 | | | | 8,792 | | | | 32,245 | | | Overdraft restricted as to use for ATM funding only | | 103,599 | | | | 17,267 | | | | - | | | | - | | | | 120,866 | | | Indirect and derivative facilities | | - | | | | 10,360 | | | | - | | | | - | | | | 10,360 | | | Movement in utilized overdraft facilities: | | | | | | | | | | | | | | | | | | | | | Balance as of June 30, 2018 | | - | | | | - | | | | - | | | | - | | | | - | | | Utilized | | 506,472 | | | | 64,196 | | | | 13,857 | | | | - | | | | 584,525 | | | Repaid | | (434,629 | ) | | | (63,202 | ) | | | (4,992 | ) | | | - | | | | (502,823 | ) | | Foreign currency adjustment(1) | | 945 | | | | 399 | | | | - | | | | - | | | | 1,344 | | | Balance as of March 31, 2019(2) | | 72,788 | | | | 1,393 | | | | 8,865 | | | | - | | | | 83,046 | | | Restricted as to use for ATM funding only | | 72,788 | | | | 1,393 | | | | - | | | | - | | | | 74,181 | | | No restrictions as to use | | - | | | | - | | | | 8,865 | | | | - | | | | 8,865 | | | Movement in utilized indirect and derivative facilities: | | | | | | | | | | | | | | | | | | | | | Balance as of June 30, 2018 | | - | | | | 7,871 | | | | - | | | | - | | | | 7,871 | | | Guarantees cancelled | | - | | | | (829 | ) | | | - | | | | - | | | | (829 | ) | | Utilized | | - | | | | 47 | | | | - | | | | - | | | | 47 | | | Foreign currency adjustment(1) | | - | | | | (411 | ) | | | - | | | | - | | | | (411 | ) | | Balance as of March 31, 2019 | $ | - | | | $ | 6,678 | | | $ | - | | | $ | - | | | $ | 6,678 | |
(1) Represents the effects of the fluctuations between the ZAR and the U.S. dollar.
(2) Nedbank balance as of March 31, 2019, of $1.4 million comprises the net of total overdraft facilities withdrawn of $5.6 million offset against funds in bank accounts with Nedbank of $4.2 million. Movement in long-term borrowings Summarized below is the movement in the Company’s long term borrowing from as of June 30, 2018 to as of March 31, 2019: | | | South Africa | | | | | | | | | Continuing | | | | Discontinued | | | | | | | | | | | June | | | | | | | | | | | | | Amended | | | | 2018 | | | | Other | | | | | | | | | July 2017 | | | | Facility | | | | (Note 2) | | | | Total | | | | | | | | | | | | | | | | | | | | Included in current portion of long-term borrowings | $ | 44,079 | | | $ | - | | | $ | 616 | | | $ | 44,695 | | | Included in long-term borrowings | | 5,469 | | | | - | | | | - | | | | 5,469 | | | Balance as of June 30, 2018 | | 49,548 | | | | - | | | | 616 | | | | 50,164 | | | Utilized | | - | | | | 14,613 | | | | - | | | | 14,613 | | | Repaid | | (30,797 | ) | | | (4,944 | ) | | | (569 | ) | | | (36,310 | ) | | Deconsolidated (Note 2) | | - | | | | (10,150 | ) | | | - | | | | (10,150 | ) | | Foreign currency adjustment(1) | | (2,928 | ) | | | 481 | | | | (47 | ) | | | (2,494 | ) | | Balance as of March 31, 2019, included in current portion of long-term borrowings | $ | 15,823 | | | $ | - | | | $ | - | | | $ | 15,823 | |
(1) Represents the effects of the fluctuations between the ZAR and the U.S. dollar. The Company paid a non-refundable deal origination fee of approximately ZAR 6.3 million ($0.6 million) in August 2017. Interest expense incurred under the Company’s South African long-term borrowing during the three months ended March 31, 2017,2019 and 2018, was $0.3 million.$0.6 million and $1.9 million, respectively. Interest expense incurred during the nine months ended March 31, 2019 and 2018, was $2.7 million and 2017,$5.5 million, respectively. Prepaid facility fees amortized during each of the three months ended March 31, 2019 and 2018, was $0.1 million, respectively. Prepaid facility fees amortized during the nine months ended March 31, 2019 and 2018, was $0.2 million and $0.3 million, respectively. 28
11. Borrowings (continued) Movement in long-term borrowings (continued) Interest expense incurred in respect of the Company’s South Korean debt facilities during the nine months ended March 31, 2018, was $0.4 million and $0.9 million, respectively.million. Prepaid facility fees amortized during the three months ended March 31, 2017, was $0.03 million. Prepaid facility fees amortized during the nine months ended March 31, 2018, and 2017, was $0.1 million and $0.09 million, respectively.million. 12. Capital structure The following table presents a reconciliation between the number of shares, net of treasury, presented in the unaudited condensed consolidated statement of changes in equity during the nine months ended March 31, 20182019 and 2017,2018, respectively, and the number of shares, net of treasury, excluding non-vested equity shares that have not vested during the nine months ended March 31, 2019 and 2018, and 2017, respectively: | | | | March 31, | | | March 31, | | | | | | 2018 | | | 2017 | | | | | | | | | | | | | Number of shares, net of treasury: | | | | | | | | | Statement of changes in equity | | 56,855,187 | | | 57,590,085 | | | | Less: Non-vested equity shares that have not vested (Note 13) | | (934,673 | ) | | (904,356 | ) | | | Number of shares, net of treasury excluding non-vested equity shares that have not vested | | 55,920,514 | | | 56,685,729 | |
| | | March 31, | | | March 31, | | | | | 2019 | | | 2018 | | | | | | | | | | | Number of shares, net of treasury: | | | | | | | | Statement of changes in equity | | 56,815,925 | | | 56,855,187 | | | Less: Non-vested equity shares that have not vested (Note 14) | | (831,408 | ) | | (934,673 | ) | | Number of shares, net of treasury excluding non-vested equity shares that have not vested | | 55,984,517 | | | 55,920,514 | |
Common stock repurchases13. Accumulated other comprehensive loss
Executed under share repurchase authorizations
The Company did not repurchase any of its shares duringtable below presents the three and nine months ended March 31, 2018, orchange in accumulated other comprehensive (loss) income per component during the three months ended March 31, 2017.2019: | | | Three months ended | | | | | March 31, 2019 | | | | | Accumulated | | | | | | | | foreign | | | | | | | | currency | | | | | | | | translation | | | | | | | | reserve | | | Total | | | | | | | | | | | Balance as of January 1, 2019 | $ | (198,272 | ) | $ | (198,272 | ) | | Release of foreign currency translation reserve related to disposal of DNI (Note 2). | | 1,806 | | | 1,806 | | | Movement in foreign currency translation reserve | | (7,872 | ) | | (7,872 | ) | | Balance as of March 31, 2019 | $ | (204,338 | ) | $ | (204,338 | ) |
The table below presents the change in accumulated other comprehensive (loss) income per component during the three months ended March 31, 2018: | | | Three months ended | | | | | March 31, 2018 | | | | | | | | Accumulated | | | | | | | | | | | net | | | | | | | | | | | unrealized | | | | | | | | | | | income on | | | | | | | | Accumulated | | | asset | | | | | | | | foreign | | | available for | | | | | | | | currency | | | sale, net of | | | | | | | | translation | | | tax (As | | | | | | | | reserve | | | restatedA) | | | Total | | | | | | | | | | | | | | Balance as of January 1, 2018 | $ | (123,359 | ) | $ | - | | $ | (123,359 | ) | | Movement in foreign currency translation reserve | | 20,512 | | | - | | | 20,512 | | | Balance as of March 31, 2018 | $ | (102,847 | ) | $ | - | | $ | (102,847 | ) |
(A) Refer to Note 1. In February 2016,29
13. Accumulated other comprehensive loss (continued) The table below presents 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. Duringchange in accumulated other comprehensive (loss) income per component during the nine months ended March 31, 2017, the Company repurchased 3,137,609 shares for approximately $31.6 million under its share repurchase authorizations.2019: | | | Nine months ended | | | | | March 31, 2019 | | | | | Accumulated | | | | | | | | foreign | | | | | | | | currency | | | | | | | | translation | | | | | | | | reserve | | | Total | | | | | | | | | | | Balance as of June 30, 2018 | $ | (184,436 | ) | $ | (184,436 | ) | | Release of foreign currency translation reserve related to disposal of DNI (Note 2). | | 1,806 | | | 1,806 | | | Movement in foreign currency translation reserve related to equity-accounted investment | | 5,430 | | | 5,430 | | | Movement in foreign currency translation reserve | | (27,138 | ) | | (27,138 | ) | | Balance as of March 31, 2019 | $ | (204,338 | ) | $ | (204,338 | ) |
20
12. | Accumulated other comprehensive loss
|
The table below presents the change in accumulated other comprehensive (loss) income per component during the nine months ended March 31, 2018: | | | | Nine months ended | | | | | | March 31, 2018 | | | | | | | | | Accumulated | | | | | | | | | | | | net | | | | | | | | | | | | unrealized | | | | | | | | | Accumulated | | | income on | | | | | | | | | foreign | | | asset | | | | | | | | | currency | | | available for | | | | | | | | | translation | | | sale, net of | | | | | | | | | reserve | | | tax | | | Total | | | | | | | | | | | | | | | | Balance as of June 30, 2017 | $ | (162,569 | ) | $ | - | | $ | (162,569 | ) | | | Movement in foreign currency translation reserve related to equity accounted investment | | (227 | ) | | - | | | (227 | ) | | | Unrealized income on asset available for sale, net of tax of $8,477 . | | - | | | 29,366 | | | 29,366 | | | | Movement in foreign currency translation reserve | | 59,949 | | | - | | | 59,949 | | | | Balance as of March 31, 2018 | $ | (102,847 | ) | $ | 29,366 | | $ | (73,481 | ) |
| | | Nine months ended | | | | | March 31, 2018 | | | | | | | | Accumulated | | | | | | | | | | | net | | | | | | | | | | | unrealized | | | | | | | | | | | income on | | | | | | | | Accumulated | | | asset | | | | | | | | foreign | | | available for | | | | | | | | currency | | | sale, net of | | | | | | | | translation | | | tax (As | | | | | | | | reserve | | | restatedA) | | | Total | | | | | | | | | | | | | | Balance as of June 30, 2017 | $ | (162,569 | ) | $ | - | | $ | (162,569 | ) | | Movement in foreign currency translation reserve related to equity accounted investment | | (227 | ) | | - | | | (227 | ) | | Movement in foreign currency translation reserve | | 59,949 | | | - | | | 59,949 | | | Balance as of March 31, 2018 | $ | (102,847 | ) | $ | - | | $ | (102,847 | ) |
(A) Refer to Note 1. During the three and nine months ended March 31, 2019, the Company reclassified $1.8 million from accumulated other comprehensive loss (accumulated foreign currency translation reserve) to net (loss) income related to the DNI disposal (refer to Note 2). There were no reclassifications from accumulated other comprehensive loss to comprehensivenet (loss) income during the three and nine months ended March 31, 2018 or 2017.2018. 13. | Stock-based compensation
|
30
14. Stock-based compensation Stock option and restricted stock activity Options The following table summarizes stock option activity for the nine months ended March 31, 20182019 and 2017:2018: | | | | | | | | | | Weighted | | | | | | | | | | | | | | | Weighted | | | average | | | | | | Weighted | | | | | | | | | average | | | remaining | | | Aggregate | | | average | | | | | | | | | exercise | | | contractual | | | intrinsic | | | grant date | | | | | | Number of | | | price | | | term | | | value | | | fair value | | | | | | shares | | | ($) | | | (in years) | | | ($’000) | | | ($) | | | | | | | | | | | | | | | | | | | | | | Outstanding – June 30, 2017 | | 846,607 | | | 13.87 | | | 3.80 | | | 486 | | | | | | | Forfeitures | | (37,333 | ) | | 11.23 | | | | | | | | | | | | | Outstanding – March 31, 2018 | | 809,274 | | | 13.99 | | | 2.92 | | | 427 | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding – June 30, 2016 | | 2,077,524 | | | 15.92 | | | 3.65 | | | 926 | | | | | | | Exercised | | (68,740 | ) | | 9.15 | | | | | | 882 | | | | | | | Expired unexercised | | (474,443 | ) | | 22.51 | | | | | | | | | | | | | Outstanding – March 31, 2017 . | | 1,534,341 | | | 14.19 | | | 3.88 | | | 2,150 | | | | |
| | | | | | | | | Weighted | | | | | | | | | | | | | | Weighted | | | average | | | | | | Weighted | | | | | | | | average | | | remaining | | | Aggregate | | | average | | | | | | | | exercise | | | contractual | | | intrinsic | | | grant date | | | | | Number of | | | price | | | term | | | value | | | fair value | | | | | shares | | | ($) | | | (in years) | | | ($’000) | | | ($) | | | | | | | | | | | | | | | | | | | | Outstanding – June 30, 2018 | | 809,274 | | | 13.99 | | | 2.67 | | | 370 | | | 4.20 | | | Granted – September 2018 | | 600,000 | | | 6.20 | | | 10.00 | | | 1,212 | | | 2.02 | | | Forfeitures | | (278,386 | ) | | 19.16 | | | | | | | | | 5.00 | | | Outstanding – March 31, 2019 | | 1,130,888 | | | 8.60 | | | 6.33 | | | - | | | 2.70 | | | | | | | | | | | | | | | | | | | | Outstanding – June 30, 2017 | | 846,607 | | | 13.87 | | | 3.80 | | | 486 | | | 4.21 | | | Forfeitures | | (37,333 | ) | | 11.23 | | | | | | | | | 4.55 | | | Outstanding – March 31, 2018 | | 809,274 | | | 13.99 | | | 2.92 | | | 427 | | | 4.20 | |
During the nine months ended March 31, 2019, 600,000 stock options were awarded to executive officers and employees. No stock options were awarded during the three months ended March 31, 2019, or during the three and nine months ended March 31, 2018, or 2017. Thererespectively. During the three months ended March 31, 2019, employees forfeited 78,386 stock options. No stock options were no forfeituresforfeited during the three months ended March 31, 2018. During the nine months ended March 31, 2019, employees and executive officers forfeited 278,386 stock options, including 200,000 stock options granted in August 2008, with a strike price of $24.46 per share, as these stock options expired unexercised. During the nine months ended March 31, 2018, employees forfeited 37,333 stock options. There The fair value of each option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the assumptions noted in the following table. The estimated expected volatility is calculated based on the Company’s 750 day volatility. The estimated expected life of the option was determined based on historical behavior of employees who were no forfeitures duringgranted options with similar terms. The table below presents the three and nine months ended March 31, 2017; however,range of assumptions used to value options granted during the nine months ended March 31, 2017, 474,4432019: | Nine months | | ended | | March 31, | | 2019 | | Expected volatility | 44% | | Expected dividends | 0% | | Expected life (in years) | 3 | | Risk-free rate | 2.75% |
The following table presents stock options awarded in August 2006, expired unexercised. 21
13. | Stock-based compensation
|
Stock optionvested and restricted stock activity (continued)expected to vest as of March 31, 2019:
| | | | | | | | | Weighted | | | | | | | | | | | Weighted | | | average | | | | | | | | | | | average | | | remaining | | | Aggregate | | | | | | | | exercise | | | contractual | | | intrinsic | | | | | Number of | | | price | | | term | | | value | | | | | shares | | | ($) | | | (in years) | | | ($’000) | | | Vested and expected to vest – March 31, 2019 | | 1,130,888 | | | 8.60 | | | 6.33 | | | - | |
Options (continued)
These options have an exercise price range of $7.35$6.20 to $24.46.$13.16. 31
14. Stock-based compensation (continued) Stock option and restricted stock activity (continued) Options (continued) The following table presents stock options that are exercisable as of March 31, 2018:2019: | | | | | | | | | | Weighted | | | | | | | | | | | | Weighted | | | average | | | | | | | | | | | | average | | | remaining | | | Aggregate | | | | | | | | | exercise | | | contractual | | | intrinsic | | | | | | Number of | | | price | | | term | | | value | | | | | | shares | | | ($) | | | (in years) | | | ($’000) | | | | Exercisable – March 31, 2018 | | 809,274 | | | 13.99 | | | 2.92 | | | 427 | |
| | | | | | | | | Weighted | | | | | | | | | | | Weighted | | | average | | | | | | | | | | | average | | | remaining | | | Aggregate | | | | | | | | exercise | | | contractual | | | intrinsic | | | | | Number of | | | price | | | term | | | value | | | | | shares | | | ($) | | | (in years) | | | ($’000) | | | Exercisable – March 31, 2019 | | 547,888 | | | 11.13 | | | 2.97 | | | - | |
No stock options became exercisable during the three and nine months ended March 31, 2019, or during the three months ended March 31, 2018, and 2017, respectively. DuringHowever, during the nine months ended March 31, 2018, and 2017, respectively, 105,982 and 154,803 stock options became exercisable. The Company issues new shares to satisfy stock option exercises. Restricted stock The following table summarizes restricted stock activity for the nine months ended March 31, 2019 and 2018: | | | Number of | | | | Weighted | | | | | shares of | | | | average grant | | | | | restricted | | | | date fair value | | | | | stock | | | | ($’000) | | | Non-vested – June 30, 2018 | | 765,411 | | | | 6,162 | | | Granted – September 2018 | | 148,000 | | | | 114 | | | Total Vested | | (64,003 | ) | | | 503 | | | Vested – August 2018 | | (52,594 | ) | | | 459 | | | Vested – March 2019 | | (11,409 | ) | | | 44 | | | Forfeitures | | (18,000 | ) | | | 70 | | | Non-vested – March 31, 2019 | | 831,408 | | | | 5,496 | | | | | | | | | | | | Non-vested – June 30, 2017 | | 505,473 | | | | 11,173 | | | Total Granted | | 611,411 | | | | 4,522 | | | Granted – August 2017 | | 588,594 | | | | 4,288 | | | Granted – March 2018 | | 22,817 | | | | 234 | | | Vested – August 2017 | | (56,250 | ) | | | 527 | | | Total Forfeitures | | (125,961 | ) | | | 1,491 | | | Forfeitures | | (30,635 | ) | | | 358 | | | Forfeitures – August and November 2014 awards with market conditions | | (95,326 | ) | | | 1,133 | | | Non-vested – March 31, 2018 | | 934,673 | | | | 9,608 | |
The September 2018 grants comprise 148,000 shares of restricted stock awarded to executive officers that are subject to market and 2017: | | | | Number of | | | Weighted | | | | | | shares of | | | average grant | | | | | | restricted | | | date fair value | | | | | | stock | | | ($’000) | | | | Non-vested – June 30, 2017 | | 505,473 | | | 11,173 | | | | Granted – August 2017 | | 588,594 | | | 4,288 | | | | Granted – March 2018 | | 22,817 | | | 234 | | | | Vested – August 2017 | | (56,250 | ) | | 527 | | | | Forfeitures | | (30,635 | ) | | 358 | | | | Forfeitures – August and November 2014 awards with market conditions | | (95,326 | ) | | 1,133 | | | | Non-vested – March 31, 2018 | | 934,673 | | | 9,608 | | | | | | | | | | | | | Non-vested – June 30, 2016 | | 589,447 | | | 7,622 | | | | Granted – August 2016 | | 387,000 | | | 4,145 | | | | Vested – August 2016 | | (72,091 | ) | | 735 | | | | Non-vested – March 31, 2017 | | 904,356 | | | 11,142 | |
time-based vesting. The August 2017 grants comprise (i) 326,000 shares of restricted stock awarded to executive officers and employees that are subject to time-based vesting, (ii) 210,000 shares of restricted stock awarded to executive officers that are subject to market and time-based vesting, and (iii) 52,594 shares of restricted stock awarded to non-employee directors. The March 2018 grant relates to an award made to the Company’s new Chief Financial Officer. The August 2016 grants comprise 350,000 and 37,000 shares of restricted stock awarded to executive officers and non-employee directors, respectively. The 326,000 shares of restricted stock will only vest if the recipient is employed by the Company on a full-time basis on August 23, 2020. The 52,594 shares of restricted stock awarded to non-employee directors will only vest if the recipient is a directorin August 2017 vested on August 23, 2018. The 22,8172018, and 11,409 shares of restricted stock, vest in two tranches, 11,409 will vestrepresenting half of the 22,817 shares granted to our Chief Financial Officer on March 1, 2019, and 11,408 will vest2018, vested on March 1, 2020, subject2019. During the three and nine months ended March 31, 2019, 18,000 shares of restricted stock with time-based vesting conditions were forfeited by employees upon their termination from the Company. During the nine months ended March 31, 2018, 56,250 shares of restricted stock granted to non-employee directors vested and employees forfeited 30,635 shares of restricted stock with either market or performance conditions upon their termination from the Chief Financial Officer’s continued employment.Company. 2232
13. | Stock-based compensation
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14. Stock-based compensation (continued) Stock option and restricted stock activity (continued) Restricted stock (continued) Market Conditions - Restricted Stock Granted in September 2018 The 148,000 shares of restricted stock awarded to executive officers in September 2018 are subject to time-based and performance-based (a market condition) vesting conditions and vest in full only on the date, if any, that the following conditions are satisfied: (1) the price of the Company’s common stock must equal or exceed certain agreed VWAP levels (as described below) during a measurement period commencing on the date that it files its Annual Report on Form 10-K for the fiscal year ended 2021 and ending on December 31, 2021 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited. The $23.00 price target represents an approximate 55% increase, compounded annually, in the price of the Company’s common stock on Nasdaq over the $6.20 closing price on September 7, 2018. The VWAP levels and vesting percentages related to such levels are as follows: - Below $15.00 (threshold)—0%
- At or above $15.00 and below $19.00—33%
- At or above $19.00 and below $23.00—66%
- At or above $23.00—100%
The fair value of these shares of restricted stock was calculated using a Monte Carlo simulation of a stochastic volatility process. The choice of a stochastic volatility process as an extension to the standard Black Scholes process was driven by both observations of larger than expected moves in the daily time series for the Company’s VWAP price, but also the observation of the strike structure of volatility (i.e. skew and smile) for out-of-the money calls and out-of-the money puts versus at-the-money options for both the Company’s stock and NASDAQ futures. In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the final vested value on maturity is the share price on vesting date. In its calculation of the fair value of the restricted stock, the Company used an average volatility of 37.4% for the VWAP price, a discounting based on USD overnight indexed swap rates for the grant date, and no future dividends. The average volatility was extracted from the time series for VWAP prices as the standard deviation of log prices for the three years preceding the grant date. The mean reversion of volatility and the volatility of volatility parameters of the stochastic volatility process were extracted by regressing log differences against log levels of volatility from the time series for at-the-money options 30 day volatility quotes, which were available from January 2, 2018 onwards. Market Conditions - Restricted Stock Granted in August 2017 The 210,000 shares of restricted stock awarded to executive officers in August 2017 are subject to time-based and performance-based (a market condition) vesting conditions and vest in full only on the date, if any, that the following conditions are satisfied: (1) the price of the Company’s common stock must equal or exceed certain agreed VWAP levels (as described below) during a measurement period commencing on the date that it files its Annual Report on Form 10-K for the fiscal year ended 2020 and ending on December 31, 2020 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited. The $23.00 price target represents an approximate 35% increase, compounded annually, in the price of the Company’s common stock on Nasdaq over the $9.38 closing price on August 23, 2017. The VWAP levels and vesting percentages related to such levels are as follows: | • | Below $15.00 (threshold)—0% | | • | At or above $15.00 and below $19.00—33% | | • | At or above $19.00 and below $23.00—66% | | • | At or above $23.00—100% |
- Below $15.00 (threshold)—0%
- At or above $15.00 and below $19.00—33%
- At or above $19.00 and below $23.00—66%
- At or above $23.00—100%
These 210,000 shares of restricted stock are effectively forward starting knock-in barrier options with multi-strike prices of zero. The fair value of these shares of restricted stock was calculated utilizing a Monte Carlo simulation model which was developed for the purpose of the valuation of these shares. For each simulated share price path, the market share price condition was evaluated to determine whether or not the shares would vest under that simulation. A standard Geometric Brownian motion process was used in the forecasting of the share price instead of a “jump diffusion”"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. 33
14. Stock-based compensation (continued) Stock option and restricted stock activity (continued) Restricted stock (continued) In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the final vested value on maturity is the share price on vesting date. 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. The remaining 150,000 shares continue to be subject to time-based and performance-based vesting conditions. In order for any of the shares to vest, the recipient must remain employed by the Company on a full-time basis on the date that it files its Annual Report on Form 10-K for the fiscal year ended June 30, 2019. If that condition is satisfied, then the shares will vest based on the level of Fundamental EPS the Company achieves for the fiscal year ended June 30, 2019 (“("2019 Fundamental EPS”EPS"), as follows: | • | One-third of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.60; | | • | Two-thirds of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.80; and | | • | All of the shares will vest if the Company achieves 2019 Fundamental EPS of $3.00. |
- One-third of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.60;
- Two-thirds of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.80; and
- All of the shares will vest if the Company achieves 2019 Fundamental EPS of $3.00.
At levels of 2019 Fundamental EPS greater than $2.60 and less than $3.00, the number of shares that will vest will be determined by linear interpolation relative to 2019 Fundamental EPS of $2.80. Any shares that do not vest in accordance with the above-described conditions will be forfeited. All shares of restricted stock have been valued utilizing the closing price of shares of the 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:
| • | One-third of the shares will vest if the Company achieves 2018 Fundamental EPS of $2.88; | | • | Two-thirds of the shares will vest if the Company achieves 2018 Fundamental EPS of $3.30; and | | • | All of the shares will vest if the Company achieves 2018 Fundamental EPS of $3.76. |
23
13. | Stock-based compensation
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Stock option and restricted stock activity (continued)
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 nine months ended March 31, 2017, the Company reversed the stock-based compensation charge recognized to date related to the 301,537 shares of restricted stock because it believed that it was unlikely that the 2018 Fundamental EPS target would be achieved due to the dilutive impact on the fundamental EPS calculation as a result of issuance of the approximate 10 million shares to the IFC in May 2016.
Vesting of all non-employee director shares issued prior to June 30, 2017
Grants of restricted stock to non-employee directors made during fiscal 2017, as well as those grants made in prior years, originally vested over a three-year period. After the end of fiscal 2017, the 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 nine months ended March 31, 2018, restricted stock with market conditions awarded in August and November 2014, were forfeited, because the target market conditions were not achieved. The stock-based compensation charge related to these awards was not reversed upon forfeiture because these awards contained market conditions. The fair value of restricted stock vesting during each of the nine months ended March 31, 20182019 and 2017,2018, respectively, was $0.5 million and $0.7 million. Stock-based compensation charge and unrecognized compensation cost The Company recorded a stock-based compensation charge, net during each of the three months ended March 31, 2019 and 2018 of $0.5 million and 2017 of $0.6 million respectively, which comprised: | | | | | | | Allocated to cost | | | | | | | | | | | | of goods sold, IT | | | Allocated to | | | | | | | | | processing, | | | selling, general | | | | | | Total | | | servicing and | | | and | | | | | | charge | | | support | | | administration | | | | Three months ended March 31, 2018 | | | | | | | | | | | | Stock-based compensation charge | $ | 575 | | $ | - | | $ | 575 | | | | Total – three months ended March 31, 2018 | $ | 575 | | $ | - | | $ | 575 | | | | | | | | | | | | | | | | Three months ended March 31, 2017 | | | | | | | | | | | | Stock-based compensation charge | $ | 621 | | $ | - | | $ | 621 | | | | Total – three months ended March 31, 2017 | $ | 621 | | $ | - | | $ | 621 | |
| | | | | | Allocated to cost | | | | | | | | | | | of goods sold, IT | | | Allocated to | | | | | | | | processing, | | | selling, general | | | | | Total | | | servicing and | | | and | | | | | charge | | | support | | | administration | | | Three months ended March 31, 2019 | | | | | | | | | | | Stock-based compensation charge | $ | 578 | | $ | - | | $ | 578 | | | Reversal of stock compensation charge related to | | | | | | | | | | | restricted stock and stock options forfeited | $ | (91 | ) | | - | | $ | (91 | ) | | Total – three months ended March 31, 2019 | $ | 487 | | $ | - | | $ | 487 | | | Three months ended March 31, 2018 | | | | | | | | | | | Stock-based compensation charge | $ | 575 | | $ | - | | $ | 575 | | | Total – three months ended March 31, 2018 | $ | 575 | | $ | - | | $ | 575 | |
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13. | Stock-based compensation (continued)
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14. Stock-based compensation charge(continued) Stock option and unrecognized compensation costrestricted stock activity (continued) Restricted stock (continued) The Company recorded a stock-based compensation charge, (reversal)net during the nine months ended March 31, 2019 and 2018 of $1.7 million and 2017 of $2.0 million and ($0.07 million), respectively, which comprised: | | | | | | | of goods sold, IT | | | Allocated to | | | | | | | | | processing, | | | selling, general | | | | | | Total | | | servicing and | | | and | | | | | | charge | | | support | | | administration | | | | Nine months ended March 31, 2018 | | | | | | | | | | | | Stock-based compensation charge | $ | 2,052 | | $ | - | | $ | 2,052 | | | | Reversal of stock compensation charge related to stock options forfeited | | (42 | ) | | - | | | (42 | ) | | | Total – nine months ended March 31, 2018 | $ | 2,010 | | $ | - | | $ | 2,010 | | | | | | | | | | | | | | | | Nine months ended March 31, 2017 | | | | | | | | | | | | Stock-based compensation charge | $ | 1,759 | | $ | - | | $ | 1,759 | | | | Reversal of stock compensation charge related to restricted stock | | (1,827 | ) | | - | | | (1,827 | ) | | | Total – nine months ended March 31, 2017 | $ | (68 | ) | $ | - | | $ | (68 | ) |
| | | | | | Allocated to cost | | | | | | | | | | | of goods sold, IT | | | Allocated to | | | | | | | | processing, | | | selling, general | | | | | Total | | | servicing and | | | and | | | | | charge | | | support | | | administration | | | Nine months ended March 31, 2019 | | | | | | | | | | | Stock-based compensation charge | $ | 1,763 | | $ | - | | $ | 1,763 | | | Reversal of stock compensation charge related to restricted stock and stock options forfeited | | (91 | ) | | - | | | (91 | ) | | Total – nine months ended March 31, 2019 | $ | 1,672 | | $ | - | | $ | 1,672 | | | Nine months ended March 31, 2018 | | | | | | | | | | | Stock-based compensation charge | $ | 2,052 | | $ | - | | $ | 2,052 | | | Reversal of stock compensation charge related to stock options forfeited | | (42 | ) | | - | | | (42 | ) | | Total – nine months ended March 31, 2018 | $ | 2,010 | | $ | - | | $ | 2,010 | |
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 March 31, 2018, there was no2019, the total unrecognized compensation cost related to stock options because all stock options granted have vested.was approximately $1.0 million, which the Company expects to recognize over approximately three years. As of March 31, 2018,2019, the total unrecognized compensation cost related to restricted stock awards was approximately $4.0$2.0 million, which the Company expects to recognize over approximately two years. This amount excludes the total unrecognized compensation cost as of March 31, 2018, of approximately $3.9 million, related to restricted stock awards that the Company expects will not vest due to it not achieving the 2018 Fundamental EPS. As of March 31, 2018, the cumulative unrecorded stock-based compensation charge related to these awards of restricted stock that the Company has determined are expected not to vest and has not expensed in its consolidated statement of operations is approximately $3.2 million. As of March 31, 20182019 and June 30, 2017,2018, respectively, the Company recorded a deferred tax asset of approximately $0.7$0.8 million and $0.9$0.7 million, respectively, related to the stock-based compensation charge recognized related to employees of Net1. As of March 31, 2019, and June 30, 2018, respectively, the Company hasrecorded a valuation allowance of approximately $0.8 million and $0.7 million, related to the deferred tax asset because it does not believe that the stock-based compensation deduction would be utilized as it does not anticipate generating sufficient taxable income in the United States. The Company deducts the difference between the market value on date of exercise by the option recipient and the exercise price from income subject to taxation in the United States.
15. (Loss) Earnings per share The Company has issued redeemable common stock which is redeemable at an amount other than fair value. Redemption of a class of common stock at other than fair value increases or decreases the carrying amount of the redeemable common stock and is reflected in basic earnings per share using the two-class method. There were no redemptions of common stock, or adjustments to the carrying value of the redeemable common stock during the three and nine months ended March 31, 20182019 or 2017.2018. Accordingly, the two-class method presented below does not include the impact of any redemption. The Company’s redeemable common stock is described in Note 15 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K10-K/A for the year ended June 30, 2017.2018. Basic (loss) earnings per share include shares of restricted stock that meet the definition of a participating security because these shares are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Basic (loss) earnings per share have been calculated using the two-class method and basic (loss) earnings per share for the three and nine months ended March 31, 20182019 and 2017,2018, reflects only undistributed earnings. The computation below of basic (loss) earnings per share excludes the net (loss) income attributable to shares of unvested restricted stock (participating non-vested restricted stock) from the numerator and excludes the dilutive impact of these unvested shares of restricted stock from the denominator. Diluted (loss) earnings per share have been calculated to give effect to the number of shares of additional common stock that would have been outstanding if the potential dilutive instruments had been issued in each period. Stock options are included in the calculation of diluted (loss) earnings per share utilizing the treasury stock method and are not considered to be participating securities, as the stock options do not contain non-forfeitable dividend rights. 2535
14. | Earnings per share (continued)
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15. (Loss) Earnings per share (continued) The calculation of diluted (loss) earnings per share includes the dilutive effect of a portion of the restricted stock granted to employees in August 2014, November 2014, August 2015, August 2016, August 2017, March 2018, May 2018 and MarchSeptember 2018 as these shares of restricted stock are considered contingently returnable shares for the purposes of the diluted earnings per share calculation and the vesting conditions in respect of a portion of the restricted stock had been satisfied. The vesting conditions for awards made in September 2018, March 2018, August 2017 August 2016 and August 20152016 are discussed in Note 1314 above and the vesting conditions for all other awards are discussed in Note 18 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K10-K/A for the year ended June 30, 2017.2018. The following table presents net (loss) income attributable to Net1 (income((loss) income from continuing operations) and the share data used in the basic and diluted (loss) earnings per share computations using the two-class method: | | | | Three months ended | | | Nine months ended | | | | | | March 31, | | | March 31, | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | | | | (in thousands except | | | (in thousands except | | | | | | percent and | | | percent and | | | | | | per share data) | | | per share data) | | | | Numerator: | | | | | | | | | | | | | | | Net income attributable to Net1 | $ | 3,009 | | $ | 18,392 | | $ | 32,114 | | $ | 61,665 | | | | Undistributed earnings | | 3,009 | | | 18,392 | | | 32,114 | | | 61,665 | | | | Percent allocated to common shareholders (Calculation 1) | | 98% | | | 98% | | | 98% | | | 98% | | | | Numerator for earnings per share: basic and diluted | $ | 2,962 | | $ | 18,064 | | $ | 31,597 | | $ | 60,609 | | | | | | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | | | Denominator for basic earnings per share: weighted-average common shares outstanding | | 55,828 | | | 53,666 | | | 55,874 | | | 52,054 | | | | Effect of dilutive securities: | | | | | | | | | | | | | | | Stock options | | 61 | | | 169 | | | 54 | | | 127 | | | | Denominator for diluted earnings per share: adjusted weighted average common shares outstanding and assumed conversion | | 55,889 | | | 53,835 | | | 55,928 | | | 52,181 | | | | | | | | | | | | | | | | | | | Earnings per share: | | | | | | | | | | | | | | | Basic | $ | 0.05 | | $ | 0.34 | | $ | 0.57 | | $ | 1.16 | | | | Diluted | $ | 0.05 | | $ | 0.34 | | $ | 0.56 | | $ | 1.16 | | | | | | | | | | | | | | | | | | | (Calculation 1) | | | | | | | | | | | | | | | Basic weighted-average common shares outstanding (A) | | 55,828 | | | 53,666 | | | 55,874 | | | 52,054 | | | | Basic weighted-average common shares outstanding and | | | | | | | | | | | | | | | unvested restricted shares expected to vest (B) | | 56,716 | | | 54,639 | | | 56,788 | | | 52,961 | | | | Percent allocated to common shareholders (A) / (B) | | 98% | | | 98% | | | 98% | | | 98% | |
| | | Three months ended | | | | Nine months ended | | | | | March 31, | | | | December 31, | | | | | 2019 | | | | 2018 | | | | 2019 | | | | 2018 | | | | | | | | | (As | | | | | | | | (As | | | | | | | | | restatedA) | | | | | | | | restatedA) | | | | | (in thousands except | | | | (in thousands except percent | | | | | percent and | | | | and | | | | | per share data) | | | | per share data) | | | Numerator: | | | | | | | | | | | | | | | | | Net (loss) income attributable to Net1 | $ | (54,784 | ) | | $ | 32,375 | | | $ | (123,924 | ) | | $ | 61,480 | | | Undistributed (loss) earnings | | (54,784 | ) | | | 32,375 | | | | (123,924 | ) | | | 61,480 | | | Continuing | | (50,299 | ) | | | 29,084 | | | | (122,913 | ) | | | 58,189 | | | Discontinued | $ | (4,485 | ) | | $ | 3,291 | | | $ | (1,011 | ) | | $ | 3,291 | | | Percent allocated to common shareholders (Calculation 1) | | 98% | | | | 98% | | | | 99% | | | | 98% | | | Numerator for (loss) earnings per share: basic and diluted. | | $(53,958 | ) | | $ | 31,868 | | | | $(122,113 | ) | | $ | 60,490 | | | Continuing | | (49,540 | ) | | | 28,629 | | | | (121,117 | ) | | | 57,252 | | | Discontinued | | $(4,417 | ) | | | $3,239 | | | | $(996 | ) | | | $3,238 | | | | | | | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | | | | | Denominator for basic (loss) earnings per share: weighted- average common shares outstanding | | 55,971 | | | | 55,828 | | | | 55,965 | | | | 55,874 | | | Effect of dilutive securities: | | | | | | | | | | | | | | - | | | Stock options | | - | | | | 61 | | | | 24 | | | | 54 | | Denominator for diluted (loss) earnings per share:
adjusted weighted average common shares outstanding and assumed conversion | | 55,971 | | | | 55,889 | | | | 55,989 | | | | 55,928 | | | | | | | | | | | | | | | | | | | | (Loss) Earnings per share: | | | | | | | | | | | | | | | | | Basic | $ | (0.96 | ) | | $ | 0.57 | | | $ | (2.18 | ) | | $ | 1.08 | | | Continuing | $ | (0.88 | ) | | $ | 0.51 | | | $ | (2.16 | ) | | $ | 1.02 | | | Discontinued | $ | (0.08 | ) | | $ | 0.06 | | | $ | (0.02 | ) | | $ | 0.06 | | | Diluted | $ | (0.96 | ) | | $ | 0.57 | | | $ | (2.18 | ) | | $ | 1.08 | | | Continuing | $ | (0.88 | ) | | $ | 0.51 | | | $ | (2.16 | ) | | $ | 1.02 | | | Discontinued | $ | (0.08 | ) | | $ | 0.06 | | | $ | (0.02 | ) | | $ | 0.06 | | | | | | | | | | | | | | | | | | | | (Calculation 1) | | | | | | | | | | | | | | | | | Basic weighted-average common shares outstanding (A) | | 55,971 | | | | 55,828 | | | | 55,965 | | | | 55,874 | | | Basic weighted-average common shares outstanding and unvested restricted shares expected to vest (B) | | 56,828 | | | | 56,716 | | | | 56,795 | | | | 56,788 | | | Percent allocated to common shareholders (A) / (B) | | 98% | | | | 98% | | | | 99% | | | | 98% | | | (A) Refer to Note 1. | | | | | | | | | | | | | | | |
Options to purchase 288,6921,166,554 and 351,828503,698 shares of the Company’s common stock at prices ranging from $10.59$6.20 to $24.46$13.16 per share and $8.75 to $13.16 per share were outstanding during the three and nine months ended March 31, 2018,2019, respectively, but were not included in the computation of diluted (loss) earnings per share because the options’ exercise price was greater than the average market price of the Company’s common stock. The options, which expire at various dates through August 27, 2024,September 7, 2028, were still outstanding as of March 31, 2018.2019. 15. | Supplemental cash flow information
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16. Supplemental cash flow information The following table presents supplemental cash flow disclosures for the three and nine months ended March 31, 20182019, and 2017:2018: | | | | Three months ended | | | Nine months ended | | | | | | March 31, | | | March 31, | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | | Cash received from interest | $ | 4,561 | | $ | 5,265 | | $ | 14,409 | | $ | 14,600 | | | | Cash paid for interest | $ | 2,298 | | $ | 435 | | $ | 6,716 | | $ | 2,007 | | | | Cash paid for income taxes | $ | 2,276 | | $ | 3,631 | | $ | 22,925 | | $ | 27,698 | |
| | | Three months ended | | | Nine months ended | | | | | March 31, | | | March 31, | | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | Cash received from interest | $ | 1,403 | | $ | 4,561 | | $ | 4,765 | | $ | 14,409 | | | Cash paid for interest | $ | 3,373 | | $ | 2,298 | | $ | 9,027 | | $ | 6,716 | | | Cash paid for income taxes | $ | 2,411 | | $ | 2,276 | | $ | 12,533 | | $ | 22,925 | |
26Investing activities
15. | Supplemental cash flow information (continued)
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Treasury The transaction referred to in Note 2 under which the Company reduced its shareholding in DNI from 55% to 38% and used the proceeds, of $27.6 million, from the sale to settle its obligation, of $27.6 million, to subscribe for additional shares at costin DNI was closed using a cashless settlement process. Therefore, the proceeds from sale and the settlement of the obligation to subscribe for additional shares in DNI were not included in net cash (used in) provided by investing activities 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’sunaudited condensed consolidated statement of cash flows for the three and nine months ended March 31, 2016.2019.
17. Revenue recognition The Company is a leading provider of transaction processing services, financial inclusion products and services and secure payment technology. The Company operates market-leading payment processors in South Africa and internationally. The Company offers debit, credit and prepaid processing and issuing services for all major payment networks. In South Africa, The Company provides innovative low-cost financial inclusion products, including banking, lending and insurance, and is a leading distributor of mobile subscriber starter packs for Cell C, a South African mobile network operator. Disaggregation of revenue The following table represents our revenue disaggregated by major revenue streams, including reconciliation to operating segments for the three months ended March 31, 2019: | | | | | | | | | Rest of | | | | | | | | South | | | | | | the | | | | | | | | Africa | | | Korea | | | world | | | Total | | | South African transaction processing | | | | | | | | | | | | | | Processing fees | $ | 14,166 | | $ | - | | $ | - | | $ | 14,166 | | | Other | | 1,908 | | | - | | | - | | | 1,908 | | | Sub-total | | 16,074 | | | - | | | - | | | 16,074 | | | International transaction processing | | | | | | | | | | | | | | Processing fees | | - | | | 30,895 | | | 2,125 | | | 33,020 | | | Other | | - | | | 1,161 | | | 177 | | | 1,338 | | | Sub-total | | - | | | 32,056 | | | 2,302 | | | 34,358 | | | Financial inclusion and applied technologies | | | | | | | | | | | | | | Telecom products and services | | 17,409 | | | - | | | - | | | 17,409 | | | Account holder fees | | 2,445 | | | - | | | - | | | 2,445 | | | Lending revenue | | 6,075 | | | - | | | - | | | 6,075 | | | Technology products | | 5,357 | | | - | | | - | | | 5,357 | | | Insurance revenue | | 755 | | | - | | | - | | | 755 | | | Other | | 4,011 | | | - | | | - | | | 4,011 | | | Sub-total | | 36,052 | | | - | | | - | | | 36,052 | | | | $ | 52,126 | | $ | 32,056 | | $ | 2,302 | | $ | 86,484 | |
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17. Revenue recognition (continued) Disaggregation of revenue (continued) The following table represents our revenue disaggregated by major revenue streams, including reconciliation to operating segments for the nine months ended March 31, 2019: | | | | | | | | | Rest of | | | | | | | | South | | | | | | the | | | | | | | | Africa | | | Korea | | | world | | | Total | | | South African transaction processing | | | | | | | | | | | | | | Processing fees | $ | 63,426 | | $ | - | | $ | - | | $ | 63,426 | | | Welfare benefit distribution fees | | 3,086 | | | - | | | - | | | 3,086 | | | Other | | 4,828 | | | - | | | - | | | 4,828 | | | Sub-total | | 71,340 | | | - | | | - | | | 71,340 | | | International transaction processing | | | | | | | | | | | | | | Processing fees | | - | | | 99,866 | | | 7,323 | | | 107,189 | | | Other | | - | | | 4,141 | | | 539 | | | 4,680 | | | Sub-total | | - | | | 104,007 | | | 7,862 | | | 111,869 | | | Financial inclusion and applied technologies | | | | | | | | | | | | | | Telecom products and services | | 54,576 | | | - | | | - | | | 54,576 | | | Account holder fees | | 16,190 | | | - | | | - | | | 16,190 | | | Lending revenue | | 22,021 | | | - | | | - | | | 22,021 | | | Technology products | | 15,396 | | | - | | | - | | | 15,396 | | | Insurance revenue | | 4,580 | | | - | | | - | | | 4,580 | | | Other | | 13,546 | | | - | | | - | | | 13,546 | | | Sub-total | | 126,309 | | | - | | | - | | | 126,309 | | | | $ | 197,649 | | $ | 104,007 | | $ | 7,862 | | $ | 309,518 | |
Nature of goods and services Processing fees The Company earns processing fees from transactions processed for its customers. The Company provides its customers with transaction processing services that involve the collection, transmittal and retrieval of all transaction data in exchange for consideration upon completion of the transaction. In certain instances, the Company also provides a funds collection and settlement service for its customers. The Company considers these services as a single performance obligation. The Company’s contracts specify a transaction price for services provided. Processing revenue fluctuates based on the type and the volume of transactions processed. Revenue is recognized on the completion of the processed transaction. Customers that have a bank account managed by the Company are issued cards that can be utilized to withdraw funds at an ATM or to transact at a merchant point of sale device ("POS"). The Company earns processing fees from transactions processed for these customers. The Company’s contracts specify a transaction price for each service provided (for instance, ATM withdrawal, balance enquiry, etc.). Processing revenue fluctuates based on the type and the volume of transactions performed by the customer. Revenue is recognized on the completion of the processed transaction. Welfare benefit distribution fees The Company provided a welfare benefits distribution service in South Africa to a customer under a contract which expired on September 30, 2018. The Company was required to distribute social welfare grants to identified recipients using an internally developed payment platform at designated distribution points (pay points) which enabled the recipients to access their grants. The contract specified a fixed fee per account for one or more grants received by a recipient. The Company recognized revenue for each grant recipient paid at the fixed fee. Telecom products and services The Company has entered into contracts with mobile networks in South Africa to distribute subscriber identity modules ("SIM") cards on their behalf. The Company is entitled to receive consideration based on the activation of each SIM as well as from a percentage of the value loaded onto each SIM. The Company recognizes revenue from these services once the criteria specified for activation have been met as well as when it is entitled to its consideration related to the value loaded onto the SIM. Revenue from contracts with mobile networks fluctuates based on the number of SIMs activated as well as on the value loaded onto the SIM. 38
17. Revenue recognition (continued) Nature of goods and services (continued) Telecom products and services (continued) The Company purchases airtime for resale to customers. The Company recognizes revenue as the airtime is delivered to the customer. Revenue from the resale of airtime to customers fluctuates based on the volume of airtime sold. Account holder fees The Company provides bank accounts to customers and this service is underwritten by a regulated banking institution because the Company is not a bank. The Company charges its customers a fixed monthly bank account administration fee for all active bank accounts regardless of whether the account holder has transacted or not. The Company recognizes account holder fees on a monthly basis on all active bank accounts. Revenue from account holder’s fees fluctuates based on the number of active bank accounts. Lending revenue The Company provides short-term loans to customers in South Africa and charges up-front initiation fees and monthly service fees. Initiation fees are recognized using the effective interest rate method, which requires the utilization of the rate of return implicit in the loan, that is, the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan. Monthly service fee revenue is recognized under the contractual terms of the loan. The monthly service fee amount is fixed upon initiation and does not change over the term of the loan. Technology products The Company supplies hardware and licenses for its customers to use the Company’s technology. Hardware includes the sale of POS devices, SIM cards and other consumables which can occur on an ad hoc basis. The Company recognizes revenue from hardware at the transaction price specified in the contract as the hardware is delivered to the customer. Licenses include right to use certain technology developed by the Company and is recognized ratably over the license period. Insurance revenue The Company writes life insurance contracts, and policy holders pay the Company a monthly insurance premium at the beginning of each month. Premium revenue is recognized on a monthly basis net of policy lapses. Policy lapses are provided for on the basis of expected non-payment of policy premiums. Significant judgments and estimates The Company was subject to a court process regarding the determination of the price to be charged for welfare benefit distribution services provided from April 1, 2018 to September 30, 2018. In December 2018, the Constitutional Court of South Africa clarified that it was not required to ratify the price and stated that the parties should reach an agreement on the price, failing which they should approach the lower courts in South Africa. The Company has initiated discussions with SASSA, but the parties had not reached an agreement as of March 31, 2019, regarding the pricing for services provided through September 30, 2018. Management determined, under previous revenue guidance, that there was no evidence of an arrangement at a fixed and determinable price other than that noted in the court ordered extension provided in March 2018 and did not record any additional revenue related to the services provided from April 1, 2018 to June 30, 2018, and recorded revenue at the rate specified in the contract. Upon adoption of the new revenue guidance on July 1, 2018, the Company determined that it was unable to estimate the amount of revenue that it is entitled to receive because the court had not yet confirmed the amount at that date. Accordingly, the Company has not recorded any additional revenue during the nine months ended March 31, 2019, related to the price to be charged for welfare benefit distribution services provided through September 30, 2018. The Company recorded revenue at the rate specified in the contract. The Company expects to record any additional revenue once there is agreement between the Company and SASSA on the fee. Accounts Receivable, Contract Assets and Contract Liabilities The Company recognizes accounts receivable when its right to consideration under its contracts with customers becomes unconditional. The Company has no contract assets or contract liabilities. 39
18. Operating segments The Company discloses segment information as reflected in the management information systems reports that its chief operating decision maker uses in making decisions and to report certain entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets or reports material revenues. A description of the Company’s operating segments is contained in Note 2322 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K10-K/A for the year ended June 30, 2017.2018. As discussed in Note 2, the Company has presented DNI as a discontinued operation. The reconciliation of the reportable segmentssegment’s revenue to revenue from external customers for the three months ended March 31, 20182019 and 2017,2018, is as follows: | | | | Revenue | | | | | | | | | | | | From | | | | | | Reportable | | | Inter- | | | external | | | | | | Segment | | | segment | | | customers | | | | South African transaction processing | $ | 73,508 | | $ | 7,429 | | $ | 66,079 | | | | International transaction processing | | 46,240 | | | - | | | 46,240 | | | | Financial inclusion and applied technologies | | 59,574 | | | 9,172 | | | 50,402 | | | | Total for the three months ended March 31, 2018 | $ | 179,322 | | $ | 16,601 | | $ | 162,721 | | | | | | | | | | | | | | | | South African transaction processing | $ | 63,967 | | $ | 7,331 | | $ | 56,636 | | | | International transaction processing | | 41,514 | | | - | | | 41,514 | | | | Financial inclusion and applied technologies | | 56,881 | | | 7,087 | | | 49,794 | | | | Total for the three months ended March 31, 2017 | $ | 162,362 | | $ | 14,418 | | $ | 147,944 | |
| | | Revenue | | | | | | | | | | | From | | | | | Reportable | | | Inter- | | | external | | | | | Segment | | | segment | | | customers | | | South African transaction processing | $ | 17,374 | | $ | 1,300 | | $ | 16,074 | | | International transaction processing | | 34,358 | | | - | | | 34,358 | | | Financial inclusion and applied technologies | | 36,650 | | | 598 | | | 36,052 | | | Total for the three months ended March 31, 2019 | $ | 88,382 | | $ | 1,898 | | $ | 86,484 | | | | | | | | | | | | | | South African transaction processing | $ | 73,508 | | $ | 7,429 | | $ | 66,079 | | | International transaction processing | | 46,240 | | | - | | | 46,240 | | | Financial inclusion and applied technologies | | 59,574 | | | 9,172 | | | 50,402 | | | Total for the three months ended March 31, 2018 | $ | 179,322 | | $ | 16,601 | | $ | 162,721 | |
The reconciliation of the reportable segmentssegment’s revenue to revenue from external customers for the nine months ended March 31, 20182019 and 2017,2018, is as follows: | | | | Revenue | | | | | | | | | | | | From | | | | | | Reportable | | | Inter- | | | external | | | | | | Segment | | | segment | | | customers | | | | South African transaction processing | $ | 204,093 | | $ | 19,755 | | $ | 184,338 | | | | International transaction processing | | 136,447 | | | - | | | 136,447 | | | | Financial inclusion and applied technologies | | 168,018 | | | 25,108 | | | 142,910 | | | | Total for the nine months ended March 31, 2018 | $ | 508,558 | | $ | 44,863 | | $ | 463,695 | | | | | | | | | | | | | | | | South African transaction processing | $ | 181,397 | | $ | 18,127 | | $ | 163,270 | | | | International transaction processing | | 131,704 | | | - | | | 131,704 | | | | Financial inclusion and applied technologies | | 179,681 | | | 19,645 | | | 160,036 | | | | Total for the nine months ended March 31, 2017 | $ | 492,782 | | $ | 37,772 | | $ | 455,010 | |
| | | | | | Revenue | | | | | | | | | | | | | | From | | | | | Reportable | | | Inter- | | | external | | | | | Segment | | | segment | | | customers | | | South African transaction processing | $ | 77,093 | | $ | 5,753 | | $ | 71,340 | | | International transaction processing | | 111,869 | | | - | | | 111,869 | | | Financial inclusion and applied technologies | | 128,611 | | | 2,302 | | | 126,309 | | | Total for the nine months ended March 31, 2019 | $ | 317,573 | | $ | 8,055 | | $ | 309,518 | | | | | | | | | | | | | | South African transaction processing | $ | 204,093 | | $ | 19,755 | | $ | 184,338 | | | International transaction processing | | 136,447 | | | - | | | 136,447 | | | Financial inclusion and applied technologies | | 168,018 | | | 25,108 | | | 142,910 | | | Total for the nine months ended March 31, 2018 | $ | 508,558 | | $ | 44,863 | | $ | 463,695 | |
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
16. | Operating segments (continued)
|
The reconciliation of the reportable segments measuremeasures of profit or loss to income before income taxes for the three and nine months ended March 31, 20182019 and 2017,2018, is as follows: | | | | Three months ended | | | Nine months ended | | | | | March 31, | | | March 31, | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | | Reportable segments measure of profit or loss | $ | 12,795 | | $ | 31,563 | | $ | 65,579 | | $ | 99,494 | | | | Operating income: Corporate/Eliminations | | (5,231 | ) | | (7,016 | ) | | (16,702 | ) | | (17,177 | ) | | | Interest income | | 5,154 | | | 5,124 | | | 14,903 | | | 14,489 | | | | Interest expense | | (2,426 | ) | | (467 | ) | | (6,872 | ) | | (1,773 | ) | | | Income before income taxes | $ | 10,292 | | $ | 29,204 | | $ | 56,908 | | $ | 95,033 | |
| | | Three months ended | | | Nine months ended | | | | | March 31, | | | March 31, | | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | Reportable segments measure of profit or loss | $ | (7,818 | ) | $ | 12,795 | | $ | (31,678 | ) | $ | 65,579 | | | Operating income: Corporate/Eliminations | | (13,865 | ) | | (5,231 | ) | | (32,184 | ) | | (16,702 | ) | | Change in fair value of equity securities | | (26,263 | ) | | 37,843 | | | (42,099 | ) | | 37,843 | | | Loss on disposal of DNI | | (5,140 | ) | | - | | | (5,140 | ) | | - | | | Interest income, net of impairment | | (959 | ) | | 5,154 | | | 586 | | | 14,903 | | | Interest expense | | (3,493 | ) | | (2,426 | ) | | (9,030 | ) | | (6,872 | ) | | (Loss) Income before income taxes | $ | (57,538 | ) | $ | 48,135 | | $ | (119,545 | ) | $ | 94,751 | |
40
18. Operating segments (continued) The following tables summarize segment information that is prepared in accordance with GAAP for the three and nine months ended March 31, 2019 and 2018, with the impact of the deconsolidation of DNI included in discontinued operations: | | | Three months ended | | | | Nine months ended | | | | | March 31, | | | | March 31, | | | | | 2019 | | | | 2018 | | | | 2019 | | | | 2018 | | | Revenues | | | | | | | | | | | | | | | | | South African transaction processing | $ | 17,374 | | | $ | 73,508 | | | $ | 77,093 | | | $ | 204,093 | | | International transaction processing | | 34,358 | | | | 46,240 | | | | 111,869 | | | | 136,447 | | | Financial inclusion and applied technologies | | 36,650 | | | | 59,574 | | | | 128,611 | | | | 168,018 | | | Continuing | | 18,808 | | | | 59,574 | | | | 72,274 | | | | 168,018 | | | Discontinued | | 17,842 | | | | - | | | | 56,337 | | | | - | | | Total | | 88,382 | | | | 179,322 | | | | 317,573 | | | | 508,558 | | | Continuing | | 70,540 | | | | 179,322 | | | | 261,236 | | | | 508,558 | | | Discontinued | | 17,842 | | | | - | | | | 56,337 | | | | - | | | Operating income (loss) | | | | | | | | | | | | | | | | | South African transaction processing(1) | | (12,954 | ) | | | 12,719 | | | | (28,297 | ) | | | 38,521 | | | International transaction processing | | 1,909 | | | | (14,892 | ) | | | 628 | | | | (14,567 | ) | | Financial inclusion and applied technologies(1) | | 3,227 | | | | 14,968 | | | | (4,009 | ) | | | 41,625 | | | Continuing(1) | | (4,911 | ) | | | 14,968 | | | | (28,409 | ) | | | 41,625 | | | Discontinued | | 8,138 | | | | - | | | | 24,400 | | | | - | | | Subtotal: Operating segments | | (7,818 | ) | | | 12,795 | | | | (31,678 | ) | | | 65,579 | | | Corporate/Eliminations | | (13,865 | ) | | | (5,231 | ) | | | (32,184 | ) | | | (16,702 | ) | | Continuing | | (6,399 | ) | | | (5,231 | ) | | | (19,465 | ) | | | (16,702 | ) | | Discontinued | | (7,466 | ) | | | - | | | | (12,719 | ) | | | - | | | Total(1) | | (21,683 | ) | | | 7,564 | | | | (63,862 | ) | | | 48,877 | | | Continuing(1) | | (22,355 | ) | | | 7,564 | | | | (75,543 | ) | | | 48,877 | | | Discontinued | | 672 | | | | - | | | | 11,681 | | | | - | | | Depreciation and amortization | | | | | | | | | | | | | | | | | South African transaction processing | | 914 | | | | 1,236 | | | | 2,776 | | | | 3,476 | | | International transaction processing | | 2,367 | | | | 4,668 | | | | 7,937 | | | | 13,681 | | | Financial inclusion and applied technologies | | 616 | | | | 398 | | | | 1,657 | | | | 1,062 | | | Continuing | | 349 | | | | 398 | | | | 1,044 | | | | 1,062 | | | Discontinued | | 267 | | | | - | | | | 613 | | | | - | | | Subtotal: Operating segments | | 3,897 | | | | 6,302 | | | | 12,370 | | | | 18,219 | | | Corporate/Eliminations | | 5,984 | | | | 3,039 | | | | 18,158 | | | | 8,811 | | | Continuing | | 3,824 | | | | 3,039 | | | | 10,745 | | | | 8,811 | | | Discontinued | | 2,160 | | | | - | | | | 7,413 | | | | - | | | Total | | 9,881 | | | | 9,341 | | | | 30,528 | | | | 27,030 | | | Continuing | | 7,454 | | | | 9,341 | | | | 22,502 | | | | 27,030 | | | Discontinued | | 2,427 | | | | - | | | | 8,026 | | | | - | | | Expenditures for long-lived assets | | | | | | | | | | | | | | | | | South African transaction processing | | 434 | | | | 1,794 | | | | 2,767 | | | | 3,171 | | | International transaction processing | | 712 | | | | 1,990 | | | | 2,353 | | | | 3,788 | | | Financial inclusion and applied technologies | | 469 | | | | 441 | | | | 2,160 | | | | 842 | | | Continuing | | 61 | | | | 441 | | | | 1,429 | | | | 842 | | | Discontinued | | 408 | | | | - | | | | 731 | | | | - | | | Subtotal: Operating segments | | 1,615 | | | | 4,225 | | | | 7,280 | | | | 7,801 | | | Corporate/Eliminations | | - | | | | - | | | | - | | | | - | | | Total | | 1,615 | | | | 4,225 | | | | 7,280 | | | | 7,801 | | | Continuing | | 1,207 | | | | 4,225 | | | | 6,549 | | | | 7,801 | | | Discontinued | $ | 408 | | | $ | - | | | $ | 731 | | | $ | - | |
(1) South African transaction processing and 2017:Financial inclusion and applies technologies include retrenchment costs for the three months ended March 31, 2019 of: $2,972 (nine months: $3,673) and $1,570 (nine months: $1,570), respectively, for total retrenchment costs for the three months of $4,542 (nine months: $5,243). The retrenchment costs are included in selling, general and administration expense on the unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019. | | | | Three months ended | | | Nine months ended | | | | | March 31, | | | March 31, | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | | Revenues | | | | | | | | | | | | | | | South African transaction processing | $ | 73,508 | | $ | 63,967 | | $ | 204,093 | | $ | 181,397 | | | | International transaction processing | | 46,240 | | | 41,514 | | | 136,447 | | | 131,704 | | | | Financial inclusion and applied technologies | | 59,574 | | | 56,881 | | | 168,018 | | | 179,681 | | | | Total | | 179,322 | | | 162,362 | | | 508,558 | | | 492,782 | | | | Operating income (loss) | | | | | | | | | | | | | | | South African transaction processing | | 12,719 | | | 15,531 | | | 38,521 | | | 44,451 | | | | International transaction processing | | (14,892 | ) | | 1,968 | | | (14,567 | ) | | 11,689 | | | | Financial inclusion and applied technologies | | 14,968 | | | 14,064 | | | 41,625 | | | 43,354 | | | | Subtotal: Operating segments | | 12,795 | | | 31,563 | | | 65,579 | | | 99,494 | | | | Corporate/Eliminations | | (5,231 | ) | | (7,016 | ) | | (16,702 | ) | | (17,177 | ) | | | Total | | 7,564 | | | 24,547 | | | 48,877 | | | 82,317 | | | | Depreciation and amortization | | | | | | | | | | | | | | | South African transaction processing | | 1,236 | | | 1,139 | | | 3,476 | | | 3,433 | | | | International transaction processing | | 4,668 | | | 5,083 | | | 13,681 | | | 16,440 | | | | Financial inclusion and applied technologies | | 398 | | | 365 | | | 1,062 | | | 1,056 | | | | Subtotal: Operating segments | | 6,302 | | | 6,587 | | | 18,219 | | | 20,929 | | | | Corporate/Eliminations | | 3,039 | | | 3,703 | | | 8,811 | | | 10,188 | | | | Total | | 9,341 | | | 10,290 | | | 27,030 | | | 31,117 | | | | Expenditures for long-lived assets | | | | | | | | | | | | | | | South African transaction processing | | 1,794 | | | 448 | | | 3,171 | | | 1,490 | | | | International transaction processing | | 1,990 | | | 1,309 | | | 3,788 | | | 6,275 | | | | Financial inclusion and applied technologies | | 441 | | | 192 | | | 842 | | | 733 | | | | Subtotal: Operating segments | | 4,225 | | | 1,949 | | | 7,801 | | | 8,498 | | | | Corporate/Eliminations | | - | | | - | | | - | | | - | | | | Total | $ | 4,225 | | $ | 1,949 | | $ | 7,801 | | $ | 8,498 | |
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18. Operating segments (continued) 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. 2819. Income tax
Income tax in interim periods For the purposes of interim financial reporting, the Company determines the appropriate income tax provision by first applying the effective tax rate expected to be applicable for the full fiscal year to ordinary income. This amount is then adjusted for the tax effect of significant unusual items, for instance, changes in tax law, valuation allowances and non-deductible transaction-related expenses that are reported separately, and have an impact on the tax charge. The cumulative effect of any change in the enacted tax rate, if and when applicable, on the opening balance of deferred tax assets and liabilities is also included in the tax charge as a discrete event in the interim period in which the enactment date occurs. For the three and nine months ended March 31, 2018,2019, the tax charge was calculated using the expectedCompany’s effective tax rate was adversely impacted by the valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by the Company’s South African businesses, the non-deductible impairment losses, the DNI disposal loss, and non-deductible expenses, including transaction-related expenditure and non-deductible interest on its South African long-term debt facility, which was partially offset by tax expense recorded by the Company’s profitable businesses in South Africa and South Korea. The deferred tax impact of the change in the fair value of the Company’s investment in Cell C also impacted the Company’s effective rate for fiscal 2019, as this amount is recorded at a lower rate (at a capital gains rate) than the year.South African statutory rate. The March 31, 2019, carrying value of the Company’s investment in Cell C is less than its initial cost and therefore it has a capital gains benefit for tax purposes, however, the Company does not expect to generate any significant capital gains in the foreseeable future and has provided a valuation allowance of $3.6 million related to this capital gains benefit deferred tax asset. The Company’s effective tax rate for the three and nine months ended March 31, 2018, was 106.3%40.3% and 55.0%42.0%, respectively, and was higher than the South African statutory rate as a result of an impairment loss, non-deductible expenses (including transaction-related expenditure and non-deductible interest on our South African long-term facility), the impact of the changes in U.S. federal statutory tax rates described below and for the nine months ended March 31, 2018, a valuation allowance provided related to an allowance for doubtful working capital finance receivables created. For The deferred tax impact of the three and nine months ended March 31, 2017,change in the tax charge was calculated usingfair value of the expectedCompany’s investment in Cell C also impacted the Company’s effective tax rate for the year. The Company’s effective taxfiscal 2018, as this amount is recorded at a lower rate for the three and nine months ended March 31, 2017, was 35.0% and 34.0%, respectively, and was higher(at a capital gains rate) than the South African statutory rate as a result of additional taxes payable resulting from the finalization of a tax review in South Korea, non-deductible expenses and the tax impact attributable to distributions from our South African subsidiary.rate.
New U.S.Recent Tax Legislation
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”"TCJA"), was enacted into law, which significantly modifyingchanges existing U.S. federal tax laws. The TCJA reduceslaw and includes numerous provisions that affect the Company’s business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. During the year ended June 30, 2018, the TCJA required the Company to incur a transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for corporationsforeign cash and certain other net current assets, and 8% on the remaining income. The TCJA also reduced the U.S. federal statutory tax rate from 35% to 21% effective from January 1, 2018, eliminates alternative minimum2018. The TCJA includes a provision to tax global intangible low taxed income ("GILTI") of foreign subsidiaries which is effective for corporations, limitsthe Company beginning July 1, 2018. The TCJA was effective in the third quarter of fiscal year 2018. As of March 31, 2019, the Company has not completed its accounting for the estimated tax effects of the TCJA. Due to the timing of the enactment and the complexity in applying the provisions of the TCJA, the provisional net operating loss carryforwards (and eliminates carrybacks), limitscharge is subject to revisions as the deductibilityCompany continues to complete its analysis of interest expensethe TCJA, collect and transitions the system of U.S. international taxation of corporations from a worldwide tax system to a territorial tax system. Specifically, the transition to a territorial tax system is not expected to have a significantprepare necessary data, and interpret additional guidance issued by standard-setting and regulatory bodies. Adjustments may materially impact on the Company’s future consolidatedprovision for income taxes and effective tax rate in the period in which the adjustments are made. The Company has calculated its Transition Tax liability as of June 30, 2018, and recorded a Transition Tax, before the application of any foreign tax credits, of $56.9 million, and has no liability after the application of generated foreign tax credits. In fact, the Company believes that it generatesmay generate excess foreign tax credits based on its preliminary calculations. 42
19. Income tax (continued) Recent Tax Legislation (continued) The Company re-measured its deferred taxes to reflect the majorityreduced rate that will apply when these deferred taxes are settled or realized in future periods. The TCJA subjects a U.S. corporation to tax on its GILTI. Due to the complexity of the new GILTI tax rules, the Company continues to evaluate this provision of the TCJA and the application of GAAP. Under GAAP, the Company has the option to make an accounting policy election of either (i) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or (ii) factoring such amounts into a company’s measurement of its deferred taxes (the "deferred method"). The Company has elected the period cost method and will record U.S. inclusions in taxable income in tax jurisdictions with tax rates higher (mainly South Africa, where its income is taxed at 28%, and Korea, where our income is taxed at 22%) than the new federal statutory tax rate of 21%. related to GILTI as a current-period expense when incurred. The Company is currently analyzingnot yet able to reasonably estimate the impacteffect of these changes; therefore, an estimatethis provision of the full impactTCJA on deferred tax assets and liabilities,it because whether it expects to have future U.S. inclusions in taxable income tax expense, net income and other affected accounts is not yet available. The Company hasrelated to GILTI depends on a June year end and therefore it will use a blended ratenumber of 28.10% for its tax year ending June 30, 2018, in the U.S. Certaindifferent aspects 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 thatestimated future results of global operations. Therefore, 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 nine months ended March 31, 2018, was $0.3 million. The Company has also provided an additional valuation allowance of approximately $0.6 millionnot made any adjustments related to net operating loss carryforwards that it does not believe will be utilized as a result of the enactment of the TCJA.potential GILTI tax in its financial statements. 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 nine months ended March 31, 2018.2019. As of March 31, 2018,2019, the Company had accrued interest related to uncertain tax positions of approximately $0.1 million on its balance sheet. The Company does not expect changes related to its unrecognized tax benefits will have a significant impact on its results of operations or financial position in the next 12 months. As of March 31, 20182019 and June 30, 2017,2018, the Company had unrecognized tax benefits of $0.5$1.0 million and $0.5$0.8 million, respectively, all of which would impact the Company’s effective tax rate. The Company files income tax returns mainly in South Africa, South Korea, Germany, Hong Kong, India, the United Kingdom, Botswana and in the U.S. federal jurisdiction. As of March 31, 2018,2019, the Company’s South African subsidiaries are no longer subject to income tax examination by the South African Revenue Service for periods before June 30, 2013.2014. The Company is subject to income tax in other jurisdictions outside South Africa, none of which are individually material to its financial position, statement of cash flows, or results of operations. 29
18. | 20. Commitments and contingencies |
Guarantees
Guarantees The South African Revenue Service and certain of the Company’s customers, suppliers and other business partners have asked the Company to provide them with guarantees, including standby letters of credit, issued by a South African bank. The Company is required to procure these guarantees for these third parties to operate its business. Nedbank has issued guarantees to these third parties amounting to ZAR 108.096.0 million ($9.16.6 million, translated at exchange rates applicable as of March 31, 2018)2019) and thereby utilizing part of the Company’s short-term facility. The Company in turn has provided nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 108.096.0 million ($9.16.6 million, translated at exchange rates applicable as of March 31, 2018)2019). The Company pays commission of between 0.4% per annum to 1.9%1.94% per annum of the face value of these guarantees and does not recover any of the commission from third parties. The Company has not recognized any obligation related to these counter-guarantees in its consolidated balance sheet as of March 31, 2018.2019. The maximum potential amount that the Company could pay under these guarantees is ZAR 108.096.0 million ($9.16.6 million, translated at exchange rates applicable as of March 31, 2018)2019). The guarantees have reduced the amount available for borrowings under the Company’s short-term credit facility described in Note 9.11. Contingencies Challenge to Payment by SASSA of Additional Implementation Costs As the Company previously disclosed, in June 2014, the Company received approximately ZAR 277.0 million, excluding VAT, from SASSA, related to the recovery of additional implementation costs its subsidiary, CPS, incurred during the beneficiary reregistration process in fiscal 2012 and 2013. After the award of the tender, SASSA requested that CPS biometrically register all social grant beneficiaries (including child grant beneficiaries) and collect additional information for each child grant recipient. CPS agreed to SASSA’s request and, as a result, it performed approximately 11.0 million additional registrations beyond those that it contracted to register for the quoted service fee. Accordingly, CPS sought reimbursement from SASSA, supported by a factual findings certificate from an independent auditing firm. SASSA agreed to pay CPS the ZAR 277.0 million as full settlement of the additional costs it incurred.
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 CPS of ZAR 317.0 million (approximately ZAR 277 million, excluding VAT) and directing CPS to repay the aforesaid amount, plus interest. Corruption Watch claimed that there was no lawful basis to make the payment to CPS, and that the decision was unreasonable and irrational and did not comply with South African legislation. CPS was 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 (“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, including VAT, 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 itits 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 rejectedrefused the application seeking leave to appeal.
In May 2018, CPS is in the process of filing an applicationdelivered its petition seeking leave to appeal the whole order and judgment of the High Court with the Supreme Court of Appeal. In September 2018, CPS received notification from the Supreme Court that its petition seeking leave to appeal had been granted. The matter is expected to be heard during the first half of calendar 2019. The Company cannot predict whether leave to appeal will be granted or if granted, how the Supreme Court of Appeal wouldwill rule on the matter. 43
20. Commitments and contingencies (continued) 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. 3021. Related party transactions
DNI leased a building that was owned by a company in which Mr. A.J. Dunn, DNI’s Chief Executive Officer, has a direct shareholding of 16%. The property was sold in November 2018. During the nine months ended March 31, 2019, DNI paid rental of approximately $1.0 million. On April 2, 2019, the Company’s board of directors determined that Mr. A.J. Dunn no longer performs a policy-making function by virtue of the change in the importance of his position within the Net1 group and is, therefore, no longer an executive officer. 44
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-K10-K/A for the year ended June 30, 2017,2018, 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”Factors" and elsewhere in our Annual Report on Form 10-K10-K/A for the year ended June 30, 2017.2018. 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”"may," "will," "should," "could," "would," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or “continue”"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 Restructuring of South African operations and strategy for financial inclusion initiatives in South Africa
Following the auto-migration of a substantial portion of our EPE customers, we faced a significant reduction in the number of accounts, transactions, fees, and consumption of financial and value-added services. In addition, customers who had loans or insurance policies and had been migrated, unwittingly defaulted on their regular payments. Our rural-South Africa distribution business has a high-fixed cost structure with physical locations, assets and employees. The decline in revenue coupled with the high-fixed costs resulted in significant operating losses for the company over the past six months. Beginning in late January, we commenced an aggressive restructuring initiative to reduce our physical infrastructure and headcount in order to right size the business given the current level of business activity. We have made meaningful progress in this regard and remain on track to reaching a breakeven EBITDA on a monthly basis by the end of the last quarter of fiscal 2019.
Restructuring of South African operations – In late January, we commenced with an extensive cost reduction exercise, which included a reduction of over 2,500 employees (being close to 50% of our original staff complement), reducing the availability of our mobile ATM infrastructure, and terminating certain leases. During the third quarter of 2019, we incurred retrenchment costs of $4.5 million related to the reduction of personnel in the field and at the head office level.
Increasing collaboration with Finbond - We have actively worked with the Finbond teams to identify synergies between our organizations in order to address the market opportunity for the millions of unbanked and under-banked South Africans. Finbond has been certified to become an issuer of UEPS/EMV cards, and in early Q4 2019, we initiated a pilot using our biometrically-enabled UEPS/EMV cards. We expect to commercially launch this initiative on a larger scale during Q1 2020, at which point we believe we can once again start growing our customer base.
Stabilization of financial services - Our lending and insurance businesses have stabilized in the third quarter of fiscal 2019 due to a more steady base of active EPE accounts. This stability now provides us with the opportunity to re-direct our efforts to growing these business lines, although this will be done cautiously to manage the risk of any potential future auto-migration of customers. We have begun discussions with other financial services providers, including Finbond, to use our EPE base as a distribution channel for their own lending products, but these discussions are still at an early stage.
Our loan book under Moneyline has increased slightly in the third quarter of fiscal 2019 and, following the write off of the loans that were provided against in Q2 2019, we have seen the level of non-performing loans return broadly to historical levels. Within Smartlife, the number of policies paid up has also stabilized and while the lapses related to the increased non-payment continued in the third quarter of fiscal 2019, the lapse-rate is now also returning to more normal levels.
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SASSA Updatecontract exit and Transitionsummary of legal proceedings On Although we have not been involved operationally with SASSA since September 30, 2018, we have been actively trying to resolve all legal and legacy outstanding items that would allow us to focus on our core business. An update on the key topics follow:
Settlement of payment of fees due for the last six months of the SASSA contract – Following the March 23, 2018 the Constitutional Court orderedorder for a six-month extension of our current contract with SASSA for the payment of grants in cash at pay points only, we were allowed to charge our monthly fee based on the same terms and conditions aspreviously contracted rate of ZAR 16.44 (including VAT) per cash pay point recipient. Given that we serviced the contract that was due to expire on March 31, 2018. Accordingly, using available information as of March 31, 2018, we have continued to pay approximately 1.9 million grant recipients at pay points. While the Court order was silent regarding the payment of the other 9.1 million grant recipients who access their grants utilizing PIN or by biometric verification at POS and ATMs, we have continued to support the bank accounts that underpin these grant payments, of which there are approximately 1.1 million grant recipients who receive their grants using their SASSA/Grindrod Bank cards with biometric verification at ATMs and merchant POS, 5.5 million grant recipients who make use of their SASSA/Grindrod Bank cards and PIN to access their grants through the National Payment System and approximately 2.5 million grant recipients who receive their grants utilizing commercial bank accounts, including our EasyPay Everywhere, or EPE, bank account. As SASSA is no longer paying us a service fee for the management of these accounts with effect from April 1, 2018, the grant recipients themselves now bear the cost for the fees associated with these accounts. SASSA has indicated that grant recipients will be encouraged to open a commercial bank account of their choice in the future, including the special account offered by the South African Post Office, or SAPO, for grant recipients. SASSA reported in its April 2018 filing withhighest-cost beneficiaries, the Constitutional Court that the planned issuance of the new SASSA/SAPO payment cards had been delayed dueallowed us to “delays with the procurement process”. According to media reports, SAPO commenced with the rollout of its card issuance program on May 3, 2018. The Constitutional Court further ordered that we may approach the National Treasury in order for them to investigate and make a recommendation regardingfair determination of the price towe should be paid for our contracted services during the six-month period. We approached therendered. National Treasury forrecommended a price review shortly after receiptrate of ZAR 51.00 (including VAT) per cash pay point recipient per month to the Constitutional Court order and on April 30, 2018, the National Treasury filed their recommendation with the Constitutional Court proposing fee levels that were materially lower than we had requested, but significantly higher than the current fee levels. We believe that National Treasury’s recommendation does not takeCourt. Contrary to SASSA’s stated plans into account, and does not recognize the need for us to maintain our infrastructure regardless of the number of beneficiaries paid and therefore we will ask the Constitutional Court to refer the matter back to National Treasury. For additional information refer to “Item 1A.—Risk Factors— 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.”
SASSA also filed its monthly progress report withstance, the Constitutional Court on April 30,December 5, 2018, stating its intentionruled that they are not required to reduceratify the Treasury recommended rate, and that CPS and SASSA must agree on the pricing. To date we have not reached an agreement on SASSA for the pricing and have instituted a dispute resolution process. We believe it may be necessary for this matter to go through a legal process for resolution.
Auto-migration of EPE customers to SAPO – As part of SASSA’s migration to SAPO, a number of grant recipients at pay pointsEPE customers were auto-migrated by SASSA during August and October 2018, where post office accounts were unilaterally opened for beneficiaries by SASSA, often without the customer’s consent. We initiated a legal process to 800,000 by the end of September 2018,halt this migration and to consolidate certain pay points.try and recover some of our EPE customers who had been migrated despite completing the mandatory documentation for electing to be paid in a private bank account. On April 25, 2018,January 29, 2019, we received an adverse order in that it was unlikely that those EPE customers, who had provided biometric consent prior to regulations being effected, would be required to be returned to us. Following this order, we followed a multi-faceted approach to try and other bidders, received a notice fromaddress the auto-migration issue. First, we were granted leave to appeal the order, which we are pursuing. Second, the court granted an order requiring SASSA informing usto account for the process to auto-migrate approximately 700,000 of the suspensionEPE accounts who had submitted Annexure C forms to SAPO. Third, we are considering taking the decision of the tender issued in December 2017minister for administrative review. While the appointment of a service provider to distribute grants in cash at pay points when our contract expires on September 30, 2018. 31
In an affidavit filed with the Constitutional Court, the recently appointed Minister of Social Development, Ms. Susan Shabangu, indicated that she had ordered the suspension of the tender due to objections received regarding the completeness of the tender document from a prospective bidder, as well as the fact that the Bid Evaluation Committee did not have the required skills to evaluate a tender of this nature. Minister Shabangu also indicated to members of the Portfolio Committee for Social Development in the South African Parliament that there will be no request for a further extension of our contract when it expires on September 30, 2018. We cannot predict when, or if, the tender process will resume.
Wefirst and third actions are relieved thatlonger processes, we finally have visibility regarding the end of our contract and we look forwardbelieve SASSA’s response to the successful completion ofsecond action should provide valuable insights into their Annexure C acceptance and processing policies, and will guide our contract on September 30, 2018. We are extremely proud of our achievements of uninterrupted grant deliveryfuture efforts to 11.0 million social grant recipients sincebank the inception of our contract in April 2012, and the saving of more than ZAR 2.0 billion per annum that our biometric payment technology realized for government due to the elimination of fraudulent grants. We intend to focus our resources and technology on the provision of financial inclusion services to our target market after our contract expires, without the contractual constraints and challenges we have experienced during the past six years.
Progress of financial inclusion initiatives in South Africa
In June 2015, we began the rollout of EPE, our business-to-consumer, or B2C, offeringunbanked in South Africa. At April 30, 2018,The risk of our remaining EPE customers being auto-migrated still exists, but there has been no further auto-migration since November 2018. Refer to discussion under "Part II—Item 1—Legal Proceedings— Legal proceedings against SASSA in respect of transfer of grant payments from EPE to SAPO accounts."
Progress on various corporate activities As part of the extensive strategic review of all of our businesses and investments, we had more than 2.6have made progress on multiple fronts: Disposal of DNI – We have concluded two transactions to reduce our investment in DNI. First, in March 2019, we reduced our holding in DNI from 55% to 38% through the sale of 17% in DNI for ZAR 400 million. We utilized the proceeds from this sale to settle the contingent purchase consideration of R400 million, active EPE accounts, comparedwhich related to 2.3 million at January 31, 2018. EPE is a fully transactional, low cost account created to serve the needsachievement of South Africa’s unbanked and under-banked population, most of whom are social grant recipients. The EPE account offers customers a comprehensive suite of financial and various financial inclusion services, such as prepaid products,certain performance targets by DNI. Second, in an economical, convenient and secure solution. EPE provides account holders with a biometrically-enabled UEPS/EMV debit MasterCard, mobile and internet banking services, ATM and POS services, as well as loans, insurance and other financial products and value-added services. In order for us to address the sizeable opportunity for EPE and related financial inclusion services in South Africa, in fiscal 2016,May 2019, we began to expand our brick-and-mortar financial services branch infrastructure, which supplements our nationwide distribution, with a biometrically-enabled UEPS/EMV ATM network, and hired a dedicated sales force. We believe there is further room to expand our physical branch and ATM infrastructure and our efforts will be supplemented by employing a roaming sales force equipped with a biometrically-enabled UEPS/EMV card-issuing work station. In January 2018, we deployedsold an additional 500 portable card-issuing working stations8% of DNI to RMB, and employed 625 temporary staffused the proceeds to achieve this objective. At April 30, 2018,early-settle the majority of our outstanding long-term borrowings. Third, also in May 2019, we had 152 branches (January 31, 2018: 152), 1,100 ATMs (January 31, 2018: 1,073), and 2,371 (January 31, 2018: 2,394) dedicated employees, includinggranted DNI a call option to acquire our remaining 30% interest in DNI at a strike price of ZAR 859 million, or $59.3 million in order to monetize our remaining investment in DNI. We expect the temporary staff.call option to be exercised within the next eight months.
Our efforts have resulted in an increased rate in the numberEarly repayment of EPE accounts opened, the amountlong-term debt – We utilized ZAR 15.0 million of loans disbursedour cash reserves and the numberproceeds from the sale 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 ten months since July 1, 2017, we sold approximately 145,000 new policies related to our simple, low-cost life insurance products, in addition to the free basic life insurance policy provided with every EPE account opened. On May 2, 2018, we introduced low-cost mobile telephony and data packages, designed in collaboration with Cell C and DNI, as part of our “lifestyle” product offering and we intend to deploy further relevant products in the near future. We believe that are we already the market leaders, both in terms of cost and scale, in the provision of bank accounts, credit and insurance products in the market segments which we serve.
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The graph below presents the growth of the number of EPE cards and Smart Life policies:
Cell C and DNI
In July and August 2017, we made strategic investments in DNI and Cell C, respectively. Additionally, on March 9, 2018, we increased our voting and economican 8% interest in DNI to 49% throughearly-settle our ZAR 230.0 million long-term borrowings in full. reserves. This has strengthened our balance sheet and improved our liquidity profile in South Africa as we reposition the subscription for additional sharesbusiness.
Progress in Korea – Our advisors assisting with a subscription priceimproving the growth and profitability in Korea have completed the first phase of ZAR 89.3 million ($7.5 million). We also agreed to subscribe for additional shares in DNI at an aggregate subscription price of ZAR 126.0 million ($10.7 million, translated at exchange rates applicable as of March 31, 2018),their project, which will increase our voting and economic interest in DNI to 55%. This additional subscription is subject to certain conditions, including obtaining South African Competition Commission approval. We have already made our submissions to the Competition Commission and we expect its response by June 30, 2018. If we do not receive approval by that date, we will not complete the additional subscription, unless the parties agree to amend the June 30 date. The investments in Cell C and DNI are consistent with our approach of leveraging our significant and established infrastructure, and pursuing strategic acquisition opportunities or partnerships to gain access to new markets or complementary products. We identified the need to offer customers a truly bespoke, affordable and comprehensive package that will go beyond basic telephony. An integrated mobile-based digital product will therefore likely differentiate the offerings of all the relevant stakeholders in this transaction, including Net1. The Cell C and DNI investments allow us to address the needsconsisted of the broader South African population through ownershipidentification of actionable items. In phase two, they will work with management to implement the near-term action items identified in the value chain includingfirst phase. We expect the network, payment, product, distribution and hardware. The relationship with overall exercise to take another 6-12 months before we see meaningful improvements in operating performance. In parallel, our board is reviewing the strategic alternatives for this business.
Cell C and DNI also has other complementary benefits to us and these partners. For instance we recently sold one million subscriber identity module, or SIM, cards to Cell C and have subsequently received orders for an additional five million SIMs. We have additionally created new low-cost products relevant for our unbanked and under-banked customer base in collaboration with DNI and Cell C and launched these during – During the first week of May 2018. Our investment in DNI complements our existing distribution footprint and provides us with access to a further 2,000 employees who are dedicated to the marketing of our products, mainly in urban and semi-urban areas. Refer also Note 6 to our unaudited condensed consolidated financial statements for additional financial information regarding Cell C and DNI.
Bank Frick and Finbond
In January 2018, we purchased an additional 5% in Bank Frick from the Frick Foundation for CHF 10.4 million ($11.1 million), in cash, and the Frick Foundation agreed to contribute approximately CHF 3.8 million ($4.1 million) to Bank Frick to facilitate the development of Bank Frick’s Fintech and blockchain businesses. Bank Frick recently reported its 2017 results, posting a 97% net profit growth to CHF 6.3 million. It also became the first bank in the CHF area to issue a certificate based on crypto-currencies, launched custodial services for professional crypto-currency investors, and has supported over a dozen initial coin offerings, or ICOs.The bank has stated that it expects to grow its head count by 50% in 2018 in order to support the expansion of its blockchain offerings as well as related IT and operational support.
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We are approaching the final stages of certification for Finbond to become an issuer of biometrically-enabled UEPS/EMV cards and expect to commence with related activities during the fourththird quarter of fiscal 2018. Finbond operates an extensive distribution network2019, Cell C signed a binding term sheet with the Buffet consortium which, once concluded, is expected to substantially improve Cell C’s liquidity position and meaningfully reduce its debt servicing costs. Cell C has also appointed a new chief executive officer, whose focus is on executing the Buffet transaction, managing liquidity and lifting the operational performance of approximately 430 branches across South Africa that will be utilized asthe business.
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International activities IPG – The restructuring and re-organization of IPG is now complete with Malta having become the centralized operation of our international activities. IPG’s new card issuing and service points for the biometrically-enabled UEPS/EMV cards. We are also deploying biometrically-enabled ATM’s across the Finbond branch network. In April 2018, we followed our rights pursuant to a rights offering conducted by Finbond and we now own 261,069,481 Finbond shares, representing approximately 27.6%merchant acquiring platforms have been certified. As part of Finbond’s issued and outstanding ordinary shares after the rights offering. Refer also Note 6 to our unaudited condensed consolidated financial statements for additional financial information regardingVisa’s merger with Visa Europe, Bank Frick is required to undergo recertification with Visa, which is currently underway and Finbond.expected to be completed during the calendar 2019.
International Payments Group
We Once completed, IPG is expected to begin the re-organizationdeployment of our International Payments Group, or IPG, duringits new products to the European SME market. During the third quarter by consolidating all our e-money licensesof fiscal 2019, IPG also secured approval from the Mauritian regulators to become a principal member of China UnionPay for international issuing and international card issuing, acquiringacquiring. This approval has been shared with UnionPay and processing activities (excluding South Koreawe are awaiting their acceptance of the same. Our beta prototype crypto-asset storage product is now ready, and India) under a single management structure. IPG made good progress with keywe believe we will begin commercially rolling out this market-leading product developments during the quarter, including its unique multicurrency-issuing platform and new card management system. In addition, IPG is working in close collaboration with Bank Frick and other specialist departments in the Net1 groupearly fiscal 2020.
Bank Frick – Bank Frick continues to develop bespoke blockchain-based solutions, including a highly secure but easily accessible crypto-assetits capacity and expertise in relation to cryptocurrency and blockchain technology. It has expanded its headcount; however, its calendar 2018 performance was slightly lower than anticipated, which was largely due to investments in expanding headcount and improving systems. Bank Frick continues to work closely with IPG regarding our acquiring, processing and cryptocurrency storage solution for crypto-asset investors and exchanges.initiatives. India
On April 19, 2018, MobiKwik launchedZappGroup – Our new Africa-focused investment, ZappGroup made significant strides in its virtual MobiKwik Visa Exclusive card utilizing our mobile virtual card, or MVC technology. Assecond quarter of May 1, 2018 over 10,000 MobiKwik usersexistence. During Q2 2019, ZappGroup had signed up the largest bank in Ghana and went live with a beta product. During the third quarter of fiscal 2019, ZappGroup progressed live testing and has also signed up two of the three largest mobile operators in Ghana. ZappGroup has also integrated with the largest merchant network, (allowing it to reach many more merchants) and is expecting to achieve commercial launch in the first quarter of fiscal 2020. ZappGroup also commenced activities to sign customer contracts in Nigeria and is working closely with us and OneFi.
OneFi – Given the success of it digital lending product, Pay-Later, in the third quarter of fiscal 2019, OneFi has rebranded as Carbon, expanding its offering as a full-fledged digital financial services platform that offers bill payments, fund transfers and savings, in addition to loans. OneFi is currently disbursing approximately 50,000 new loans per month. India – Our virtual card project with MobiKwik has continued to demonstrate steady growth given the constraints applied by our current issuing bank partner. However, as a result of new regulatory guidelines, MobiKwik has applied for MVCdirect membership with Visa and transaction volumeonce finalized, is expected to allow MobiKwik to expand issuances to its millions of customers. MobiKwik has already exceeded INR 17.0 million ($0.3 million, translated at exchange rates applicable asperformed well in advance of expectations, primarily due to its successful transition to being a digital financial services provider. During the year ended March 31, 2018).2019, MobiKwik has more than doubled its revenue and halved its loss, keeping its momentum to reach breakeven in its current fiscal year. Digital financial services now account for approximately 25% of MobiKwik’s total monthly revenue compared to zero during the previous fiscal year. 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. We have identified the following critical accounting policies that are described in more detail in our Annual Report on Form 10-K10-K/A for the year ended June 30, 2017:2018: | • | - Business combinations and
the recoverability of goodwill;
| | • | Intangible assets acquired through acquisitions; | | • | Deferred taxation; | | • | Stock-based compensation; and | | • | Accounts receivable and allowance for doubtful accounts receivable. |
In addition, we identified the following policy with respect to the valuationrecoverability of goodwill;
Intangible assets acquired through acquisitions;Valuation of investment in Cell C;Deferred taxation;Stock-based compensation; and impairment of marketable securities as a new critical accounting policy.Valuation
Accounts receivable and impairment of marketable securitiesallowance for doubtful accounts receivable.Our investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of available-for-sale securities are recognized in accumulated other comprehensive income, net of tax, in our condensed consolidated balance sheet. Changes in the fair value of available-for-sale securities impact our reported net income only when such securities are sold or an other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities will be calculated with reference to its original cost.
We regularly review the carrying value of our available-for-sale securities to determine whether it is other-than-temporarily impaired, which would require us to record an impairment charge in the period in which such determination is made. In making this determination, we consider, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and our intent to sell, or whether we will be more likely than not be required to sell, the security before recovery of its amortized cost basis. Our assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security, which would have an adverse impact on our financial condition and operating results.
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Recent accounting pronouncements adopted Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements adopted, including the dates of adoption and the effects on our unaudited condensed consolidated financial statements. Recent accounting pronouncements not yet adopted as of March 31, 20182019 Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of March 31, 2018,2019, including the expected dates of adoption and effects on our financial condition, results of operations and cash flows. 47
Currency Exchange Rate Information Actual exchange rates The actual exchange rates for and at the end of the periods presented were as follows: | Table 1 | | Three months ended | | | Nine months ended | | | Year ended | | | Three months ended | | | Nine months ended | | | Year ended | | | | | March 31, | | | March 31, | | | June 30, | | | March 31, | | | March 31, | | | June 30, | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2017 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2018 | | | ZAR : $ average exchange rate | | 11.9614 | | | 13.2272 | | | 12.9291 | | | 13.7526 | | | 13.6147 | | | 14.0207 | | | 11.9614 | | | 14.1319 | | | 12.9291 | | | 12.8557 | | | Highest ZAR : $ rate during period | | 12.4308 | | | 13.7630 | | | 14.4645 | | | 14.8114 | | | 14.8114 | | | 14.6337 | | | 12.4308 | | | 15.4335 | | | 14.4645 | | | 14.4645 | | | Lowest ZAR : $ rate during period | | 11.5526 | | | 12.4379 | | | 11.5526 | | | 12.4379 | | | 12.4379 | | | 13.3064 | | | 11.5526 | | | 13.1528 | | | 11.5526 | | | 11.5526 | | | Rate at end of period | | 11.8255 | | | 13.4124 | | | 11.8255 | | | 13.4124 | | | 13.0535 | | | 14.4789 | | | 11.8255 | | | 14.4789 | | | 11.8255 | | | 13.7255 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | KRW : $ average exchange rate | | 1,072 | | | 1,154 | | | 1,104 | | | 1,144 | | | 1,141 | | | 1,125 | | | 1,072 | | | 1,125 | | | 1,104 | | | 1,098 | | | Highest KRW : $ rate during period | | 1,091 | | | 1,207 | | | 1,156 | | | 1,210 | | | 1,210 | | | 1,137 | | | 1,091 | | | 1,141 | | | 1,156 | | | 1,156 | | | Lowest KRW : $ rate during period | | 1,059 | | | 1,111 | | | 1,059 | | | 1,092 | | | 1,092 | | | 1,112 | | | 1,059 | | | 1,108 | | | 1,059 | | | 1,056 | | | Rate at end of period | | 1,061 | | | 1,118 | | | 1,061 | | | 1,118 | | | 1,144 | | | 1,137 | | | 1,061 | | | 1,137 | | | 1,061 | | | 1,114 | |
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48
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 nine months ended March 31, 20182019 and 2017,2018, vary slightly from the averages shown in the table above. The translation rates we use in presenting our results of operations are the rates shown in the following table: | Table 2 | | Three months ended | | | Nine months ended | | | Year ended | | | Three months ended | | | Nine months ended | | | Year ended | | | | March 31, | | | March 31, | | | June 30, | | | March 31, | | | March 31, | | | June 30, | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2017 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2018 | | | Income and expense items: $1 = ZAR . | | 11.9479 | | | 13.2226 | | | 12.8934 | | | 13.7681 | | | 13.6182 | | | | Income and expense items: $1 = ZAR. | | | 14.1703 | | | 11.9479 | | | 14.2665 | | | 12.8934 | | | 12.6951 | | | Income and expense items: $1 = KRW | | 1,067 | | | 1,160 | | | 1,099 | | | 1,155 | | | 1,146 | | | 1,131 | | | 1,067 | | | 1,124 | | | 1,099 | | | 1,095 | | | | | | | | | | | | | | | | | | | | | Balance sheet items: $1 = ZAR | | 11.8255 | | | 13.4124 | | | 11.8255 | | | 13.4124 | | | 13.0535 | | | 14.4789 | | | 11.8255 | | | 14.4789 | | | 11.8255 | | | 13.7255 | | | Balance sheet items: $1 = KRW | | 1,061 | | | 1,118 | | | 1,061 | | | 1,118 | | | 1,144 | | | 1,137 | | | 1,061 | | | 1,137 | | | 1,061 | | | 1,114 | |
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 profitsresults 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 DNI was accounted for using the equity method from August 1, 2017, until June 30, 2018, includes the resultsdate upon which we obtained control of Pros SoftwareDNI through the acquisition of an additional voting and Masterpayment Financial Services (formerly known as C4U Malta)economic interest. Accordingly, the three and nine months ended March 31, 2019, included DNI for the entire period and excludes XeoHealth from November 1, 2017 as a resultconsolidated subsidiary. DNI was included as an equity-accounted investment for the entire third quarter of fiscal 2018 and for eight of the salenine months ended March 31, 2018. Except for the loss recognized on disposal of DNI, the business. Fiscal 2017 includesdeconsolidation of DNI on March 31, 2019, did not have an impact on the results of Pros Software from October 1, 2016,analysis presented below for the three and Masterpayment Financial Services from November 1, 2016.nine months ended March 31, 2019.
Our operating segment revenue presented in “—"—Results of operations by operating segment”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 1618 to those statements. 3649
We analyze our business and operations in terms of three inter-related but independent operating segments: (1) South African transaction processing, (2) International transaction processing and (3) Financial inclusion and applied technologies. In addition, corporate and corporate office activities that are impracticable to ascribe directly to any of the other operating segments, as well as any inter-segment eliminations, are included in corporate/eliminations. Third quarter of fiscal 20182019 compared to third quarter of fiscal 20172018 The following factors had a significant influence on our results of operations during the third quarter of fiscal 20182019 as compared with the same period in the prior year: | • | Growth in insurance and lending businesses:Continuing volume growth and operating efficiencies in our insurance and lending businesses during the third quarter of fiscal 2018, resulted in an improved contribution to our financial inclusion revenue. However, operating income and operating margin during the third quarter of fiscal 2018 were adversely impacted by additional costs incurred to expand the availability of our offering;
| | • | Ongoing contributions from EasyPay Everywhere:EPE revenue and operating income growth was driven primarily by ongoing EPE adoption as we further expanded our customer base utilizing our ATM infrastructure;
| | • | Higher equity-accounted earnings related to DNI and Bank Frick:The acquisition of 49% of DNI and 35% of Bank Frick positively impacted our reported results by approximately $4.4 million, before amortization of intangible assets, net of deferred taxes;
| | • | Favorable impact from the weakening of the U.S. dollar against South African Rand:The U.S. dollar depreciated by 10% against the ZAR and 8% against the KRW during the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017, which positively impacted our reported results;
| | • | Non-cash impairment loss related primarily to Masterpayment intangible assets:We recorded an impairment loss of $19.9 million related to Masterpayment and Masterpayment Financial Services goodwill;
| | • | Higher revenue from Masterpayment and severance payments:Masterpayment contributed higher revenues as a result of an increase in processing activities, particularly related to its crypto-currency processing launched in December 2017. However, we mutually agreed with two of Masterpayment’s senior managers that with effect from the end of March 2018, the managers terminated their employment with Masterpayment and we incurred severance costs related to this separation;
| | • | Indirect taxes refund in Korea:We received a refund of indirect taxes of approximately $2.5 million during the third quarter of fiscal 2018 which positively impacted our reported results;
| | • | Regulatory changes in South Korea pertaining to fees on card transactions:The impact of changes to regulations governing the fees that may be charged on card transactions continues to adversely impact our operating income in South Korea as all parties in the payment process adapt to the new laws and renegotiate their respective positions in the marketplace;
| | • | Lower net interest income resulting from strategic investments:Interest income was $1.8 million lower as a result of cash utilized to purchase non-controlling stakes in Cell C, DNI and Bank Frick, while interest expense increased due to the South African lending facility we obtained in August 2017 to partially fund our investments; and
| | • | Lower prepaid sales and ad hoc terminal sales:The number of transacting users purchasing prepaid products through our mobile channel decreased due to security features introduced in fiscal 2017.
|
- Decline in revenue:Our revenues declined 37% in ZAR primarily due to the expiration of our SASSA contract, significant decline in EPE account numbers driven by SASSA’s auto-migration of accounts to SAPO, and a reduction in EPE-related financial and value-added services and transaction fees due to a smaller customer base, but partially offset by the inclusion of DNI;
- Increase in operating losses:Lower revenue, coupled with a high-fixed cost infrastructure, resulted in an operating loss. During the third quarter of fiscal 2019, we commenced with a restructuring of our South African operations to bring our cost structure in-line with our current customer base, and expect to reach break-even on a cash basis by the end of the fourth quarter of fiscal 2019. We incurred $4.5 million in retrenchment costs during the third quarter of 2019;
- Non-cash losses, impairments and fair-value adjustments:We incurred a $5.1 million non-cash loss on disposal of DNI, an impairment loss of $5.3 million related to DNI intangibles, a fair value adjustment loss of $26.3 million for Cell C and a $2.6 million impairment of our Cedar Cellular note; and
- Adverse foreign exchange movements:The U.S. dollar appreciated 19% against the ZAR and 6% against the KRW during the third quarter of fiscal 2019, which adversely impacted our reported results.
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Consolidated overall results of operations This discussion is based on the amounts prepared in accordance with U.S. GAAP. The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR: | | | In U.S. Dollars | | | Table 3 | | (U.S. GAAP) | | | | | Three months ended March 31, | | | | | 2018 | | | 2017 | | | $ % | | | | | $’000 | | | $ ’000 | | | change | | | Revenue | | 162,721 | | | 147,944 | | | 10% | | | Cost of goods sold, IT processing, servicing and support | | 77,860 | | | 70,912 | | | 10% | | | Selling, general and administration | | 48,091 | | | 42,195 | | | 14% | | | Depreciation and amortization | | 9,341 | | | 10,290 | | | (9% | ) | | Impairment loss | | 19,865 | | | - | | | | | | Operating income | | 7,564 | | | 24,547 | | | (69% | ) | | Interest income | | 5,154 | | | 5,124 | | | 1% | | | Interest expense | | 2,426 | | | 467 | | | 419% | | | Income before income tax expense | | 10,292 | | | 29,204 | | | (65% | ) | | Income tax expense | | 10,941 | | | 10,233 | | | 7% | | | Net (loss) income before earnings from equity-accounted investments | | (649 | ) | | 18,971 | | | (103% | ) | | Earnings from equity-accounted investments | | 3,960 | | | 45 | | | | | | Net income | | 3,311 | | | 19,016 | | | (83% | ) | | Less net income attributable to non-controlling interest | | 302 | | | 624 | | | (52% | ) | | Net income attributable to us | | 3,009 | | | 18,392 | | | (84% | ) |
| | | In U.S. Dollars | | | Table 3 | | (U.S. GAAP) | | | | | Three months ended March 31, | | | | | 2019(A) | | | | 2018 | | | | | | | | | | | | As | | | | | | | | | | | | restated(A)(B) | | | $ % | | | | | $ ’000 | | | | $ ’000 | | | change | | | Revenue | | 86,484 | | | | 162,721 | | | (47% | ) | | Cost of goods sold, IT processing, servicing and support | | 50,179 | | | | 77,860 | | | (36% | ) | | Selling, general and administration | | 42,802 | | | | 48,091 | | | (11% | ) | | Depreciation and amortization | | 9,881 | | | | 9,341 | | | 6% | | | Impairment loss | | 5,305 | | | | 19,865 | | | (73% | ) | | Operating (loss) income | | (21,683 | ) | | | 7,564 | | | nm | | | Change in fair value of equity securities | | (26,263 | ) | | | 37,843 | | | nm | | | Loss on disposal of DNI | | 5,140 | | | | - | | | nm | | | Interest income, net of impairment loss | | (959 | ) | | | 5,154 | | | nm | | | Interest expense | | 3,493 | | | | 2,426 | | | 44% | | | (Loss) income before income tax (benefit) expense | | (57,538 | ) | | | 48,135 | | | nm | | | Income tax (benefit) expense | | (2,490 | ) | | | 19,418 | | | nm | | | Net (loss) income before (loss) earnings from equity-accounted investments | | (55,048 | ) | | | 28,717 | | | nm | | | (Loss) earnings from equity-accounted investments | | (464 | ) | | | 3,960 | | | nm | | | Net (loss) income | | (55,512 | ) | | | 32,677 | | | nm | | | Continuing | | (50,784 | ) | | | 29,386 | | | nm | | | Discontinued | | (4,728 | ) | | | 3,291 | | | nm | | | (Add) Less net (loss) income attributable to non-controlling interest | | (728 | ) | | | 302 | | | nm | | | Continuing | | (485 | ) | | | 302 | | | nm | | | Discontinued | | (243 | ) | | | - | | | nm | | | Net (loss) income attributable to us | | (54,784 | ) | | | 32,375 | | | nm | | | Continuing | | (50,299 | ) | | | 29,084 | | | nm | | | Discontinued | | (4,485 | ) | | | 3,291 | | | nm | |
(A) Refer to Note 2 to the unaudited condensed consolidated financial statements for discontinued operations disclosures.
| | | In South African Rand | | | Table 4 | | (U.S. GAAP) | | | | | Three months ended March 31, | | | | | 2018 | | | 2017 | | | | | | | | ZAR | | | ZAR | | | ZAR % | | | | | ’000 | | | ’000 | | | change | | | Revenue | | 1,944,174 | | | 1,956,205 | | | (1% | ) | | Cost of goods sold, IT processing, servicing and support | | 930,263 | | | 937,642 | | | (1% | ) | | Selling, general and administration | | 574,586 | | | 557,928 | | | 3% | | | Depreciation and amortization | | 111,606 | | | 136,060 | | | (18% | ) | | Impairment loss | | 237,345 | | | - | | | nm | | | Operating income | | 90,374 | | | 324,575 | | | (72% | ) | | Interest income | | 61,579 | | | 67,753 | | | (9% | ) | | Interest expense | | 28,986 | | | 6,175 | | | 369% | | | Income before income tax expense | | 122,967 | | | 386,153 | | | (68% | ) | | Income tax expense | | 130,722 | | | 135,307 | | | (3% | ) | | Net (loss) income before earnings from equity-accounted investments | | (7,755 | ) | | 250,846 | | | (103% | ) | | Earnings from equity-accounted investments | | 47,314 | | | 595 | | | nm | | | Net income | | 39,559 | | | 251,441 | | | (84% | ) | | Less net income attributable to non-controlling interest | | 3,608 | | | 8,251 | | | (56% | ) | | Net income attributable to us | | 35,951 | | | 243,190 | | | (85% | ) |
In ZAR,50
| | | In South African Rand | | | Table 4 | | (U.S. GAAP) | | | | | Three months ended March 31, | | | | | 2019(A) | | | | 2018 | | | | | | | | | | | | As | | | | | | | | | | | | restated(A)(B) | | | ZAR % | | | | | ZAR ’000 | | | | ZAR ’000 | | | change | | | Revenue | | 1,225,669 | | | | 1,944,174 | | | (37% | ) | | Cost of goods sold, IT processing, servicing and support | | 711,146 | | | | 930,263 | | | (24% | ) | | Selling, general and administration | | 606,599 | | | | 574,586 | | | 6% | | | Depreciation and amortization | | 140,036 | | | | 111,606 | | | 25% | | | Impairment loss | | 75,184 | | | | 237,345 | | | (68% | ) | | Operating (loss) income | | (307,296 | ) | | | 90,374 | | | nm | | | Change in fair value of equity securities | | (372,204 | ) | | | 452,144 | | | nm | | | Loss on disposal of DNI | | 72,845 | | | | - | | | nm | | | Interest income | | (13,591 | ) | | | 61,579 | | | nm | | | Interest expense | | 49,503 | | | | 28,986 | | | 71% | | | (Loss) income before income tax expense | | (815,439 | ) | | | 575,111 | | | nm | | | Income tax expense | | (35,289 | ) | | | 232,004 | | | nm | | | Net (loss) income before (loss) earnings from equity-accounted | | | | | | | | | | | | investments | | (780,150 | ) | | | 343,107 | | | nm | | | (Loss) earnings from equity-accounted investments | | (6,576 | ) | | | 47,314 | | | nm | | | Net (loss) income | | (786,726 | ) | | | 390,421 | | | nm | | | Continuing | | (719,720 | ) | | | 351,100 | | | nm | | | Discontinued | | (67,006 | ) | | | 39,321 | | | nm | | | (Add) Less net (loss) income attributable to non-controlling interest | | (10,317 | ) | | | 3,608 | | | nm | | | Continuing | | (6,873 | ) | | | 3,608 | | | nm | | | Discontinued | | (3,444 | ) | | | - | | | nm | | | Net (loss) income attributable to us | | (776,409 | ) | | | 386,813 | | | nm | | | Continuing | | (712,847 | ) | | | 347,492 | | | nm | | | Discontinued | | (63,562 | ) | | | 39,321 | | | nm | |
(A) Refer to Note 2 to the unaudited condensed consolidated financial statements for discontinued operations disclosures.
(B) Refer to Notes 1 to the unaudited condensed consolidated financial statements for additional information regarding the restatement. The decrease in revenue was primarily due to lower prepaid airtime sales, which wasthe expiration of our SASSA contract, elimination of fees earned on SASSA-Grindrod accounts and the effect of fewer EPE accounts due to the auto-migration and its knock-on effect on related fees, financial and value-added services, partially offset by an improved contribution from Masterpayment, more fees generated from our EPE and ATM offerings, improved insurance activities, higher KSNET revenue at a more favorable exchange rate and a modest increase in the numberinclusion of SASSA biometrically-enabled UEPS/EMV grant recipients paid.DNI. In ZAR, the The decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer SASSA Grindrod-account grant recipients utilizing the South African National Payment System which resulted in lower transactions costs incurred by us and fewer prepaid airtime sales, which was partially offset by increases in goodsthe inclusion of DNI. Our third quarter of fiscal 2019 expenses also included certain committed fixed and services purchased from third parties, lower profitability under CPS’ contract with SASSA, higher expenses incurred duevariable costs (including security, vehicle-related expenditures, banking fees and other transaction costs) that relate to increased usagethe maintenance and expansion of the South African National Payment System by beneficiaries and expenses incurred to operate our EPE and ATM offerings.financial inclusion initiatives.
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The In ZAR, the increase in selling, general and administration expense was primarily due to the impactinclusion of October 2017 annual salary increases for our South African employees,DNI, payment of $4.5 million (ZAR 63.8 million) of retrenchment packages and an increase in our allowance for doubtful finance loans receivable resulting from a commensurate increase in our lending book incosts at the last lending cycleinternational payments group as part of calendar 2017, as well as increases in goodsits restructuring and services purchased from third parties. These increases werere-establishment initiatives, which was partially offset by fewer agent incentivethe elimination of some operating costs paid in Korea duerelated to weaker trading conditions inour expired SASSA contract. Our third quarter of fiscal 2018, lower executive remuneration2019 expense also includes certain committed fixed and lower transaction-related expenditures invariable costs (including premises and staff costs) that relate to the prior year.maintenance and expansion of our financial inclusion initiatives.
Depreciation and amortization decreasedincreased primarily due to the amortization of acquired intangible assets related to the DNI acquisition, partially offset by an increase in the number of intangible assets that are fully amortized and tangible assets that arebecame fully depreciated. 51
During the third quarter of fiscal 2019, we reviewed certain customer relationships identified as part of our acquisition of DNI for impairment because Cell C recently entered into a roaming arrangement with another South African mobile telecommunications network provider which will extend Cell C’s network coverage and this arrangement impacted the identified customer relationship recognized. As a consequence of the review, we recorded an impairment loss of $5.3 million related to a portion of the customer relationship during the third quarter of fiscal 2019. Refer to Note 9 of our unaudited condensed consolidated financial statements for additional information regarding the impairment loss. 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 (loss) income margin for the third quarter of fiscal 2019 and 2018 was (25.1%) and 2017 was 5% and 17%4.6%, respectively. Operating (loss) income margin excluding the $19.9 million impairment losslosses incurred during the respective periods would have been 17% in fiscal 2018.(18.9%) and 16.9%, respectively. We discuss the components of operating income margin under “—"—Results of operations by operating segment.”" The decrease was primarily attributablechange in fair value of equity securities represents a non-cash fair value adjustment (loss) gain of $(26.3 million) related to Cell C and caused by reduced EBITDA levels in Cell C. Refer to Note 7 of our unaudited condensed consolidated financial statements for the methodology and inputs used in the fair value calculation for the third quarter of fiscal 2019. We recognized a non-cash loss of $5.1 million related to the sale of DNI on March 31, 2019. Excluding the impact of the impairment loss, higher cost of goods sold, IT processing, servicing and support relative to the reduction$2.6 million discussed in revenue. In ZAR,Note 8 of our unaudited condensed consolidated financial statements, interest on surplus cash decreased to $1.6 million (ZAR 23.3 million) from $5.2 million (ZAR 61.6 million) from $5.1 million (ZAR 67.8 million), due primarily to the lower average daily ZAR cash balances partially offset by interest earned onresulting from our significant investments over the loan to Finbondlast 21 months and the listed Cedar Cellular note.cash used to fund the operating losses of the last quarter in the South African operations.
Interest expense increased to $3.5 million (ZAR 49.5 million) from $2.4 million (ZAR 29.0 million) from $0.5, due to increased borrowings which we obtained to fund our ATMs, which was partially offset by a reduction in our long-term South African debt. Fiscal 2019 tax benefit was $2.5 million (ZAR 6.235.3 million), due primarily compared to a tax expense of $19.4 million (ZAR 232.0 million) in fiscal 2018. Our effective tax rate was adversely impacted by the valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by our South African businesses, the non-deductible impairment losses, the DNI disposal loss, and non-deductible expenses, including transaction-related expenditure and non-deductible interest on our South African long-term debt facility, which was partially offset by tax expense recorded by our profitable businesses in South Africa and South Korea. The deferred tax impact of the change in the fair value of our investment in Cell C also impacted the effective rate for fiscal 2019, as this amount is recorded at a lower rate (at a capital gains rate) than the South African facility we obtained to partially fundstatutory rate. The March 31, 2019, carrying value of our investmentsinvestment in Cell C is less than its initial cost and DNItherefore it has a capital gains benefit for tax purposes, however, we do not expect to generate any significant capital gains in the foreseeable future and interest on the short-term financing obtainedhave provided a valuation allowance of $3.6 million related to finance our workingthis capital requirements, partially offset by the absence of interest expense on our South Korean debt as a result of its full repayment in October 2017. Fiscal 2018gains benefit deferred tax expense was $10.9 million (ZAR 130.7 million) compared to $10.2 million (ZAR 135.3 million) in fiscal 2017.asset. Our effective tax rate for fiscal 2018, was 106.3%40.3% and was higher than the South African statutory rate as a result of the deferred tax impact of the increase in the fair value of our investment in Cell C, the impairment loss, non-deductible expenses (including transaction-related expenditure and non-deductible interest on our South African long-term facility) and.
DNI was consolidated into our results for the impactthird quarter of fiscal 2019. The consolidation of DNI has adversely impacted the changes in U.S. federal statutory tax law. Our effective tax rate for fiscal 2017, was 35.0% and was higher than the South African statutory rate as a resultcomparability of non-deductible expenses. Earningsour (loss) earnings from equity-accounted investments increased primarily due toduring the inclusionthird quarter of fiscal 2019 because it was accounted for using the equity method during the third quarter of fiscal 2018. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our share of the earnings of DNIfirst quarter and Bank Frick.its annual results during our fourth quarter. The table below presents the relative (loss) earnings (loss) from our equity accounted investments:
| Table 5 | | Three months ended March 31, | | | Three months ended March 31, | | | | | 2018 | | | 2017 | | | $ % | | | 2019 | | 2018 | | | $ % | | | | | $ ’000 | | | $ ’000 | | | change | | | $ ’000 | | | $ ’000 | | | change | | | Bank Frick | | | (90 | ) | | | 653 | | | nm | | | Share of net income | | | 52 | | | | 747 | | | (93% | ) | | Amortization of intangible assets, net of deferred tax | | | (142 | ) | | | (94 | ) | | 51% | | | DNI | | 3,291 | | | - | | | nm | | | - | | | | 3,291 | | | nm | | | Share of net income | | 3,628 | | | - | | | nm | | | - | | | | 3,628 | | | nm | | | Amortization of intangible assets, net of deferred tax | | (337) | | | - | | | nm | | | - | | | | (337 | ) | | nm | | | Bank Frick | | 653 | | | - | | | nm | | | | Share of net income | | 747 | | | - | | | nm | | | | Amortization of intangible assets, net of deferred tax | | (94) | | | - | | | nm | | | | Other | | 16 | | | 45 | | | (64% | ) | | (374 | ) | | | 16 | | | nm | | | Earnings from equity accounted investments | | 3,960 | | | 45 | | | nm | | | | (Loss) earnings from equity accounted investments | | | (464 | ) | | | 3,960 | | | Nm | |
3952
Results of operations by operating segment The composition of revenue and the contributions of our business activities to operating income are illustrated below: | Table 6 | | In U.S. Dollars (U.S. GAAP) | | In U.S. Dollars (U.S. GAAP) | | | | | Three months ended March 31, | | Three months ended March 31, | | | | 2018 | | | % of | | | 2017 | | | % of | | | % | | | 2019 | | % of | | 2018 | | % of | | % | | | Operating Segment | | $ ’000 | | | total | | | $ ’000 | | | total | | | change | | | $ ’000 | | | total | | | $ ’000 | | | total | | | change | | | Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | South African transaction processing | | 73,508 | | | 45% | | | 63,967 | | | 43% | | | 15% | | | 17,374 | | 20% | | 73,508 | | 45% | | (76% | ) | | International transaction processing | | 46,240 | | | 28% | | | 41,514 | | | 28% | | | 11% | | | 34,358 | | 40% | | 46,240 | | 28% | | (26% | ) | | Financial inclusion and applied technologies | | 59,574 | | | 37% | | | 56,881 | | | 38% | | | 5% | | | 36,650 | | | | 42% | | | | 59,574 | | | | 37% | | | (38% | ) | | Continuing | | | 18,808 | | | | 21% | | | | 59,574 | | | | 37% | | | (68% | ) | | Discontinued | | | 17,842 | | | | 21% | | | | - | | | | - | | | nm | | | Subtotal: Operating segments | | 179,322 | | | 110% | | | 162,362 | | | 109% | | | 10% | | | 88,382 | | 102% | | 179,322 | | 110% | | (51% | ) | | Intersegment eliminations | | (16,601 | ) | | (10% | ) | | (14,418 | ) | | (9% | ) | | 15% | | | (1,898 | ) | | | (2% | ) | | | (16,601 | ) | | | (10% | ) | | (89% | ) | | Consolidated revenue | | 162,721 | | | 100% | | | 147,944 | | | 100% | | | 10% | | | 86,484 | | | | 100% | | | | 162,721 | | | | 100% | | | (47% | ) | | Operating income (loss): | | | | | | | | | | | | | | | | | | Continuing | | | 68,642 | | | | 79% | | | | 162,721 | | | | 100% | | | (58% | ) | | Discontinued | | | 17,842 | | | | 21% | | | | - | | | | - | | | nm | | | Operating (loss) income: | | | | | | | | | | | | | | South African transaction processing | | 12,719 | | | 168% | | | 15,531 | | | 63% | | | (18% | ) | | (12,954 | ) | | 60% | | 12,719 | | 168% | | nm | | | International transaction processing | | (14,892 | ) | | (197% | ) | | 1,968 | | | 8% | | | (857% | ) | | 1,909 | | (9% | ) | | (14,892 | ) | | (197% | ) | | nm | | | Financial inclusion and applied technologies | | 14,968 | | | 198% | | | 14,064 | | | 57% | | | 6% | | | 3,227 | | | | (15% | ) | | | 14,968 | | | | 198% | | | (78% | ) | | Continuing | | | (4,911 | ) | | | 23% | | | | 14,968 | | | | 198% | | | nm | | | Discontinued | | | 8,138 | | | | (38% | ) | | | - | | | | - | | | nm | | | Subtotal: Operating segments | | 12,795 | | | 169% | | | 31,563 | | | 128% | | | (59% | ) | | (7,818 | ) | | 36% | | 12,795 | | 169% | | nm | | | Corporate/Eliminations | | (5,231 | ) | | (69% | ) | | (7,016 | ) | | (28% | ) | | (25% | ) | | (13,865 | ) | | | 64% | | | | (5,231 | ) | | | (69% | ) | | 165% | | | Consolidated operating income | | 7,564 | | | 100% | | | 24,547 | | | 100% | | | (69% | ) | | | Continuing | | | (6,399 | ) | | | 30% | | | | (5,231 | ) | | | (69% | ) | | 22% | | | Discontinued | | | (7,466 | ) | | | 34% | | | | - | | | | - | | | nm | | | Consolidated operating (loss)income | | | (21,683 | ) | | | 100% | | | | 7,564 | | | | 100% | | | nm | | | Continuing | | | (22,355 | ) | | | 103% | | | | 7,564 | | | | 100% | | | nm | | | Discontinued | | | 672 | | | | (3% | ) | | | - | | | | - | | | nm | |
53
| Table 7 | | In South African Rand (U.S. GAAP) | | | In South African Rand (U.S. GAAP) | | | | | Three months ended March 31, | | | Three months ended March 31, | | | | | 2018 | | | | | | 2017 | | | | | | | | | 2019 | | | | 2018 | | | | | | | | | ZAR | | | % of | | | ZAR | | | % of | | | % | | | ZAR | | % of | | ZAR | | % of | | % | | | Operating Segment | | ’000 | | | total | | | ’000 | | | total | | | change | | | ’000 | | | total | | | ’000 | | | total | | | change | | | Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | South African transaction processing | | 878,266 | | | 45% | | | 845,810 | | | 43% | | | 4% | | | 246,228 | | 20% | | 878,266 | | 45% | | (72% | ) | | International transaction processing | | 552,471 | | | 28% | | | 548,923 | | | 28% | | | 1% | | | 486,928 | | 40% | | 552,471 | | 28% | | (12% | ) | | Financial inclusion and applied technologies | | 711,784 | | | 37% | | | 752,115 | | | 38% | | | (5% | ) | | 519,411 | | | | 42% | | | | 711,784 | | | | 37% | | | (27% | ) | | Continuing | | | 266,551 | | | | 21% | | | | 711,784 | | | | 37% | | | (63% | ) | | Discontinued | | | 252,860 | | | | 21% | | | | - | | | | - | | | nm | | | Subtotal: Operating segments | | 2,142,521 | | | 110% | | | 2,146,848 | | | 109% | | | - | | | 1,252,567 | | 102% | | 2,142,521 | | 110% | | (42% | ) | | Intersegment eliminations | | (198,347 | ) | | (10% | ) | | (190,643 | ) | | (9% | ) | | 4% | | | (26,898 | ) | | | (2% | ) | | | (198,347 | ) | | | (10% | ) | | (86% | ) | | Consolidated revenue | | 1,944,174 | | | 100% | | | 1,956,205 | | | 100% | | | (1% | ) | | 1,225,669 | | | | 100% | | | | 1,944,174 | | | | 100% | | | (37% | ) | | Operating income (loss): | | | | | | | | | | | | | | | | | | Continuing | | | 972,809 | | | | 79% | | | | 1,944,174 | | | | 100% | | | (50% | ) | | Discontinued | | | 252,860 | | | | 21% | | | | - | | | | - | | | nm | | | Operating (loss) income: | | | | | | | | | | | | | | South African transaction processing | | 151,965 | | | 168% | | | 205,360 | | | 63% | | | (26% | ) | | (183,587 | ) | | 60% | | 151,965 | | 168% | | nm | | | International transaction processing | | (177,928 | ) | | (197% | ) | | 26,022 | | | 8% | | | (784% | ) | | 27,055 | | (9% | ) | | (177,928 | ) | | (197% | ) | | nm | | | Financial inclusion and applied technologies | | 178,836 | | | 198% | | | 185,963 | | | 57% | | | (4% | ) | | 45,734 | | | | (15% | ) | | | 178,836 | | | | 198% | | | (74% | ) | | Continuing | | | (69,599 | ) | | | 23% | | | | 178,836 | | | | 198% | | | nm | | | Discontinued | | | 115,333 | | | | (38% | ) | | | - | | | | - | | | nm | | | Subtotal: Operating segments | | 152,873 | | | 169% | | | 417,345 | | | 128% | | | (63% | ) | | (110,798 | ) | | 36% | | 152,873 | | 169% | | nm | | | Corporate/Eliminations | | (62,499 | ) | | (69% | ) | | (92,770 | ) | | (28% | ) | | (33% | ) | | (196,498 | ) | | | 64% | | | | (62,499 | ) | | | (69% | ) | | 214% | | | Consolidated operating income | | 90,374 | | | 100% | | | 324,575 | | | 100% | | | (72% | ) | | | Continuing | | | (90,688 | ) | | | 30% | | | | (62,499 | ) | | | (69% | ) | | 45% | | | Discontinued | | | (105,810 | ) | | | 34% | | | | - | | | | - | | | nm | | | Consolidated operating (loss)income | | | (307,296 | ) | | | 100% | | | | 90,374 | | | | 100% | | | nm | | | Continuing | | | (316,819 | ) | | | 103% | | | | 90,374 | | | | 100% | | | nm | | | Discontinued | | | 9,523 | | | | (3% | ) | | | - | | | | - | | | nm | |
South African transaction processing The increasedecrease in segment revenue and operating income was primarily due to the continued growthsubstantial decrease in the number of EPESASSA grant recipients paid under our SASSA contract as the contract ended at the end of the first quarter of fiscal 2019. Our revenue and operating income was also adversely impacted by the significant reduction in the number of SASSA grant recipients with SASSA-branded Grindrod cards linked to Grindrod bank accounts as well as a lower number of EPE accounts. These decreases in revenue and operating income were partially offset by higher transaction revenue as a result of increased usage of our ATMs. Our South African transaction processing operating segment activities have been adversely impacted by the loss of EPE customers as a result of the events discussed under "Recent Developments—SASSA contract exit and summary of legal proceedings— Auto-migration of EPE customers to SAPO". Operating income decreased however, primarily due to an increase in inter-segment charges, the impact of annual salary increases granted to our South African employees in October 2017, increases in goods and services purchased from third parties and declining profitability at CPS given the fact that its monthly fee per grant recipient has been fixedfor this operating segment for the last six years.third quarter of fiscal 2019 included retrenchment costs of $3.0 million (ZAR 41.7 million). Our operating (loss) income margin for the third quarter of fiscal 2019 and 2018 was (74.6%) and 2017 was 17% and 24%17.3%, respectively. This is a reflectionExcluding restructuring costs, the operating loss margin for the third quarter of the declining profitability of the CPS operation given the fee per grant recipient has remained fixed over the full term of the SASSA contract to March 31, 2018.fiscal 2019 was (57.5%). International transaction-based activities Segment revenue was higherlower during the third quarter of fiscal 20182019, primarily due to an increasea contraction in IPG transactions processed, specifically meaningfully lower crypto-exchange and China processing activities, particularly related to Masterpayment’s crypto-currency processing launched in December 2017.activity, and modestly lower KSNET revenue as a result of lower transaction values processed. Operating income during the third quarter of fiscal 2018 was adversely impacted by thea $19.9 million impairment loss lower operating income generated in Korea as a result of the impact on us of changes to regulations governing the fees that may be charged on card transactions and severance payments to Masterpayment managers, partially offsetpositively impacted by an ad hoc refund of indirect taxes of $2.5 million in Korea. Excluding the impact of the impairment loss and the ad hoc tax refund, operating income during the third quarter of fiscal 2019 was lower compared to fiscal 2018 due to the decrease in IPG revenues and resulting from these lower revenues, and partially offset by an improved contribution from KSNET, primarily as a result of a lower depreciation expense. 40 IPG continues to work in close collaboration with Bank Frick and our other specialist departments to develop bespoke blockchain-based solutions, including a highly secure but easily accessible crypto-asset storage solution for crypto-asset investors and exchanges and incurred expenses of approximately $0.3 million during the third quarter of fiscal 2019 related to this project.
Operating income (loss) income margin for the third quarter of fiscal 2019 and 2018 was 5.6% and 2017 was (32%(32.2%) and 5%, respectively. Excluding the goodwill impairment loss and the indirect taxesad hoc tax refund, received, segment operating income and margin for fiscal 2018 were $2.4 million and 5%5.2%, respectively. 54
Financial inclusion and applied technologies In ZAR, segment Segment revenue decreased primarily due to fewer prepaid airtime and other value addedvalue-added services sales, lower lending and insurance revenue, and a decrease in inter-segment revenues, partially offset by increased volumes in our insurance and lending businesses, and an increase in inter-segment revenues.the inclusion of DNI. Operating income was also impactedsignificantly lower than third quarter of fiscal 2018, primarily due to lower revenue generation and higher expenses incurred to maintain and expand our financial service infrastructure, partially offset by these factors as well as an increase in the allowancecontribution from DNI. Operating income for doubtful finance loans receivable resulting from a commensurate increase in our lending book.this operating segment for the third quarter of fiscal 2019 included retrenchment costs of $1.6 million (ZAR 22.1 million).
Operating income margin for the Financial inclusion and applied technologies segment was 25%8.8% and 25.1% during each of the third quarter of fiscal 2019 and 2018, and 2017, respectively, andrespectively. Excluding restructuring costs, the operating income margin for the third quarter of fiscal 2019 was impacted by fewer low margin prepaid product sales, improved revenues from our insurance businesses and an increase in inter-segment revenues, offset by annual salary increases granted to our South African employees.13.1%. 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 officersofficer’s insurance premiums; telecommunications expenses; and elimination entries. Our corporate expenses have decreasedincreased primarily due to lowera $5.3 million impairment loss as well as higher acquired intangible asset amortization, non-employee director expenses, transaction-related expenditures and lower executive compensation, which was partially offset by a modest increase in ZAR denominated goods and services purchased from third parties and directors’external service provider fees. Year to date fiscal 20182019 compared to year to date fiscal 20172018 The following factors had a significant influence on our results of operations during the year to date fiscal 20182019 as compared with the same period in the prior year: | • | Growth in insurance businesses:Volume growth and operating efficiencies in our insurance businesses during the year to date fiscal 2018, resulted in an improved contribution to our financial inclusion revenue and operating income. The significant growth in our South African lending book resulted in a substantial increase in the allowance for doubtful finance loans receivable, in accordance with our policy of providing for doubtful finance loans receivable at the time that a loan is originated;
| | • | Ongoing contributions from EasyPay Everywhere:EPE revenue and operating income growth was driven primarily by ongoing EPE adoption as we further expanded our customer base utilizing our ATM infrastructure;
| | • | Higher equity-accounted earnings related to DNI:The acquisition of 49% of DNI and 35% of Bank Frick positively impacted our reported results by approximately $8.1 million, before amortization of intangible assets, net of deferred taxes;
| | • | Favorable impact from the weakening of the U.S. dollar against South African Rand:The U.S. dollar depreciated by 6% against the ZAR and 5% against the KRW during the year to date fiscal 2018 compared with fiscal 2017, which positively impacted our reported results;
| | • | Non-cash impairment loss related primarily to Masterpayment intangible assets:We recorded an impairment loss of $19.9 million related to Masterpayment and Masterpayment Financial Services goodwill;
| | • | Higher revenue from Masterpayment, severance payments and allowance for credit losses:Masterpayment contributed higher revenues as a result of an increase in processing activities, particularly related to its crypto-currency processing launched in December 2017. We mutually agreed with two of Masterpayment’s senior managers that with effect from the end of March 2018, the managers terminated their employment with Masterpayment and we incurred severance costs related to this separation. An allowance for credit losses related to doubtful working capital finance receivables of $7.8 million was created. A valuation allowance has been provided for any potential tax benefit from this event as it is unlikely that this amount would be utilized for taxation purposes;
| | • | Lower net interest income resulting from investments in Cell C, DNI and Bank Frick:Interest income was $4.9 million lower as a result of cash utilized to purchase non-controlling stakes in Cell C, DNI and Bank Frick, while interest expense increased due to the South African lending facility we obtained in August 2017 to partially fund our investments;
| | • | Indirect taxes refund in Korea:We received a refund of indirect taxes of approximately $2.5 million during the year to date fiscal 2018 which positively impacted our reported results;
| | • | Regulatory changes in South Korea pertaining to fees on card transactions:The impact of changes to regulations governing the fees that may be charged on card transactions continues to adversely impact our revenues and operating income in South Korea as all parties in the payment process adapt to the new laws and renegotiate their respective positions in the marketplace; and
| | • | Lower prepaid sales and ad hoc terminal sales:The number of transacting users purchasing prepaid products through our mobile channel decreased due to security features introduced in fiscal 2017. In addition, our results were adversely impacted by fewer ad hoc terminal sales.
|
- Decline in revenue:Our revenues declined 26% in ZAR primarily due to the expiration of our SASSA contract, significant decline in EPE account numbers driven by SASSA’s auto-migration of accounts to SAPO, and a reduction in EPE-related financial and value-added services and transaction fees due to a smaller customer base, but partially offset by the inclusion of DNI;
- Increase in operating losses:Lower revenue, coupled with a high-fixed cost infrastructure and write-downs due to limited recoverability of dues from customers, resulted in an operating loss. During the first half of fiscal 2019, we commenced with a restructuring of our South African operations to bring our cost structure in-line with our current customer base, and expect to reach break-even on a cash basis by the end of the fourth quarter of fiscal 2019. We incurred $5.2 million in retrenchment costs during the fourth quarter of fiscal 2019;
- Non-cash losses, impairments and fair-value adjustments:We incurred a $5.1 million non-cash loss on disposal of DNI, intangible impairment losses of $13.5 million, a fair value adjustment loss of $42.1 million for Cell C and a $5.4 million impairment of our Cedar Cellular note; and
- Adverse foreign exchange movements:The U.S. dollar appreciated 6% against the ZAR during year to date of fiscal 2019, which adversely impacted our reported results.
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Consolidated overall results of operations This discussion is based on the amounts prepared in accordance with U.S. GAAP. The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR: | | | In U.S. Dollars | | | In U.S. Dollars | | | Table 8 | | (U.S. GAAP) | | | (U.S. GAAP) | | | | | | Nine months ended March 31, | | | | | Nine months ended March 31, | | | 2019(A) | | 2018 | | | | | | | 2018 | | | 2017 | | | | | | | | As | | | | | | | $ | | | $ | | | $ % | | | | | restated(A)(B) | | | $ % | | | | | ’000 | | | ’000 | | | change | | | $ ’000 | | | $ ’000 | | | change | | | Revenue | | 463,695 | | | 455,010 | | | 2% | | | 309,518 | | 463,695 | | (33% | ) | | Cost of goods sold, IT processing, servicing and support | | 226,506 | | | 219,210 | | | 3% | | | 173,680 | | 226,506 | | (23% | ) | | Selling, general and administration | | 141,417 | | | 122,366 | | | 16% | | | 155,676 | | 141,417 | | 10% | | | Depreciation and amortization | | 27,030 | | | 31,117 | | | (13% | ) | | 30,528 | | 27,030 | | 13% | | | Impairment loss | | 19,865 | | | - | | | nm | | | 13,496 | | | 19,865 | | (32% | ) | | Operating income | | 48,877 | | | 82,317 | | | (41% | ) | | | Interest income | | 14,903 | | | 14,489 | | | 3% | | | | Operating (loss) income | | | (63,862 | ) | | 48,877 | | nm | | | Change in fair value of equity securities | | | (42,099 | ) | | 37,843 | | nm | | | Loss on disposal of DNI | | | 5,140 | | - | | nm | | | Interest income, net of impairment | | | 586 | | 14,903 | | (96% | ) | | Interest expense | | 6,872 | | | 1,773 | | | 288% | | | 9,030 | | | 6,872 | | 31% | | | Income before income tax expense | | 56,908 | | | 95,033 | | | (40% | ) | | | (Loss) income before income tax expense | | | (119,545 | ) | | 94,751 | | nm | | | Income tax expense | | 31,280 | | | 32,320 | | | (3% | ) | | 1,702 | | | 39,757 | | (96% | ) | | Net income before earnings from equity-accounted investments | | 25,628 | | | 62,713 | | | (59% | ) | | | Earnings from equity-accounted investments | | 7,389 | | | 778 | | | 850% | | | | Net income | | 33,017 | | | 63,491 | | | (48% | ) | | | Net (loss) income before (loss) earnings from equity-accounted investments | | | (121,247 | ) | | 54,994 | | nm | | | (Loss) earnings from equity-accounted investments | | | (338 | ) | | | 7,389 | | nm | | | Net (loss) income | | | (121,585 | ) | | | 62,383 | | | nm | | | Continuing | | | (124,275 | ) | | | 57,181 | | | nm | | | Discontinued | | | 2,690 | | | | 5,202 | | | (48% | ) | | Less net income attributable to non-controlling interest | | 903 | | | 1,826 | | | (51% | ) | | 2,339 | | | | 903 | | | 159% | | | Net income attributable to us | | 32,114 | | | 61,665 | | | (48% | ) | | | Continuing | | | (1,362 | ) | | | 903 | | | nm | | | Discontinued | | | 3,701 | | | | - | | | nm | | | Net (loss) income attributable to us | | | (123,924 | ) | | | 61,480 | | | nm | | | Continuing | | | (122,913 | ) | | | 56,278 | | | nm | | | Discontinued | | | (1,011 | ) | | | 5,202 | | | (119% | ) |
| | | In South African Rand | | | Table 9 | | (U.S. GAAP) | | | | | Nine months ended March 31, | | | | | 2018 | | | 2017 | | | | | | | | ZAR | | | ZAR | | | ZAR % | | | | | ’000 | | | ’000 | | | change | | | Revenue | | 5,978,605 | | | 6,264,623 | | | (5% | ) | | Cost of goods sold, IT processing, servicing and support | | 2,920,432 | | | 3,018,105 | | | (3% | ) | | Selling, general and administration | | 1,823,346 | | | 1,684,748 | | | 8% | | | Depreciation and amortization | | 348,509 | | | 428,422 | | | (19% | ) | | Impairment loss | | 256,127 | | | - | | | nm | | | Operating income | | 630,191 | | | 1,133,348 | | | (44% | ) | | Interest income | | 192,150 | | | 199,486 | | | (4% | ) | | Interest expense | | 88,603 | | | 24,411 | | | 263% | | | Income before income tax expense | | 733,738 | | | 1,308,423 | | | (44% | ) | | Income tax expense | | 403,306 | | | 444,985 | | | (9% | ) | | Net income before earnings from equity-accounted investments | | 330,432 | | | 863,438 | | | (62% | ) | | Earnings from equity-accounted investments | | 95,269 | | | 10,712 | | | 789% | | | Net income | | 425,701 | | | 874,150 | | | (51% | ) | | Less net income attributable to non-controlling interest | | 11,643 | | | 25,141 | | | (54% | ) | | Net income attributable to us | | 414,058 | | | 849,009 | | | (51% | ) |
| (A) | Refer to Note 2 to the unaudited condensed consolidated financial statements for discontinued operations disclosures. | | (B) | Refer to Notes 1 to the unaudited condensed consolidated financial statements for additional information regarding the restatement. |
In ZAR,56
| | | In South African Rand | | | Table 9 | | (U.S. GAAP) | | | | | Nine months ended March 31, | | | | | 2019(A) | | | | 2018 | | | | | | | | | | | | As | | | | | | | | | | | | restated(A)(B) | | | ZAR % | | | | | ZAR ’000 | | | | ZAR ’000 | | | change | | | Revenue | | 4,415,955 | | | | 5,978,605 | | | (26% | ) | | Cost of goods sold, IT processing, servicing and support | | 2,477,927 | | | | 2,920,432 | | | (15% | ) | | Selling, general and administration | | 2,221,060 | | | | 1,823,346 | | | 22% | | | Depreciation and amortization | | 435,549 | | | | 348,509 | | | 25% | | | Impairment loss | | 192,551 | | | | 256,127 | | | (25% | ) | | Operating (loss) income | | (911,132 | ) | | | 630,191 | | | nm | | | Change in fair value of equity securities | | (600,635 | ) | | | 487,925 | | | nm | | | Loss on disposal of DNI | | 73,333 | | | | - | | | nm | | | Interest income, net of impairment | | 8,361 | | | | 192,150 | | | (96% | ) | | Interest expense | | 128,833 | | | | 88,603 | | | 45% | | | (Loss) income before income tax expense | | (1,705,572 | ) | | | 1,221,663 | | | nm | | | Income tax expense | | 24,283 | | | | 512,603 | | | (95% | ) | | Net (loss) income before (loss) earnings from equity-accounted | | | | | | | | | | | | investments | | (1,729,855 | ) | | | 709,060 | | | nm | | | (Loss) earnings from equity-accounted investments | | (4,822 | ) | | | 95,269 | | | nm | | | Net (loss) income | | (1,734,677 | ) | | | 804,329 | | | nm | | | Continuing | | (1,773,056 | ) | | | 737,258 | | | nm | | | Discontinued | | 38,379 | | | | 67,071 | | | (43% | ) | | Less net income attributable to non-controlling interest | | 33,371 | | | | 11,643 | | | 187% | | | Continuing | | (19,432 | ) | | | 11,643 | | | nm | | | Discontinued | | 52,803 | | | | - | | | nm | | | Net (loss) income attributable to us | | (1,768,048 | ) | | | 792,686 | | | nm | | | Continuing | | (1,753,624 | ) | | | 725,615 | | | nm | | | Discontinued | | (14,424 | ) | | | 67,071 | | | nm | |
(A) Refer to Note 2 to the unaudited condensed consolidated financial statements for discontinued operations disclosures.
(B) Refer to Notes 1 to the unaudited condensed consolidated financial statements for additional information regarding the restatement. The decrease in revenue was primarily due to lower contributions received from our South African operations as a result of the end of our CPS contract with SASSA, which also resulted in fewer SASSA Grindrod-account grant recipients using the South African National Payment System to access their grants; the loss of our EPE account holders resulting in lower transaction fees; fewer prepaid airtime sales, fewer ad hoc terminal sales, and avalue-added services sales; decreases in our insurance and lending activities and lower contributionrevenue contributions from KSNET due to regulatory changes in South Korea and IPG; which was partially offset by an improved contribution from Masterpaymentthe inclusion of DNI and Transact 24, more fees generatedhigher fee and transaction income from our EPE and ATM offerings, improved insurance activities, and an increase in the number of SASSA biometrically-enabled UEPS/EMV grant recipients paid.offerings. In ZAR, the The decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer SASSA Grindrod-account grant recipients utilizing the South African National Payment System which resulted in lower transaction costs incurred by us and fewer prepaid airtime and ad hoc terminal sales, which was partially offset by increases in goodsthe inclusion of DNI, and services purchased from third parties, higher expenses incurred due to increased usage of the South African National Payment System by beneficiaries,support and higher expenses incurred to operateexpand our EPE and ATM offerings. Our year to date fiscal 2019 expense also included certain committed fixed and variable costs (including security, vehicle-related expenditures, banking fees and other transaction costs) that relate to the maintenance and expansion of our financial inclusion initiatives. SASSA’s initiatives to convert grant recipients to the new SAPO account, often unilaterally and without the recipient’s consent, have resulted in us incurring certain expenses without any associated significant revenue generated from these activities.
42 For instance, we have deployed our mobile payment infrastructure into areas in which we believed that EPE accountholders would utilize our infrastructure, however these individuals did not use the infrastructure because they were auto-migrated to new SAPO accounts.
Our The increase in selling, general and administration expense increasedwas 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 andof approximately $23.4 million, the inclusion of DNI, payment of $5.2 million (ZAR 73.7 million) of retrenchment packages, an increase in goodscosts at the international payments group as part of its restructuring and services purchased from third parties. These increases werere-establishment initiatives and higher staff costs. Our year to date fiscal 2019 expenses also include committed fixed and variable costs (including premises and staff costs) that relate to the maintenance and expansion of our financial inclusion initiatives. Our year to date fiscal 2018 includes the impact of an allowance for doubtful Mastertrading working capital finance receivables of $7.8 million.
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Depreciation and amortization increased primarily due to the amortization of acquired intangible assets related to the DNI acquisition, partially offset by fewer agent incentive costs paid in Korea due to weaker trading conditions in fiscal 2018, lower executive remuneration and fewer transaction related expenses in fiscal 2018. Fiscal 2017 includes $1.8 million related to the reversal of stock-based compensation charges related to awards of restricted stock with performance conditions which we believe will not be achieved. Depreciation and amortization decreased primarily due to an increase in the number of intangible assets that are fully amortized and tangible assets that arebecame fully depreciated.
During the year to date fiscal 2019, we recognized an impairment loss of approximately $13.5 million, which included $7.0 million related to entire amount of IPG goodwill and $5.3 million related to DNI customer relationships. Given the consolidation and restructuring of IPG over the period through December 2018, several business lines were terminated or meaningfully reduced, resulting in lower than expected revenues, profits and cash flows we reviewed and impaired the goodwill. We also reviewed reviewed certain customer relationships identified as part of our acquisition of DNI for impairment because Cell C recently entered into a roaming arrangement with another South African mobile telecommunications network provider which will extend Cell C’s network coverage and this arrangement impacted the identified customer relationship recognized. As a consequence, we recorded an impairment loss of $5.3 million related to a portion of the customer relationship. Refer to Note 9 of our unaudited condensed consolidated financial statements for additional information regarding the impairment losses. During the year to date 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 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.”acquired. Our operating (loss) income margin for year to date fiscal 2019 and 2018 was (20.6%) and 2017 was 11% and 18%10.5% respectively. Excluding the $7.8 million valuation allowance and the $19.9 million impairment loss, fiscal 2018 operating income margin would have been 17%. We discuss the components of operating income margin under “—"—Results of operations by operating segment.”" Our operating margin declined primarily due to an increase in our allowance for doubtful finance loans receivable of approximately $23.4 million, impairment losses and losses incurred running our financial inclusion infrastructure. The decrease was primarily attributablechange in fair value of equity securities represents a non-cash fair value adjustment (loss) gain related of $(42 million) related to higher costCell C caused by a combination of goods sold, IT processing, servicinglower EBITDA levels in Cell C as well as reduced market multiples. Refer to Note 7 for the methodology and support relativeinputs used in the fair value calculation. We recognized a non-cash loss of $5.1 million related to the reductionsale of DNI on March 31, 2019. Excluding the impact of the impairment of $5.4 million discussed in revenue. In ZAR,Note 8 of our unaudited condensed consolidated financial statements, interest on surplus cash decreased to $6.0 million (ZAR 85.4 million) from $14.9 million (ZAR 192.2 million) from $14.5 million (ZAR 199.5 million), due primarily to the lower average daily ZAR cash balances partially offset by interest earned onresulting from our significant investments over the loanlast 21 months as well as cash utilized to Finbond andfund operating losses in the listed Cedar Cellular note.South African operations.
Interest expense increased to $9.0 million (ZAR 129.0 million) from $6.9 million (ZAR 88.6 million) from $1.8 million (ZAR 24.4 million), due primarily to interest on the South African facilityincreased borrowings which we obtained to partially fund our strategic investments and fund our ATMs, which was partially offset by a reduction in our long-term South African debt. Interest expense for the year to date fiscal 2018 included interest on our South Korean debt, which was fully repaid in October 2017. Fiscal 2019 tax expense was $1.7 million (ZAR 24.3 million) compared to $39.7 million (ZAR 512.6 million) in fiscal 2018. Our effective tax rate was adversely impacted by the valuation allowances created related to the deferred tax assets recognized in respect of net operating losses incurred by our South African businesses, the non-deductible impairment losses, the DNI disposal loss, and non-deductible expenses, including transaction-related expenditure and non-deductible interest on our South African long-term debt facility, which was partially offset by tax expense recorded by our profitable businesses in South Africa and South Korea. The deferred tax impact of the change in the fair value of our investment in Cell C and DNI, somewhat offset byalso impacted the reduced interest expense in our South Korean operations following the repayment ofeffective rate for fiscal 2019, as this amount is recorded at a lower rate (at a capital gains rate) than the South Korean debtAfrican statutory rate. The March 31, 2019, carrying value of our investment in October 2017. Fiscal 2018Cell C is less than its initial cost and therefore it has a capital gains benefit for tax expense was $31.3purposes, however, we do not expect to generate any significant capital gains in the foreseeable future and have provided a valuation allowance of $3.6 million (ZAR 403.3 million) comparedrelated to $32.3 million (ZAR 445.0 million) in fiscal 2017.this capital gains benefit deferred tax asset. Our effective tax rate for fiscal 2018, was 55.0%42.0% and was higher than the South African statutory rate as a result of the deferred tax impact of the increase in the fair value of our investment in Cell C, the impairment loss, a valuation allowance provided related to an allowance for doubtful working capital finance receivables created, non-deductible expenses (including transaction-related expenditure and non-deductible interest on our South African long-term facility) and the impact of the changes in U.S. federal statutory tax law. Our effective tax rate
DNI was not accounted for using the equity method during the third quarter of fiscal 2017, was 34.0% and was higher than the South African statutory rate as a result2019 because it is consolidated. The consolidation of non-deductible expenses and the tax impact attributable to distributions fromDNI has adversely impacted our South African subsidiary. Earnings(loss) earnings from equity-accounted investments increased significantly primarily due toduring the inclusionthird quarter of our share of the earnings of DNI and Bank Frick and an increase, in USD, in Finbond’s net income.fiscal 2019. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first halfquarter and its annual results during our fourth quarter.
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The table below presents the relative (loss) earnings (loss) from our equity accounted investments: | Table 10 | | Nine months ended March 31, | | | Nine months ended March 31, | | | | | 2018 | | | 2017 | | | $ % | | | 2019 | | 2018 | | | $ % | | | | | $ ’000 | | | $ ’000 | | | change | | | $ ’000 | �� | | | $ ’000 | | | change | | | DNI | | 5,202 | | | - | | | nm | | | | Bank Frick | | | (1,895 | ) | | | 975 | | | nm | | | Share of net income | | 6,868 | | | - | | | nm | | | 616 | | | | 1,234 | | | nm | | | Amortization of intangible assets, net of deferred tax | | (1,666) | | | - | | | nm | | | (427 | ) | | | (259 | ) | | 65% | | | Bank Frick | | 975 | | | - | | | nm | | | | Other | | | (2,084 | ) | | | - | | | nm | | | DNI | | | - | | | | 5,202 | | | nm | | | Share of net income | | 1,234 | | | - | | | nm | | | - | | | | 6,868 | | | nm | | | Amortization of intangible assets, net of deferred tax | | (259) | | | - | | | nm | | | - | | | | (1,666 | ) | | nm | | | Finbond | | 1,101 | | | 930 | | | 18% | | | 1,875 | | 1,101 | | 70% | | | Other | | 111 | | | (152 | ) | | (173% | ) | | (318 | ) | | | 111 | | nm | | | Earnings from equity accounted investments | | 7,389 | | | 778 | | | 850% | | | | (Loss) earnings from equity accounted investments | | | (338 | ) | | | 7,389 | | nm | |
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Results of operations by operating segment The composition of revenue and the contributions of our business activities to operating income are illustrated below: | Table 11 | | In U.S. Dollars (U.S. GAAP) | | | In U.S. Dollars (U.S. GAAP) | | | | | Nine months ended March 31, | | | Nine months ended March 31, | | | | | 2018 | | | % of | | | 2017 | | | % of | | | % | �� | | 2019 | | % of | | 2018 | | % of | | % | | | Operating Segment | | $ ’000 | | | total | | | $ ’000 | | | total | | | change | | | $ ’000 | | | total | | | $ ’000 | | | total | | | change | | | Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | South African transaction processing | | 204,093 | | | 44% | | | 181,397 | | | 40% | | | 13% | | | 77,093 | | 25% | | 204,093 | | 44% | | (62% | ) | | International transaction processing | | 136,447 | | | 29% | | | 131,704 | | | 29% | | | 4% | | | 111,869 | | 36% | | 136,447 | | 29% | | (18% | ) | | Financial inclusion and applied technologies | | 168,018 | | | 36% | | | 179,681 | | | 39% | | | (6% | ) | | 128,611 | | | | 42% | | | | 168,018 | | | | 36% | | | (23% | ) | | Continuing | | | 72,274 | | | | 24% | | | | 168,018 | | | | 36% | | | (57% | ) | | Discontinued | | | 56,337 | | | | 18% | | | | - | | | | - | | | nm | | | Subtotal: Operating segments | | 508,558 | | | 109% | | | 492,782 | | | 108% | | | 3% | | | 317,573 | | 103% | | 508,558 | | 109% | | (38% | ) | | Intersegment eliminations | | (44,863 | ) | | (9% | ) | | (37,772 | ) | | (8% | ) | | 19% | | | (8,055 | ) | | | (3% | ) | | | (44,863 | ) | | | (9% | ) | | (82% | ) | | Consolidated revenue | | 463,695 | | | 100% | | | 455,010 | | | 100% | | | 2% | | | 309,518 | | | | 100% | | | | 463,695 | | | | 100% | | | (33% | ) | | Operating income (loss): | | | | | | | | | | | | | | | | | | Continuing | | | 253,181 | | | | 82% | | | | 463,695 | | | | 100% | | | (45% | ) | | Discontinued | | | 56,337 | | | | 18% | | | | - | | | | - | | | nm | | | Operating (loss) income: | | | | | | | | | | | | | | South African transaction processing | | 38,521 | | | 79% | | | 44,451 | | | 54% | | | (13% | ) | | (28,297 | ) | | 44% | | 38,521 | | 79% | | nm | | | International transaction processing | | (14,567 | ) | | (30% | ) | | 11,689 | | | 14% | | | (225% | ) | | 628 | | (1% | ) | | (14,567 | ) | | (30% | ) | | nm | | | Financial inclusion and applied technologies | | 41,625 | | | 85% | | | 43,354 | | | 53% | | | (4% | ) | | (4,009 | ) | | | 6% | | | | 41,625 | | | | 85% | | | nm | | | Continuing | | | (28,409 | ) | | | 44% | | | | 41,625 | | | | 85% | | | nm | | | Discontinued | | | 24,400 | | | | (38% | ) | | | | | | | - | | | nm | | | Subtotal: Operating segments | | 65,579 | | | 134% | | | 99,494 | | | 121% | | | (34% | ) | | (31,678 | ) | | 49% | | 65,579 | | 134% | | nm | | | Corporate/Eliminations | | (16,702 | ) | | (34% | ) | | (17,177 | ) | | (21% | ) | | (3% | ) | | (32,184 | ) | | | 51% | | | | (16,702 | ) | | | (34% | ) | | 93% | | | Consolidated operating income | | 48,877 | | | 100% | | | 82,317 | | | 100% | | | (41% | ) | | | Continuing | | | (19,465 | ) | | | 31% | | | | (16,702 | ) | | | (34% | ) | | 17% | | | Discontinued | | | (12,719 | ) | | | 20% | | | | - | | | | - | | | nm | | | Consolidated operating (loss)income | | | (63,862 | ) | | | 100% | | | | 48,877 | | | | 100% | | | nm | | | Continuing | | | (75,543 | ) | | | 118% | | | | 48,877 | | | | 100% | | | nm | | | Discontinued | | | 11,681 | | | | (18% | ) | | | - | | | | - | | | nm | |
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| Table 12 | | In South African Rand (U.S. GAAP) | | | In South African Rand (U.S. GAAP) | | | | | Nine months ended March 31, | | | Nine months ended March 31, | | | | | 2018 | | | | | | 2017 | | | | | | | | | | | | | 2018 | | | | | | | | | ZAR | | | % of | | | ZAR | | | % of | | | % | | | 2019 | | % of | | ZAR | | % of | | % | | | Operating Segment | | ’000 | | | total | | | ’000 | | | total | | | change | | | ZAR ’000 | | | total | | | ’000 | | | total | | | change | | | Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | South African transaction processing | | 2,631,453 | | | 44% | | | 2,497,492 | | | 40% | | | 5% | | | 1,099,901 | | 25% | | 2,631,453 | | 44% | | (58% | ) | | International transaction processing | | 1,759,266 | | | 29% | | | 1,813,314 | | | 29% | | | (3% | ) | | 1,596,057 | | 36% | | 1,759,266 | | 29% | | (9% | ) | | Financial inclusion and applied technologies | | 2,166,323 | | | 36% | | | 2,473,866 | | | 39% | | | (12% | ) | | 1,834,919 | | | | 42% | | | | 2,166,323 | | | | 36% | | | (15% | ) | | Continuing | | | 1,031,148 | | | | 24% | | | | 2,166,323 | | | | 36% | | | (52% | ) | | Discontinued | | | 803,771 | | | | 18% | | | | - | | | | - | | | nm | | | Subtotal: Operating segments | | 6,557,042 | | | 109% | | | 6,784,672 | | | 108% | | | (3% | ) | | 4,530,877 | | 103% | | 6,557,042 | | 109% | | (31% | ) | | Intersegment eliminations | | (578,437 | ) | | (9% | ) | | (520,049 | ) | | (8% | ) | | 11% | | | (114,922 | ) | | | (3% | ) | | | (578,437 | ) | | | (9% | ) | | (80% | ) | | Consolidated revenue | | 5,978,605 | | | 100% | | | 6,264,623 | | | 100% | | | (5% | ) | | 4,415,955 | | | | 100% | | | | 5,978,605 | | | | 100% | | | (26% | ) | | Operating income (loss): | | | | | | | | | | | | | | | | | | Continuing | | | 3,612,184 | | | | 82% | | | | 5,978,605 | | | | 100% | | | (40% | ) | | Discontinued | | | 803,771 | | | | 18% | | | | - | | | | - | | | nm | | | Operating (loss) income: | | | | | | | | | | | | | | South African transaction processing | | 496,667 | | | 79% | | | 612,006 | | | 54% | | | (19% | ) | | (403,719 | ) | | 44% | | 496,667 | | 79% | | nm | | | International transaction processing | | (187,818 | ) | | (30% | ) | | 160,935 | | | 14% | | | (217% | ) | | 8,960 | | (1% | ) | | (187,818 | ) | | (30% | ) | | nm | | | Financial inclusion and applied technologies | | 536,688 | | | 85% | | | 596,902 | | | 53% | | | (10% | ) | | (57,197 | ) | | | 6% | | | | 536,688 | | | | 85% | | | nm | | | Continuing | | | (405,317 | ) | | | 44% | | | | 536,688 | | | | 85% | | | nm | | | Discontinued | | | 348,120 | | | | (38% | ) | | | - | | | | - | | | nm | | | Subtotal: Operating segments | | 845,537 | | | 134% | | | 1,369,843 | | | 121% | | | (38% | ) | | (451,956 | ) | | 49% | | 845,537 | | 134% | | nm | | | Corporate/Eliminations | | (215,346 | ) | | (34% | ) | | (236,495 | ) | | (21% | ) | | (9% | ) | | (459,176 | ) | | | 51% | | | | (215,346 | ) | | | (34% | ) | | 113% | | | Consolidated operating income | | 630,191 | | | 100% | | | 1,133,348 | | | 100% | | | (44% | ) | | | Continuing | | | (277,711 | ) | | | 31% | | | | (215,346 | ) | | | (34% | ) | | 29% | | | Discontinued | | | (181,465 | ) | | | 20% | | | | - | | | | - | | | nm | | | Consolidated operating (loss)income | | | (911,132 | ) | | | 100% | | | | 630,191 | | | | 100% | | | nm | | | Continuing | | | (1,077,787 | ) | | | 118% | | | | 630,191 | | | | 100% | | | nm | | | Discontinued | | | 166,655 | | | | (18% | ) | | | - | | | | - | | | nm | |
South African transaction processing The increasedecrease in segment revenue and operating income was primarily due to the substantial decrease in the number of SASSA grant recipients paid under our SASSA contract as the contract expired at the end of the first quarter of fiscal 2019. Our revenue and operating income was also adversely impacted by the significant reduction in the number of SASSA grant recipients with SASSA-branded Grindrod cards linked to Grindrod bank accounts as well as a lower number of EPE accounts. These decreases in revenue and operating income were 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.ATMs. Operating income decreased primarily duefor this operating segment for the year to an increase in inter-segment charges, the impactdate fiscal 2019 included retrenchment costs 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.$3.7 million (ZAR 51.6 million). Our operating (loss) income margin for the year to date fiscal 2019 and 2018 was (36.7%) and 2017 was 19% and 25%18.9%, respectively. This is a reflection ofExcluding restructuring costs, the declining profitability ofoperating loss margin for the CPS operation given the fee per grant recipient has remained fixed over the full term of the SASSA contractyear to March 31, 2018.date fiscal 2019 was (31.9%). 44
International transaction-based activities Segment revenue was higherlower during the third quarter ofyear to date fiscal 20182019, primarily due to an increasea contraction in IPG transactions processed, specifically meaningfully lower crypto-exchange and China processing activities, particularly relatedactivity, and lower KSNET revenue as a result of lower transaction values processed. Operating income during the year to Masterpayment’s crypto-currency processing launched in December 2017, partially offsetdate fiscal 2019 was adversely impacted by the ongoing impact of regulatory changes in South Korea on KSNET’s revenue.a $7.0 million impairment loss. Operating income during the year to date fiscal 2018 was lower due to theadversely impacted by a $19.9 million impairment loss, ana Mastertrading allowance for doubtful working capital finance receivable of $7.8 million, and a decrease in revenue at KSNET, partially offsetwas positively impacted by an ad hoc refund of indirect taxes of $2.5 million in Korea. Excluding the combined impact of the impairment losses, the allowance for doubtful finance loans receivable and the ad hoc tax refund, operating income during the year to date fiscal 2019 was lower compared to fiscal 2018 due to a decrease in IPG revenues and ongoing losses at Masterpayment during the year to date fiscal 2019, but such decrease was partially offset by an improved contribution from KSNET primarily as a result of lower depreciation expense. IPG continues to work in close collaboration with Bank Frick and our other specialist departments to develop bespoke blockchain-based solutions, including a highly secure but easily accessible crypto-asset storage solution for crypto-asset investors and exchanges and incurred expenses of approximately $0.7 million during the year to date fiscal 2019 related to this project. 60
Operating (loss) income margin for the year to date fiscal 2019 and 2018 was 0.6% and 2017 was (11%(10.7%) and 9%, respectively. Excluding the goodwill impairment, segment operating income and margin for fiscal 2019 were $7.6 million and 6.8%, respectively. Excluding the impairment loss, the Mastertrading allowance for doubtful working capital finance receivables the impairment loss and the indirect taxesadhoc tax refund, received, segment operating income and margin for fiscal 2018 were $10.6 million and 8%7.7% respectively. Operating income and margin for the year to date fiscal 2017, was also positively impacted by a refund of approximately $0.8 million that had been paid several years ago in connection with industry-wide litigation that was finalized and was $12.5 million and 9% after adjusting for this refund. Financial inclusion and applied technologies Financial inclusion and applied technologies Segment revenue decreased primarily due to fewer prepaid airtime and other value addedvalue-added services sales, as well as lower ad hoc terminal sales,lending and insurance revenues, and a decrease in inter-segment revenues, partially offset by increased volumes in our insurance businesses, and an increase in inter-segment revenues.the inclusion of DNI. Operating income was also impacted by these factors as well as an increase insignificantly lower than year to date fiscal 2018, primarily due to the allowance for doubtful finance loans receivable resultingof $23.4 million recognized in the second quarter and expenses incurred to maintain and expand our financial service infrastructure, partially offset by the contribution from a commensurate increase in our lending book compared with last year.DNI. Operating income for this operating segment for the year to date fiscal 2019 included retrenchment costs of $1.6 million (ZAR 22.1 million).
Operating (loss) income margin for the Financial inclusion and applied technologies segment was 25%(3.1%) and 24%24.8% during the year to date fiscal 2019 and 2018, and 2017, respectively, and has increased primarily due to fewer lowrespectively. Excluding restructuring costs, the operating income margin prepaid product sales, improved revenues from our insurance businesses and an increase in inter-segment revenues, offset by fewer ad hoc terminal sales, annual salary increases granted to our South African employees and the increase in the allowance for credit losses. Corporate/Eliminations
Our corporate expenses have decreased primarily due to lower executive compensation, fewer transaction-related expenditures and a $0.5 million profit related to the sale of XeoHealth, partially offset by higher stock-based compensation charges, directors’ fees and a modest increase in U.S. dollar denominated goods and services purchased from third parties. Our corporate expenses for the year to date fiscal 2017, included the reversal of $1.82019 was (1.9%).
Corporate/Eliminations Our corporate expenses increased primarily due to a $5.3 million of stock-based compensation charges.impairment loss as well as higher acquired intangible asset amortization, non-employee director expenses, transaction-related expenditures and external service provider fees. Liquidity and Capital Resources At March 31, 2018,2019, our cash and cash equivalents were $87.2$48.8 million and comprised mainly ZAR-denominated balances of ZAR 528.3263.0 million ($44.718.2 million), KRW-denominated balances of KRW 32.717.2 billion ($30.815.1 million), U.S. dollar-denominated balances of $4.7$10.7 million, and other currency deposits, primarily Botswana pula, of $7.0$4.7 million, all amounts translated at exchange rates applicable as of March 31, 2018.2019. The decrease in our unrestricted cash balances from June 30, 2017,2018, was primarily due to our investments in DNI, Bank Frick, Cell C and a $9 million listed note,significantly weaker trading activities, scheduled debt repayments, of our South African long-term debt, unscheduled repayment of our Korean debt in full, repayment of our short-term facilities, growth in our South African lending book,dividend payments to non-controlling interests and capital expenditures, which was partially offset by cash generated by mostthe contribution from the inclusion of DNI, and a decrease in our core businesses.South African lending book. 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 theany surplus cash held by our South African operations in overnight call accounts that we maintain at South African banking institutions, and any 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 KRW-dominated 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 strategic investments, through internally generated cash and our financing facilities. When considering whether to borrow under our financing facilities, we consider the cost of capital, cost of financing, opportunity cost of utilizing surplus cash and availability of tax efficient structures to moderate financing costs. Recently, we have been required to utilize our short-term financing facilities to fund our daily cash requirements as we adapt to the expiration of the SASSA contract in September 2018 and the transition of our business model. We The board is actively managing our liquidity in the light of the significant changes underway in our business and we currently believe that our cash and credit facilities are sufficient to fund our future operations for at least the next four quarters. Available short-term borrowings We also have a short-term South African credit facility with Nedbank of ZAR 400450.0 million ($33.831.1 million), which consists of (i) a primary amount of up to ZAR 200450 million, ($31.1 million) and (ii) a secondary amount, of up to ZAR 200 million.which his currently not available as discussed below. The primary amounts compriseamount comprises an overdraft facility of (i) up to ZAR 300 million ($20.7 million), which is further split into (a) a ZAR 250.0 million ($17.3 million) overdraft facility which may only be used to fund ATMs used at pay points and (b) a ZAR 50 million ($3.4 million) general banking facility and (ii) indirect and derivative facilities of up to ZAR 150 million ($10.4 million), which include letters of guarantee, letters of credit and forward exchange contracts. The temporary amount of ZAR 250.0 million was made available until February 28, 2019 and while utilized at that date was withdrawn. We are in discussions with Nedbank around the reinsatement of the normal secondary amount of R200 million ($13.8 million). As of March 31, 2018,2019, the interest rate on the overdraft facility was 9.10%. As of March 31, 2019, we had usedutilized approximately ZAR 20.2 million ($1.4 million) of the ZAR 250 million overdraft facility to fund ATMs and none of the overdraft and ZAR 108.0R50 million ($9.1 million, translated at exchange rates applicable asgeneral banking facility. As of March 31, 2018)2019, we had utilized approximately ZAR 96.7 million ($6.7 million) of the indirect and derivative facilities to obtain foreign exchange contracts and to support guarantees issued by Nedbank to various third parties on our behalf. 45 We also have a short-term South African credit facility with Rand Merchant Bank, a division of FirstRand Bank Limited, or RMB, of ZAR 1.5 billion ($103.6 million) which may only be used to fund our ATMs in South Africa. As of March 31, 2019, the interest rate on the overdraft facility was 9.25% (South African prime less a margin of 1%). As of March 31, 2019, we had utilized approximately ZAR 1.1 billion ($72.8 million) of this facility.
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We have a short-term U.S. dollar-denominated overdraft facility with Bank Frick of $10.0$20.0 million. As of March 31, 2018,2019, we had utilized approximately $3.4$8.9 million of this facilityfacility. The interest rate on the facility is 4.50% plus 3 month US Dollardollar LIBOR and interest is payable on a quarterly basis. The 3 month US Dollardollar LIBOR rate was 2.31175%2.59975%% on March 29, 2018.31, 2019. The facility has no fixed term, however, it may be terminated by either party with six weeks written notice. We also have a one year KRW 10 billion ($8.8 million) short-term overdraft facility from Hana Bank, a South Korean bank. The interest rate on the facilities is 1.984% plus 3-month CD rate. The CD rate as of March 31, 2019 was 1.87%. The facility expires in January 2020, however can be renewed. The facility is unsecured with no fixed repayment terms. As of March 31, 2018,2019, we had not utilized this facility. Available long-term borrowings As of March 31, 2019, we also had outstanding long-term debt, net of deferred fees, of ZAR 892.3229.1 million (approximately $75.5 million($15.8 million), translated at exchange rates applicable as of March 31, 2018)2019) under our South African facilities, comprising (i) ZAR 412.575 million under Facility A, (ii) ZAR 275.050 million under Facility B and ZAR 210.0105.0 million under Facility D. Interest due on the facility is based on the Johannesburg Interbank Agreed Rate, or JIBAR, in effect from time to time plus a margin of (i) 2.25% for the Facility A loan, (ii) 3.5% for the Facility B loan, (iii) 2.25% for the Facility C loan and (iv)(iii) 2.75% for the Facility D loan. The JIBAR rate has been set at 6.867%7.15% for the period to June 29, 2018. Principal2019. The Facility A, B and D loans were settled in full on May 3, 2019. The final principal repayments ontotaling ZAR 125.0 million related to the outstanding Facility A and Facility B loans arewere due in five quarterly installments which comprise a ZAR 187.5 million payment inon June 2018 and four payments of ZAR 125.0 million each thereafter. Principal repayment on the Facility C loan is to be determined by the Lenders based on the date of the repayment of any borrowings under the Facility A loan.29, 2019. Principal repayments on the Facility D loan arewere due in eightfour quarterly installments, commencing in June 2018 and are (i) ZAR 135.5 million for the first installment in June 2018 and ZAR 10.5 million for the remaining seven installments if we are unable to complete our acquisition of a further 6% in DNI or (ii) ZAR 26.3 million per quarter if we complete the investment.each, commencing on June 29, 2019. Voluntary prepayments are permitted without early repayment fees or penalties. Cash flows from operating activities Third quarter Net cash used in operating activities during the third quarter of fiscal 2019 was $14.1 million (ZAR 220.3 million) compared to net cash provided by operating activities forof $85.2 million (ZAR 1.0 billion) during the third quarter of fiscal 2018 was $85.2 million (ZAR 1.0 billion)2018. The decrease in cash provided is primarily due to significantly weaker trading activity during fiscal 2019 compared to $21.8 million (ZAR 288.3 million) for2018. During the third quarter of fiscal 2017. Excluding the impact of interest received, interest2019, we paid on our Korean and South Africa debt and taxes presented in the table below, the increase relates primarily to the receipt of certain working capital loans outstanding, offset partially by the expansion of our South African lending book and weaker trading activity during fiscal 2018 comparedtax of $0.2 million (ZAR 2.9 million) related to 2017. our 2019 tax year. We also paid taxes totaling $2.2 million in other tax jurisdictions, primarily South Korea. During the third quarter of fiscal 2018, we paid South African tax of $1.3$1.2 million (ZAR 14.5 million) related to our 2018 tax year in South Africa. We also paid taxes totaling $1.2 million in other tax jurisdictions, primarily South Korea. During Taxes paid during the third quarter of fiscal 2017,2019 and 2018 were as follows: | Table 13 | | | | | Three months ended March 31, | | | | | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | | $ | | | $ | | | ZAR | | | ZAR | | | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | First provisional payments | | 205 | | | 1,228 | | | 2,850 | | | 14,546 | | | Taxation paid related to prior years | | - | | | 2 | | | - | | | 29 | | | Taxation refunds received | | (6 | ) | | (158 | ) | | (68 | ) | | (1,919 | ) | | Total South African taxes paid | | 199 | | | 1,072 | | | 2,782 | | | 12,656 | | | Foreign taxes paid | | 2,212 | | | 1,204 | | | 30,536 | | | 14,234 | | | Total tax paid | | 2,411 | | | 2,276 | | | 33,318 | | | 26,890 | |
Year to date Net cash used in operating activities during the year to date fiscal 2019 was $2.9 million (ZAR 41.6 million) compared to $97.8 million (ZAR 1.3 billion) provided by operating activities during the year to date fiscal 2018. The decrease in cash provided is primarily due to significantly weaker trading activity during fiscal 2019 compared to 2018. During the year to date fiscal 2019, we paid South African tax of $0.4$6.5 million (ZAR 5.492.0 million) related to our 20172019 tax year. During the year to date fiscal 2019, we made an additional tax payment of $1.4 million (ZAR 20.5 million) related to our 2018 tax year in South Africa and $0.4 million (ZAR 5.6 million) related to prior years.Africa. We also paid taxes totaling $2.8$4.8 million in other tax jurisdictions, primarily South Korea. Taxes paid during the third quarter of fiscal 2018 and 2017 were as follows:
| Table 13 | | Three months ended March 31, | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | | | $ | | | $ | | | ZAR | | | ZAR | | | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | First provisional payments | | 1,228 | | | 417 | | | 14,546 | | | 5,410 | | | Taxation paid related to prior years | | 2 | | | 437 | | | 29 | | | 5,644 | | | Taxation refunds received | | (158 | ) | | - | | | (1,919 | ) | | - | | | Total South African taxes paid | | 1,072 | | | 854 | | | 12,656 | | | 11,054 | | | Foreign taxes paid | | 1,204 | | | 2,777 | | | 14,234 | | | 35,871 | | | Total tax paid | | 2,276 | | | 3,631 | | | 26,890 | | | 46,925 | |
Year to date
Net cash provided by operating activities for the year to date of fiscal 2018 was $97.8 million (ZAR 1.3 billion) compared to cash provided by operating activities of $91.4 million (ZAR 1.3 billion) for the year to date of fiscal 2017. Excluding the impact of interest received, interest paid on our Korean and South Africa debt and taxes presented in the table below, the increase relates primarily to the receipt of certain working capital loans outstanding, offset partially by the expansion of our South African lending book and weaker trading activity during fiscal 2018 compared to 2017.
During the year to date of fiscal 2018, we paid South African tax of $17.7 million (ZAR 231.2 million) related to our 2018 tax year in South Africa. During the year to date of fiscal 2018, we made an additional tax payment of $1.9 million (ZAR 25.3 million) related to our 2017 tax year in South Africa and received a refund of approximately $0.4 million (ZAR 5.2 million) related to taxes overpaid in previous tax years in South Africa. We also paid taxes totaling $3.7 million in other tax jurisdictions, primarily South Korea. During the year to date fiscal 2017, we paid South African tax of $18.2 million (ZAR 252.0 million) related to our 2017 tax year and $1.6 million (ZAR 22.4 million) related to prior tax years. We also received a refund of approximately $1.4 million (ZAR 18.9 million) related to taxes overpaid in previous tax years in South Africa. We paid dividend withholding taxes of $1.5 million (ZAR 21.3 million) during the year to date fiscal 2017. We also paid taxes totaling $7.8 million in other tax jurisdictions, primarily South Korea. 4662
Taxes paid during the year to date of fiscal 20182019 and 20172018 were as follows: | Table 14 | | Nine months ended March 31, | | | | | | Nine months ended March 31, | | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | $ | | | $ | | | ZAR | | | ZAR | | | $ | | | $ | | | ZAR | | | ZAR | | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | First provisional payments | | 17,739 | | | 18,192 | | | 231,200 | | | 251,968 | | | 6,453 | | | 17,739 | | | 91,994 | | | 231,200 | | | Taxation paid related to prior years | | 1,921 | | | 1,624 | | | 25,256 | | | 22,365 | | | 1,399 | | | 1,921 | | | 20,488 | | | 25,256 | | | Taxation refunds received | | (409 | ) | | (1,369 | ) | | (5,211 | ) | | (18,878 | ) | | (102 | ) | | (409 | ) | | (1,445 | ) | | (5,211 | ) | | Dividend withholding taxation | | - | | | 1,471 | | | - | | | 21,300 | | | | Total South African taxes paid | | 19,251 | | | 19,918 | | | 251,245 | | | 276,755 | | | 7,750 | | | 19,251 | | | 111,037 | | | 251,245 | | | Foreign taxes paid | | 3,674 | | | 7,780 | | | 48,510 | | | 105,748 | | | 4,783 | | | 3,674 | | | 67,248 | | | 48,510 | | | Total tax paid | | 22,925 | | | 27,698 | | | 299,755 | | | 382,503 | | | 12,533 | | | 22,925 | | | 178,285 | | | 299,755 | |
Cash flows from investing activities Third quarter Cash used in investing activities for the third quarter of fiscal 2019 includes capital expenditures of $1.6 million (ZAR22.9 million), primarily due to the acquisition of ATMs in South Africa and the expansion of our branch network. Cash used in investing activities for the third quarter of fiscal 2018 includes capital expenditure of $4.2 million (ZAR 50.5 million), primarily for the acquisition of data processing computer equipment and payment processing terminals in Korea and ATMs in South Africa. We also paid approximately $11.1 million for an additional 5% interest in Bank Frick, provided a $10.6 million (ZAR 126.0 million) loan to DNI and paid $7.5 million (ZAR 89.3 million) for an additional 4% interest in DNI. Year to date Cash used in investing activities for the third quarter ofyear to date fiscal 20172019 includes capital expenditureexpenditures of $1.9$7.3 million (ZAR 25.8104.0 million), primarily fordue to the acquisition of payment processing terminals in Korea. Our Korean capital expenditures have declined due to regulatory changesATMs in South Korea, which now prohibitAfrica and the provisionexpansion of payment equipment to the majority of merchants.our branch network. We also providedpaid $2.5 million for a $2.050% interest in V2 Limited, acquired customer bases in DNI for $1.4 million, loanand made a further equity contribution of $1.1 million to OneFi, the holding company of our Nigerian investment.MobiKwik. Year to date
Cash used in investing activities for the year to date of fiscal 2018 includes capital expenditure of $7.8 million (ZAR 100.6 million), primarily for the acquisition of data processing computer equipment and payment processing terminals in Korea and ATMs in South Africa. We also paid approximately $151.0 million (ZAR 2.0 billion) for a 15% interest in Cell C, $79.5 million (ZAR 1.0 billion) for a 49% interest in DNI, $51.9 million for a 35% interest in Bank Frick, provided a $10.6 million (ZAR 126.0 million) loan to DNI and paid $9.0 million for a 7.625% interest in a listed note. Cash used in investing activities for the year to date fiscal 2017 includes capital expenditure of $8.5 million (ZAR 117.0 million), primarily for the acquisition of payment processing terminals in Korea. We also paid approximately $15.3 million for a 7.5% interest in MobiKwik; provided a $10.0 million loan to Finbond; provided a $2.0 million loan to OneFi and paid approximately $2.9 million and $1.7 million, respectively, net of cash received, to acquire 100% of each of Masterpayment Financial Services and Pros Software’s ordinary shares.
Cash flows from financing activities Third quarter During the third quarter of fiscal 2019, we utilized approximately $278.3 million from our overdraft facilities, primarily to fund our ATMs, and repaid $257.1 million of these facilities, including amounts utilized in December 2018. We also utilized $8.9 million of our Bank Frick overdraft to fund our operations. We also made a scheduled South African debt facility payment of $10.5 million. During the third quarter of fiscal 2018, we made a scheduled South African debt facility payment of $17.7 million (ZAR 187.5 million) and also utilized this facility to partially fund our additional investment in DNI. We also utilized $9.8 million of our overdraft facilities and repaid $42.6 million of these facilities. Year to date During the third quarter ofyear to date fiscal 2017,2019, we sold five million shares of our common stock for $45.0 million and receivedutilized approximately $0.6$584.5 million from the exerciseour overdraft facilities, primarily to fund our ATMs, and repaid $502.8 million of stock options.these facilities. We also utilized approximately $0.3$14.6 million of our Korean borrowingsrevolving credit facility to pay quarterly interest due.lend funds to Cell C to finance the acquisition and/or requisition of telecommunication towers and other specific uses pre-approved by the lender. We also made scheduled South African debt facility payments of $31.4 million, repaid $4.9 million under our revolving credit facility and paid non-refundable origination fees of approximately $0.4 million related to the credit facilities. Year to date
During the year to date fiscal 2018, we utilized approximately $113.2 million (ZAR 1.46 billion) of our South African facility to partially fund our investments in Cell C and DNI and utilized approximately $0.3 million of our Korean facility to pay a portion of our quarterly interest due. We made accumulated scheduled South African debt facility payments of $44.4 million (ZAR 562.5 million) and made a $16.6 million payment to settle our outstanding South Korean debt facility in full. We also utilized $42.4 million of our overdraft facilities and repaid $57.0 million of these facilities. 4763
During the year to date fiscal 2017, we sold five million shares of our common stock for $45.0 million and received approximately $0.6 million from the exercise of stock options. We also paid approximately $31.6 million to repurchase 3,137,609 shares of our common stock and also paid $0.5 million, on July 1, 2016, related to settlement of amounts outstanding related to the repurchases at the end of June 2016. We also made a $28.5 million unscheduled repayment of our Korean debt utilized approximately $0.5 million of our Korean borrowings to pay quarterly interest due. In addition, we paid a guarantee fee of $1.1 million related to the guarantee issued by RMB and paid a dividend of approximately $0.6 million to certain of our non-controlling interests.
Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Capital Expenditures We expect capital spending for the fourth quarter of fiscal 20182019 to primarily include the acquisition of payment terminals for the expansion of our operations in Korea and expansion ofinvestments into our ATM infrastructure and branch network in South Africa. Our capital expenditures for the third quarter of fiscal 20182019 and 20172018 are discussed under “—"—Liquidity and Capital Resources—Cash flows from investing activities.”" All of our capital expenditures for the past three fiscal years were funded through internally generated funds. We had outstanding capital commitments as of March 31, 2018,2019, of $0.5$0.1 million related mainly to the procurement of ATMs. We expect to fund these expenditures through internally generated funds. Contingent Liabilities, Commitments and Contractual Obligations The following table sets forth our contractual obligations as of March 31, 2018:2019: | Table 15 | | Payments due by Period, as of March 31, 2018(in $ ’000s) | | Payments due by Period, as of March 31, 2019 (in $ ’000s) | | | | | | | | Less | | | | | | | | | More | | | | | | Less | | | | | | | | | More | | | | | | | | than 1 | | | 1-3 | | | 3-5 | | | than 5 | | | | | | than 1 | | | 1-3 | | | 3-5 | | | than 5 | | | | | Total | | | year | | | years | | | years | | | years | | | Total | | | year | | | years | | | years | | | years | | | South African long-term debt obligations (A) | | 82,061 | | | 61,783 | | | 20,278 | | | - | | | - | | | 16,548 | | | 16,548 | | | - | | | - | | | - | | | Contingent amount related to DNI investment (B) | | 44,480 | | | - | | | 44,480 | | | - | | | - | | | | Short-term credit facilities | | 3,400 | | | 3,400 | | | - | | | - | | | - | | | 74,181 | | | 74,181 | | | - | | | - | | | - | | | Operating lease obligations | | 10,307 | | | 4,760 | | | 3,719 | | | 1,828 | | | - | | | 9,265 | | | 5,333 | | | 3,428 | | | 504 | | | - | | | Purchase obligations | | 2,637 | | | 2,637 | | | - | | | - | | | - | | | 2,957 | | | 2,957 | | | - | | | - | | | - | | | Capital commitments | | 450 | | | 450 | | | - | | | - | | | - | | | 77 | | | 77 | | | - | | | - | | | - | | | Other long-term obligations (C)(D) | | 2,901 | | | - | | | - | | | - | | | 2,901 | | | | Other long-term obligations (B)(C) | | | 2,273 | | | - | | | - | | | - | | | 2,273 | | | Total | | 146,236 | | | 73,030 | | | 68,477 | | | 1,828 | | | 2,901 | | | 105,301 | | | 99,096 | | | 3,428 | | | 504 | | | 2,273 | |
| | (A) | – Includes $75.9$15.8 million of long-term debt and interest payable at the rate applicable on March 31, 2018,2019, under our South Africa debt facility.facilities. | | | (B) | – Under the DNI transaction agreements, we will make an additional subscription of ZAR 126 million ($10.7 million) if all agreed conditions are met. In addition, under the amended DNI transaction agreements, we are obliged to pay to DNI an additional amount not exceeding ZAR 400 million ($33.8 million) in cash, subject to DNI achieving certain performance targets and assuming that we proceed with the additional ZAR 126.0 million equity subscription.
| | (C) | – Includes policyholder liabilities of $2.7$2.0 million related to our insurance business. All amounts are translated at exchange rates applicable as of March 31, 2018.2019. | | | (D)(C) | – We have excluded a cross-guarantees in the aggregate amount of $9.1$6.6 million issued as of March 31, 2018,2019, to Nedbank to secure guarantees it has issued to third parties on our behalf as the amounts that will be settled in cash are not known and the timing of any payments is uncertain. We have also excluded contractual commitments to invest approximately $15$7.5 million in MobiKwik,V2 Limited, subject to the achievement of certain contractual conditions. |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk In addition to the tables below, see Note 57 to the unaudited condensed consolidated financial statements for a discussion of market risk. The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of March 31, 2018,2019, as a result of changes in the JIBAR rates.rate. The effect of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in each ofthe JIBAR ratesrate as of March 31, 2018,2019, are shown. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios. | | | | | | As of March 31, 2018 | | | As of March 31, 2019 | | | Table 16 | | | | | | | | Estimated annual | | | | | | | | | Estimated annual | | | | | Annual | | | | | | expected interest | | | Annual | | | | | | expected interest | | | | | expected | | | | | | charge after | | | expected | | | | | | charge after | | | | | interest | | | Hypothetical | | | hypothetical change in | | | interest | | | Hypothetical | | | hypothetical change in | | | | | charge | | | change in | | | JIBAR | | | charge | | | change in | | | JIBAR | | | | | ($ ’000) | | | JIBAR | | | ($ ’000) | | | ($ ’000) | | | JIBAR | | | ($ ’000) | | | Interest on South Africa long-term debt (JIBAR) | | 7,448 | | | 1% | | | 8,207 | | | 1,573 | | | 1% | | | 1,731 | | | | | | | | (1% | ) | | 6,689 | | | | | | (1% | ) | | 1,414 | |
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 (the "Exchange Act"), as of March 31, 2018.2019. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, and in light of the insufficient time to assess the effectiveness of the procedures we adopted to remediate the material weakness discussed below, our chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2018.2019. Changes in Internal Control over Financial Reporting There have not been any changes As previously disclosed, we identified a material weakness in our internal control over financial reporting where the control over review of the accounting for non-routine complex transactions was not appropriately designed. The material weakness resulted in (1) the misapplication of GAAP to the recognition of revenue from our SASSA contract extension, which resulted in recognition of revenue at an incorrect rate, and (2) the restatement of our financial statements as of and for the fiscal year ended June 30, 2018 as a result of the misapplication of GAAP to the accounting treatment for our investment in Cell C Proprietary Limited.
In order to remediate the material weakness, we appointed a technical resource to review the accounting for non-routine transactions and established an in-house accounting technical committee, which has been assisting in the review of the accounting for all non-routine transactions, including assessing the appropriateness of the accounting treatment adopted. This technical committee has also been assessing the need to consult external experts on the accounting of non-routine transactions. We initiated the aforementioned remediation plan during the fiscal quarternine-month period ended March 31, 2018, that have materially affected, or are reasonably likely2019, but it has not been in place for a sufficient period of time to materially affect,assess its effectiveness. We believe the foregoing efforts will effectively remediate the material weakness but, as we continue to evaluate and work to improve our internal control over financial reporting.reporting, we may modify the remediation plan. 4965
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 paymentPayment by SASSA of additional implementation costsAdditional 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.
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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, including VAT, to SASSA, plus interest from June 2014 to the date of payment. OnIn 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 refused our application. We appealed the High Court rejected the application seeking leaveCourt’s decision 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, wouldwhich has granted our leave to appeal. We expect the case to be heard during 2019. We cannot predict how the Supreme Court will rule on the matter.
LitigationConstitutional Court order regarding legalityextension of debit orderscontract with SASSA for six months for cash payments
As described in more detail under "Recent Developments—SASSA contract exit and summary of legal proceedings— Auto-migration of EPE customers to SAPO," we urgently applied to the Constitutional Court to order SASSA to pay us in respect of amounts owed to us. In December 2018, we received correspondence from the Constitutional Court informing the parties that it believes that "nothing prevents the parties from coming to an agreement on increased payments without court sanction, and if they do not, normal legal processes in other courts must be filed to determine the effects." We have engaged SASSA directly in order to resolve this matter, but we will approach the courts if the matter is not resolved to our satisfaction within a reasonable period of time. Legal proceedings against SASSA in respect of transfer of grant payments from EPE to SAPO accounts On November 13, 2018, a number of grant beneficiaries and Moneyline Financial Service Proprietary Limited, or Moneyline, one of our subsidiaries, filed an urgent application with the Gauteng Division of the High Court of South Africa seeking among other things, an order (1) declaring that biometric consent for the transfer of grant payments to EPE accounts conforms with the requirements of the Social Assistance Act Regulations, (2) prohibiting SASSA from stopping the payment of social grants into EPE accounts that were opened with biometric consent prior to January 1, 2018, when SASSA issued a new directive that completion by recipients of a SASSA-prescribed "Annexure C" form would be required in order for those recipients to have their grant payments deposited into their private bank accounts (as opposed to SAPO bank accounts), (3) directing SASSA to process all Annexure C forms within two weeks of submission and (4) directing SASSA to make all grant payments in accordance with duly completed and submitted Annexure C forms. As we On November 28, 2018, the High Court issued an interim order directing SASSA to pay the social grants of those EPE clients who had previously disclosed, eachprovided biometric consent and elected to receive their social grants into their EPE accounts, pending the issuance of a final judgment. SASSA was also ordered to process any Annexure C forms within two weeks of the submission of such forms.
On January 29, 2019, the High Court handed down its final judgment, reversing the portion of its November 28, 2018, interim order that directed SASSA to pay grants into the EPE accounts of recipients who made those biometric elections without submitting the Annexure C forms. The effect of the final judgment is that while SASSA is required to promptly pay social grants into EPE accounts of those recipients who have signed the Annexure C forms electing to have their grants paid that way, SASSA is not required to pay grants into the EPE accounts of those recipients who have not submitted the Annexure C forms, despite having provided their previous biometric consent and the Black Sash Trust, a non-governmental organization served applications petitioning the South African Supreme Court of Appealmay continue to grant themauto-migrate those grants to SAPO accounts. The court did not award costs. We applied for leave to appeal the order granted on January 29, 2019 and were granted leave on March 12, 2019. The Supreme Court directed us to eitherfile the record by no later than July 10, 2019 and directed the parties to file their respective heads of argument. Once the directive has been complied with, the Supreme Court or to a full bench of the High Court. 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 filed their respective written arguments on February 28, 2018, and we filed our written arguments on March 28, 2018. We awaitwill allocate a hearing date fromfor the Supreme Court.
appeal. We believe that SASSA’s and the Black Sash’s claims are without merit, and we intend to defend against them vigorously. However, we cannot predict how the courtsSupreme Court will rule on the matter. On February 8, 2019, Moneyline launched an application to interdict SASSA from taking any steps of its own volition to direct payment of the social grants of the grants recipients, who received payment of their grants into their EPE accounts in January, 2019, into any accounts other than their EPE accounts into which SASSA had made payments in January 2019. The application was heard on February 28, 2019 and the High Court handed down an order directing Moneyline to provide SASSA with a list of the 696,246 individuals who opened EPE accounts in 2018 and who were not paid by SASSA into those accounts in January 2019. SASSA was ordered to verify the information provided by Moneyline within 14 days and to file an affidavit, within a further 15 days, with the outcome of the verification process and detailing procedures followed by it, including a description of how SASSA administered the migration of beneficiaries to SAPO. The High Court furthermore ordered that any party is entitled to approach it for appropriate relief thereafter. SASSA filed its affidavit on April 23, 2019. Moneyline is considering the affidavit filed by SASSA and will, after consultation with its legal counsel, decide whether to file any further affidavits or seek further relief from the High Court. 66
NCR application for the cancelation of Moneyline’s registration as a credit provider Our appeal Regarding the NCR’s application to cancel the registration of theMoneyline, we raised a number of procedural points in defense and argument on these points was heard on November 27, 2015, before three tribunal members. Two ruled against us and one upheld our points. We are appealing the majority ruling to the High Court ruling in thisCourt. This matter was initially scheduled to be heard on December 6, 2017, however,4, 2018, by a full bench of the matter was subsequently removed from the roll and a new hearing date has not been set.Pretoria High Court. 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 NCR.NCR, as dealt with above. We cannot predict the outcome of this litigation.
Initiation of legal proceedings against a PG Purchasing customer regarding non-payment of working capital finance loans receivable In January 2019, we filed a Petition with the District Court of Dallas County, Texas, naming Permian Crude Transport, LP, f/k/a Permian Crude Transport, LLC, d/b/a Permian Transport & Trading ("PCT"), and Centurion Marketing, LLC d/b/a Jupiter Marketing & Trading, LLC ("Centurion"), (collectively with PCT, "PCT/Centurion") as defendants regarding the recovery of working capital finance loans receivable made to PCT/ Centurion by our wholly owned subsidiary, PG Purchasing. This lawsuit is still in its initial stages, and discovery is ongoing. Trial is currently set for December 2, 2019. We cannot predict when this matter will be heard or how the Court will rule on the matter. Item 1A. Risk Factors
See “Item 1A RISK FACTORS” in Part I of our Annual Report on Form 10-K10-K/A for the fiscal year ended June 30, 2017,2018, 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-K10-K/A for the fiscal year ended June 30, 2017.
2018.
SASSA’s previous migration of EPE customers to the SAPO account has resulted in the loss of a significant portion of our EPE customer base. Unless CPS secureswe are able to maintain our EPE customer base, our South African financial services business will likely become unsustainable and result in the closure of most or all of that business.
During September and October 2018, SASSA migrated those of our EPE customers who had not submitted to SASSA a guaranteed minimum monthly payment forsigned Annexure C form and failed to process many of the services it providesAnnexure C forms submitted by our potential customers. As a result, we have experienced a decline in the EPE customer base to under the SASSA contract which at least covers its operational costs, CPS will operate at a loss1.1 million EPE accounts receiving grants during December 2018 and may notJanuary 2019. These same factors have the financial resources to continue its business, which would likely have a materialhad an adverse effectimpact on our ability to sign up new customers to the EPE product and, as a result, we have experienced very low levels of gross new EPE accounts. As described under “Item 1.—Legal Proceedings—Legal proceedings against SASSA in respect of transfer of grant payments from EPE to SAPO accounts”, we commenced legal proceedings against SASSA challenging its actions but, in late January 2019, the High Court ruled that SASSA may pay grants into SAPO accounts unless the grant recipient has delivered a signed Annexure C form to SASSA.
While our EPE customer base has been stable since November 2018, any decision of SASSA to migrate more of our EPE customers to the SAPO account would threaten our entire South African financial services business and materially and adversely affect our business, results of operations, financial positioncondition and cash flows. On March 23, 2018, the Constitutional Court ordered that
In addition, as described in “Recent Developments—SASSA contract exit and CPS have a constitutional obligationsummary of legal proceedings— Auto-migration of EPE customers 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 requires CPS to pay approximately 1.9 million grant recipients at its pay points, which requires us to maintain and continue to operate our proprietary biometrically-enabled UEPS/EMV system. The payment of grants in cash at pay points is widely accepted as the most expensive component of the South African grant payment process. In fact, in its November 16, 2017 report, the independent panel of experts appointed by the Constitutional Court determined that the cost to CPS to pay social welfare grants at pay points at ZAR 50.00 per grant paid compared with ZAR 0.50 per grant paid electronically into a bank account. Therefore, in order to comply with the Constitutional Court’s order to pay grants at pay points, CPS will be required to continue to incur the ongoing employment costs related to the vast majority of its staff as well as costs associated with the payment infrastructure (including security, leased premises, cash transportation costs, bank charges and vehicle expenses) regardless of the number of grants actually paid.
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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 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.
We have been ordered by the High Court to repay to SASSA certain reimbursed implementation costs. We are appealing this decision, but ifSAPO,” we are unsuccessful and are ultimately required to repay substantial monies tocurrently in discussions with SASSA such repayment would adversely affect our results of operations, financial position and cash flows.
In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced a legal proceeding in the High Court seeking an order by the Court to review and set aside the decision of SASSA’s Chief Executive Officer to approve a paymentabout fees payable 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. 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 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 will rule on the matter.
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 as ordered. Parties to the March 2018 court proceedings also requested the Constitutional Court to consider further orders, including the repayment of any profits derived by CPS under its SASSA contract. The Constitutional Court did not provide such order in its March 2018 order; however, one or more third parties may in the future institute litigation challenging our right to retain a portionexcess of the amounts due under the original contract. While we will have received fromremain in litigation with SASSA, under our contract. We cannot predict whether anyit may make it more difficult for us to reach agreement in regard to such litigation will be instituted, or if it is, whether it would be successful.
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.
payment.
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,maintain a sufficient EPE customer base, we may still face challenges in transforming our South African operations to a business-to-consumer model through our EPE bank account and ATM infrastructure.
Following the conclusion of the SASSA contract on September 30, 2018, we refocused our resources and technology on the provision of financial inclusion services to our target market. In particular we enabled our mobile ATM payment infrastructure to become part of the South African National Payment System and concentrated on taking our ATMs to the rural populations of South Africa so that they have the same access to financial inclusion as they had during the tenure of our contract, without the many inconveniences and inefficiencies of SASSA’s new payment model.
While we believe that our financial services offerings are convenient and cost-effective, the success of our strategy will depend on the extent to which South African customers may notcontinue to use theseour financial products and services on a widespread basis.
As discussed in the risk factor immediately above, SASSA’s unilateral decision to move EPE customers to the SASSA account and the recent judgment preventing us from opposing SASSA’s actions, will likely make it difficult for us to attract and retain as many EPE customers as we had previously planned.
Even if we continue to maintain our current EPE customer base,, to the extent that we expect they will. Anywhere such failure could adversely impactbusiness remains viable, other factors may prevent us from successfully operating and growing our South African financial services business or the businesses of Cell Cinclude, but are not limited to: reduced adoption and DNI, which could, in turn, reduce the valueutilization of our investments in them. Additionally, attempting to integrate Cell C’sEPE accounts and DNI’s offerings withrelated products and services; insufficient utilization of our own may adversely impactATM infrastructure, especially our other business and operational relationships. Our mobile ATM infrastructure; inability to achieveaccess sufficient funding for our ATM infrastructure; competition in the expected synergies frommarketplace; restrictions imposed by SASSA or government on the Cell Cmanner in which recipients may transact; additional and/ or protracted legal proceedings with SASSA or other parties; political interference; changes in the regulatory environment; dependence on existing suppliers to provide the hardware (such as ATMs, cards and DNI transactions may have a material adverse effect onPOS devices) we require to execute our business, resultsrollout as anticipated; logistical and communications challenges; and loss of key technical and operations or financial condition. In addition, Cell C and DNI may not be able to deliver on their proposed business plans, which may adversely affect, or impair, the carrying value of our investments in them.staff. 52
Item 6. Exhibits The following exhibits are filed as part of this Form 10-Q: | | | | Incorporated by Reference Herein | | Exhibit | | Included | | | | | No. | Description of Exhibit | Herewith | Form | Exhibit | Filing Date | | 10.80* | Contract of Employment, effective March 1, 2018, between Net1 Applied Technologies South Africa Proprietary Limited and Alexander Michael Ramsay Smith | | 8-K | 10.80 | March 1, 2018 | | 10.81* | Restrictive Covenants Agreement, effective March 1, 2018, between Net1 Applied Technologies South Africa Proprietary Limited and Alexander Michael Ramsay Smith | | 8-K | 10.81 | March 1, 2018 | | 10.82* | Employment Agreement, effective March 1, 2018, between Net 1 UEPS Technologies, Inc. and Alexander Michael Ramsay Smith | | 8-K | 10.82 | March 1, 2018 | | 10.83* | Restrictive Covenants Agreement, effective March 1, 2018, between Net 1 UEPS Technologies, Inc. and Alexander Michael Ramsay Smith | | 8-K | 10.83 | March 1, 2018 | | 10.84 | Amendment and Restatement Agreement, dated March 9, 2018, among Net1 Applied Technologies South Africa Proprietary Limited, Net 1 UEPS Technologies, Inc., the parties listed in Part I of Schedule 1 thereto, as the original guarantors, FirstRand Bank Limited (acting through its Rand Merchant Bank division), as an arranger, Nedbank Limited (acting through its Corporate and Investment Banking division), as an arranger, the parties listed in Part II of Schedule 1 thereto, as the original lenders, and FirstRand Bank Limited (acting through its Rand Merchant Bank division), as agent. | | 8-K | 10.84 | March 9, 2018 | | 10.85 | Senior Facility D Agreement, dated March 9, 2018, among Net1 Applied Technologies South Africa Proprietary Limited, FirstRand Bank Limited (acting through its Rand Merchant Bank division), as original lender, and FirstRand Bank Limited (acting through its Rand Merchant Bank division), as agent. | | 8-K | 10.85 | March 9, 2018 | | 10.86 | Tranche I Subscription Agreement, dated March 8, 2018, among Net1 Applied Technologies South Africa Proprietary Limited and DNI–4PL Contracts Proprietary Limited. | | 8-K | 10.86 | March 9, 2018 | | 10.87 | Tranche II Subscription Agreement, dated March 8, 2018, among Net1 Applied Technologies South Africa Proprietary Limited and DNI–4PL Contracts Proprietary Limited. | | 8-K | 10.87 | March 9, 2018 | | 10.88 | Net1 Loan Agreement, dated March 8, 2018, among Net1 Applied Technologies South Africa Proprietary Limited and DNI–4PL Contracts Proprietary Limited. | | 8-K | 10.88 | March 9, 2018 | | 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | | | | | 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | | | | | 32 | Certification pursuant to 18 USC Section 1350 | X | | | | | 101.INS | XBRL Instance Document | X | | | | | 101.SCH | XBRL Taxonomy Extension Schema | X | | | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | | | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | | | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase | X | | | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X | | | |
* Indicates a management contract or compensatory plan or arrangement.
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 10, 2018.9, 2019. | | NET 1 UEPS TECHNOLOGIES, INC. | | | | | | By: /s/ Herman G. Kotzé | | | | | | Herman G. Kotzé | | | Chief Executive Officer | | | | | | By: /s/ Alex M.R. Smith | | | | | | Alex M.R. Smith | | | Chief Financial Officer, Treasurer and Secretary |
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