UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ To __________
Commission file number: 000-31203
NET 1 UEPS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida |
98-0171860 |
(State or other jurisdiction |
(IRS Employer |
of incorporation or organization) |
Identification No.) |
President Place, 4th Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South Africa
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code:
27-11-343-2000
Not Applicable
(Former Name, Former Address
and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO
[ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (check one):
[ ] Large accelerated filer |
[X ] Accelerated filer |
|
|
[ ] Non-accelerated filer |
[ ] Smaller reporting company |
(do not check if a smaller reporting company) |
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
YES [
] NO [X ]
As of November 3, 2015 (the latest practicable date),
47,322,702 shares of the registrants common stock, par value $0.001 per share,
net of treasury shares, were outstanding.
Form 10-Q
NET 1 UEPS TECHNOLOGIES, INC.
Table of Contents
1
Part I. Financial Information
Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Balance Sheets
|
|
Unaudited |
|
|
(A) |
|
|
|
September 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2015 |
|
|
|
(In thousands, except
share data) |
|
ASSETS |
|
CURRENT ASSETS |
|
|
|
|
|
|
Cash and
cash equivalents |
$ |
125,610
|
|
$ |
117,583
|
|
Pre-funded social welfare
grants receivable (Note 2) |
|
1,411 |
|
|
2,306 |
|
Accounts
receivable, net of allowances of September: $2,767; June: $1,956 |
|
153,453 |
|
|
148,768 |
|
Finance loans receivable,
net of allowances of September: $3,640; June: $4,227 |
|
33,921 |
|
|
40,373 |
|
Inventory
(Note 3) |
|
12,335 |
|
|
12,979 |
|
Deferred income taxes |
|
6,829 |
|
|
7,298 |
|
Total current assets before settlement assets |
|
333,559 |
|
|
329,307 |
|
Settlement assets (Note 4) |
|
600,195 |
|
|
661,916 |
|
Total current assets |
|
933,754 |
|
|
991,223 |
|
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of |
|
|
|
|
|
|
September: $92,145; June:
$94,014 |
|
52,048 |
|
|
52,320 |
|
EQUITY-ACCOUNTED INVESTMENTS |
|
14,342 |
|
|
14,329 |
|
GOODWILL (Note 6) |
|
154,294 |
|
|
166,437 |
|
INTANGIBLE ASSETS, net (Note 6) |
|
40,862 |
|
|
47,124 |
|
OTHER LONG-TERM ASSETS,
including reinsurance assets (Note 5 and Note 7) |
|
13,982 |
|
|
14,997 |
|
TOTAL ASSETS |
|
1,209,282 |
|
|
1,286,430 |
|
LIABILITIES |
|
CURRENT LIABILITIES |
|
|
|
|
|
|
Accounts
payable |
|
15,527 |
|
|
21,453 |
|
Other payables |
|
49,011 |
|
|
45,595 |
|
Current
portion of long-term borrowings (Note 9) |
|
8,359 |
|
|
8,863 |
|
Income taxes payable |
|
12,848 |
|
|
6,287 |
|
Total current liabilities before settlement
obligations |
|
85,745 |
|
|
82,198 |
|
Settlement obligations (Note 4) |
|
600,195 |
|
|
661,916 |
|
Total current liabilities |
|
685,940 |
|
|
744,114 |
|
DEFERRED INCOME TAXES |
|
9,169 |
|
|
10,564 |
|
LONG-TERM BORROWINGS (Note 9)
|
|
48,561 |
|
|
50,762 |
|
OTHER LONG-TERM LIABILITIES, including
insurance policy liabilities (Note 7) |
|
2,178 |
|
|
2,205 |
|
TOTAL
LIABILITIES |
|
745,848 |
|
|
807,645 |
|
COMMITMENTS AND CONTINGENCIES (Note 17) |
|
|
|
|
|
|
EQUITY |
|
COMMON STOCK (Note 10)
|
|
|
|
|
|
|
Authorized: 200,000,000 with $0.001 par
value; |
|
|
|
|
|
|
Issued
and outstanding shares, net of treasury - September: 47,322,702; June:
46,679,565 |
|
64 |
|
|
64 |
|
PREFERRED
STOCK |
|
|
|
|
|
|
Authorized shares: 50,000,000 with $0.001 par value;
|
|
|
|
|
|
|
Issued and outstanding shares, net of
treasury: September: -; June: - |
|
- |
|
|
- |
|
ADDITIONAL
PAID-IN-CAPITAL |
|
218,384 |
|
|
213,896 |
|
TREASURY
SHARES, AT COST: September: 18,057,228; June: 18,057,228 |
|
(214,520 |
) |
|
(214,520 |
) |
ACCUMULATED OTHER
COMPREHENSIVE LOSS |
|
(182,545 |
) |
|
(139,181 |
) |
RETAINED
EARNINGS |
|
640,888 |
|
|
617,868 |
|
TOTAL NET1 EQUITY |
|
462,271 |
|
|
478,127 |
|
NON-CONTROLLING INTEREST |
|
1,163 |
|
|
658 |
|
TOTAL EQUITY |
|
463,434 |
|
|
478,785 |
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ |
1,209,282 |
|
$ |
1,286,430 |
|
(A) Derived from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial
Statements
2
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Operations
|
|
Three months ended |
|
|
|
September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
|
(In thousands,
except per share data) |
|
REVENUE |
$ |
154,473
|
|
$ |
156,441
|
|
EXPENSE |
|
|
|
|
|
|
Cost of goods sold, IT processing, servicing and support |
|
77,382 |
|
|
74,406 |
|
Selling,
general and administration |
|
35,761 |
|
|
38,736 |
|
Depreciation and amortization |
|
10,115 |
|
|
10,174 |
|
OPERATING INCOME |
|
31,215 |
|
|
33,125 |
|
INTEREST INCOME |
|
4,275 |
|
|
4,090 |
|
INTEREST EXPENSE |
|
974 |
|
|
1,312 |
|
INCOME BEFORE INCOME TAX
EXPENSE |
|
34,516 |
|
|
35,903 |
|
INCOME TAX EXPENSE (Note 16) |
|
10,897 |
|
|
11,648 |
|
NET INCOME BEFORE EARNINGS
FROM EQUITY-ACCOUNTED INVESTMENTS |
|
23,619 |
|
|
24,255 |
|
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
|
|
188 |
|
|
92 |
|
NET INCOME |
|
23,807 |
|
|
24,347 |
|
LESS NET INCOME ATTRIBUTABLE TO
NON-CONTROLLING INTEREST |
|
787 |
|
|
258 |
|
NET INCOME ATTRIBUTABLE TO
NET1 |
$ |
23,020 |
|
$ |
24,089 |
|
Net income per share, in United States
dollars (Note 13) |
|
|
|
|
|
|
Basic earnings attributable to Net1 shareholders |
$ |
0.49 |
|
$ |
0.51 |
|
Diluted
earnings attributable to Net1 shareholders |
$ |
0.49 |
|
$ |
0.51 |
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Comprehensive Income
|
|
Three months ended |
|
|
|
September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Net income |
$ |
23,807 |
|
$ |
24,347 |
|
|
|
|
|
|
|
|
Other comprehensive income
(loss) |
|
|
|
|
|
|
Net
unrealized income (loss) on asset available for sale, net of tax |
|
50 |
|
|
(226 |
) |
Movement in foreign currency translation reserve |
|
(43,696 |
) |
|
(21,185 |
) |
Total other comprehensive loss, net of taxes |
|
(43,646 |
) |
|
(21,411 |
) |
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
(19,839 |
) |
|
2,936 |
|
(Less)
comprehensive income attributable to non- controlling interest |
|
(505 |
) |
|
(232 |
) |
Comprehensive (loss)/income attributable to Net1 |
$ |
(20,344 |
) |
$ |
2,704 |
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
4
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated
Statement of Changes in Equity for the three
months ended September 30, 2015 (dollar
amounts in thousands)
|
|
Net 1 UEPS
Technologies, Inc. Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of |
|
|
|
|
|
Number
of |
|
|
Additional |
|
|
|
|
|
other |
|
|
|
|
|
Non- |
|
|
|
|
|
|
Number
of |
|
|
|
|
|
Treasury |
|
|
Treasury |
|
|
shares, net of |
|
|
Paid-In |
|
|
Retained |
|
|
comprehensive |
|
|
Total
Net1 |
|
|
controlling |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Shares |
|
|
treasury |
|
|
Capital |
|
|
Earnings |
|
|
loss |
|
|
Equity |
|
|
Interest |
|
|
Total |
|
Balance July
1, 2015 |
|
64,736,793 |
|
$ |
64 |
|
|
(18,057,228 |
) |
$ |
(214,520 |
) |
|
46,679,565 |
|
$ |
213,896 |
|
$ |
617,868 |
|
$ |
(139,181 |
) |
$ |
478,127 |
|
$ |
658 |
|
$ |
478,785 |
|
Restricted
stock granted (Note 12) |
|
319,492 |
|
|
|
|
|
|
|
|
|
|
|
319,492 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
- |
|
Exercise of
stock option (Note 12) |
|
323,645 |
|
|
|
|
|
|
|
|
|
|
|
323,645 |
|
|
3,762 |
|
|
|
|
|
|
|
|
3,762 |
|
|
|
|
|
3,762 |
|
Stock-based
compensation charge (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
726 |
|
|
|
|
|
|
|
|
726 |
|
|
|
|
|
726 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,020 |
|
|
|
|
|
23,020 |
|
|
787 |
|
|
23,807 |
|
Other
comprehensive loss (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,364 |
) |
|
(43,364 |
) |
|
(282 |
) |
|
(43,646 |
) |
Balance
September 30, 2015 |
|
65,379,930 |
|
$ |
64 |
|
|
(18,057,228 |
) |
$ |
(214,520 |
) |
|
47,322,702 |
|
$ |
218,384 |
|
$ |
640,888 |
|
$ |
(182,545 |
) |
$ |
462,271 |
|
$ |
1,163 |
|
$ |
463,434 |
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
5
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three months ended |
|
|
|
September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
|
(In thousands) |
|
Cash flows from operating
activities |
|
|
|
|
|
|
Net income |
$ |
23,807 |
|
$ |
24,347 |
|
Depreciation and amortization
|
|
10,115 |
|
|
10,174 |
|
Earnings from equity-accounted investments
|
|
(188 |
) |
|
(92 |
) |
Fair value adjustments |
|
1,433 |
|
|
413 |
|
Interest payable |
|
709 |
|
|
1,159 |
|
Profit on disposal of plant
and equipment |
|
(95 |
) |
|
(122 |
) |
Stock-based compensation charge |
|
726 |
|
|
916 |
|
Facility fee amortized |
|
34 |
|
|
82 |
|
(Increase) Decrease in accounts receivable,
pre-funded social welfare
grants receivable and finance loans receivable |
|
(17,278 |
) |
|
9,470 |
|
Increase in inventory |
|
(931 |
) |
|
(2,123 |
) |
Increase (Decrease) in accounts payable and
other payables |
|
2,972 |
|
|
(10,933 |
) |
Increase in taxes payable |
|
7,824 |
|
|
6,611 |
|
Decrease in deferred taxes |
|
(1,026 |
) |
|
(390 |
) |
Net cash
provided by operating activities |
|
28,102 |
|
|
39,512 |
|
Cash flows from investing activities
|
|
|
|
|
|
|
Capital expenditures |
|
(10,698 |
) |
|
(9,378 |
) |
Proceeds from disposal of property, plant and
equipment |
|
348 |
|
|
241 |
|
Proceeds from sale of
business (Note 14) |
|
- |
|
|
1,895 |
|
Net change in settlement assets |
|
(21,575 |
) |
|
(43,054 |
) |
Net
cash used in investing activities |
|
(31,925 |
) |
|
(50,296 |
) |
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from issue of common
stock |
|
3,762 |
|
|
989 |
|
Long-term borrowings utilized |
|
720 |
|
|
1,097 |
|
Acquisition of treasury stock
(Note 10) |
|
- |
|
|
(9,151 |
) |
Sale of equity to non-controlling interest
(Note 10) |
|
- |
|
|
1,407 |
|
Net change in settlement
obligations |
|
21,575 |
|
|
43,054 |
|
Net cash provided by
financing activities |
|
26,057 |
|
|
37,396 |
|
Effect of exchange rate
changes on cash |
|
(14,207 |
) |
|
(4,099 |
) |
Net increase in cash and cash
equivalents |
|
8,027 |
|
|
22,513 |
|
Cash and cash equivalents
beginning of period |
|
117,583 |
|
|
58,672 |
|
Cash and cash equivalents end of
period |
$ |
125,610 |
|
$ |
81,185 |
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
6
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the
Unaudited Condensed Consolidated Financial Statements
for the three
months ended September 30, 2015 and 2014
(All amounts in tables
stated in thousands or thousands of United States Dollars, unless otherwise
stated)
1. |
Basis of Presentation and Summary of Significant
Accounting Policies |
Unaudited Interim Financial
Information
The accompanying unaudited condensed consolidated financial
statements include all majority-owned subsidiaries over which the Company
exercises control and have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) and the rules and regulations of the
United States Securities and Exchange Commission for quarterly reports on Form
10-Q and include all of the information and disclosures required for interim
financial reporting. The results of operations for the three months ended
September 30, 2015 and 2014, are not necessarily indicative of the results for
the full year. The Company believes that the disclosures are adequate to make
the information presented not misleading.
These financial statements should be read in conjunction with
the financial statements, accounting policies and financial notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended
June 30, 2015. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments), which are necessary for a fair
representation of financial results for the interim periods presented.
References to the Company refer to Net1 and its consolidated
subsidiaries, unless the context otherwise requires. References to Net1 are
references solely to Net 1 UEPS Technologies, Inc.
Recent accounting pronouncements adopted
There were no accounting pronouncements adopted during the
three months ended September 30, 2015.
Recent accounting pronouncements not yet adopted as of
September 30, 2015
In May 2014, the FASB issued guidance regarding Revenue from
Contracts with Customers. This guidance requires an entity to recognize
revenue when a customer obtains control of promised goods or services in an
amount that reflects the consideration to which the entity expects to receive in
exchange for those goods or services. In addition, the standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. The guidance was effective for the
Company beginning July 1, 2017, however this date has been extended as per
subsequent guidance issued by the FASB. Early adoption is not permitted. The
Company expects that this guidance will have a material impact on its financial
statements and is currently evaluating the impact of this guidance on its
financial statements on adoption.
In August 2015, the FASB issued guidance regarding Revenue
from Contracts with Customers, Deferral of the Effective Date. This guidance
defers the required implementation date specified in Revenue from Contracts
with Customers to December 2017. Public companies may elect to adopt the
standard along the original timeline. The Company expects that this guidance
will have a material impact on its financial statements and is currently
evaluating the impact of this guidance on its financial statements on adoption.
In August 2014, the FASB issued guidance regarding
Disclosure of Uncertainties about an Entitys Ability to Continue as a Going
Concern. This guidance requires an entity to perform interim and annual
assessments of its ability to continue as a going concern within one year of the
date that its financial statements are issued. An entity must provide certain
disclosures if conditions or events raise substantial doubt about the entitys
ability to continue as a going concern. The guidance is effective for the
Company beginning July 1, 2017. Early adoption is permitted. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
In February 2015, the FASB issued guidance regarding
Amendments to the Consolidation Analysis. This guidance amends both the
variable interest entity and voting interest entity consolidation models. The
requirement to assess an entity under a different consolidation model may change
previous consolidation conclusions. The guidance is effective for the Company
beginning July 1, 2016. Early adoption is permitted. The Company is currently
assessing the impact of this guidance on its financial statements disclosure.
7
1. |
Basis of Presentation and Summary of Significant
Accounting Policies (continued) |
Recent accounting pronouncements not
yet adopted as of September 30, 2015 (continued)
In July 2015, the FASB issued guidance regarding Simplifying
the Measurement of Inventory. This guidance requires entities to measure
most inventory at the lower of cost and net realizable value, thereby
simplifying the current guidance under which an entity must measure inventory at
the lower of cost or market (market in this context is defined as one of three
different measures). The guidance will not apply to inventories that are
measured by using either the last-in, first-out (LIFO) method or the retail
inventory method (RIM). The guidance is effective for the Company beginning
July 1, 2017. Early adoption is permitted. The Company is currently assessing
the impact of this guidance on its financial statements disclosure.
2. |
Pre-funded social welfare grants
receivable |
Pre-funded social welfare grants receivable represents amounts
pre-funded by the Company to certain merchants participating in the merchant
acquiring system. The October 2015 payment service commenced on October 1, 2015,
but the Company pre-funded certain merchants participating in the merchant
acquiring system on the last two days of September 2015.
The Companys inventory comprised the
following categories as of September 30, 2015 and June 30, 2015.
|
|
|
September 30, |
|
|
June 30, |
|
|
|
|
2015 |
|
|
2015 |
|
|
Finished goods |
$ |
12,335 |
|
$ |
12,979 |
|
|
|
$ |
12,335 |
|
$ |
12,979 |
|
4. |
Settlement assets and settlement
obligations |
Settlement assets comprise (1) cash received from the South
African government that the Company holds pending disbursement to recipient
beneficiaries of social welfare grants and (2) cash received from customers on
whose behalf the Company processes payroll payments that the Company will
disburse to customer employees, payroll-related payees and other payees
designated by the customer.
Settlement obligations comprise (1) amounts that the Company is
obligated to disburse to recipient beneficiaries of social welfare grants, and
(2) amounts that the Company is obligated to pay to customer employees,
payroll-related payees and other payees designated by the customer.
The balances at each reporting date may vary widely depending
on the timing of the receipts and payments of these assets and obligations.
5. |
Fair value of financial
instruments |
Initial recognition and
measurement
Financial instruments are recognized when the Company becomes a
party to the transaction. Initial measurements are at cost, which includes
transaction costs.
Risk management
The Company seeks to reduce its exposure to currencies other
than the South African Rand (ZAR) through a policy of matching, to the extent
possible, assets and liabilities denominated in those currencies. In addition,
the Company uses financial instruments in order to economically hedge its
exposure to exchange rate and interest rate fluctuations arising from its
operations. The Company is also exposed to equity price and liquidity risks as
well as credit risks.
8
5. |
Fair value of financial instruments
(continued) |
Risk management (continued)
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 ZAR, on the one hand, and the U.S. dollar and the euro, on the
other hand.
Translation risk
Translation risk relates to the risk that the Companys results
of operations will vary significantly as the U.S. dollar is its reporting
currency, but it earns most of its revenues and incurs most of its expenses in
ZAR. The U.S. dollar to ZAR exchange rate has fluctuated significantly over the
past three years. As exchange rates are outside the Companys control, there can
be no assurance that future fluctuations will not adversely affect the Companys
results of operations and financial condition.
Interest rate risk
As a result of its normal borrowing and leasing activities, the
Companys operating results are exposed to fluctuations in interest rates, which
it manages primarily through regular financing activities. The Company generally
maintains limited investment in cash equivalents and has occasionally invested
in marketable securities.
Credit risk
Credit risk relates to the risk of loss that the Company would
incur as a result of non-performance by counterparties. The Company maintains
credit risk policies with regard to its counterparties to minimize overall
credit risk. These policies include an evaluation of a potential counterpartys
financial condition, credit rating, and other credit criteria and risk
mitigation tools as the Companys management deems appropriate.
With respect to credit risk on financial instruments, the
Company maintains a policy of entering into such transactions only with South
African and European financial institutions that have a credit rating of BBB or
better, as determined by credit rating agencies such as Standard & Poors,
Moodys and Fitch Ratings.
UEPS-based microlending credit
risk
The Company is exposed to credit risk in its UEPS-based
microlending activities, which provides unsecured short-term loans to qualifying
customers. The Company manages this risk by performing an affordability test for
each prospective customer and assigns a creditworthiness score, which takes
into account a variety of factors such as other debts and total expenditures on
normal household and lifestyle expenses.
Equity price and liquidity risk
Equity price risk relates to the risk of loss that the Company
would incur as a result of the volatility in the exchange-traded price of equity
securities that it holds and the risk that it may not be able to liquidate these
securities. The market price of these securities may fluctuate for a variety of
reasons, consequently, the amount the Company may obtain in a subsequent sale of
these securities may significantly differ from the reported market value.
Liquidity risk relates to the risk of loss that the Company
would incur as a result of the lack of liquidity on the exchange on which these
securities are listed. The Company may not be able to sell some or all of these
securities at one time, or over an extended period of time without influencing
the exchange traded price, or at all.
9
5. |
Fair value of financial instruments
(continued) |
Financial instruments
The following section describes the valuation methodologies the
Company uses to measure its significant financial assets and liabilities at fair
value.
In general, and where applicable, the Company uses quoted
prices in active markets for identical assets or liabilities to determine fair
value. This pricing methodology applies to Level 1 investments. If quoted prices
in active markets for identical assets or liabilities are not available to
determine fair value, then the Company uses quoted prices for similar assets and
liabilities or inputs other than the quoted prices that are observable either
directly or indirectly. These investments are included in Level 2 investments.
In circumstances in which inputs are generally unobservable, values typically
reflect managements estimates of assumptions that market participants would use
in pricing the asset or liability. The fair values are therefore determined
using model-based techniques that include option pricing models, discounted cash
flow models, and similar techniques. Investments valued using such techniques
are included in Level 3 investments.
Asset measured at fair value using significant
unobservable inputs investment in Finbond Group Limited
(Finbond)
The Company's Level 3 asset represents an investment of
156,788,712 shares of common stock of Finbond, which are exchange-traded equity
securities. Finbonds shares are traded on the Johannesburg Stock Exchange
(JSE) and the Company has designated such shares as available for sale
investments. The Company has concluded that the market for Finbond shares is not
active and consequently has employed alternative valuation techniques in order
to determine the fair value of such stock. Finbond issues financial products and
services under a mutual banking licence and also has a microlending offering. In
determining the fair value of Finbond, the Company has considered amongst other
things Finbonds historical financial information (including its most recent
public accounts), press releases issued by Finbond and its published net asset
value. The Company believes that the best indicator of fair value of Finbond is
its published net asset value and has used this value to determine the fair
value.
Asset measured at fair value using significant
unobservable inputs investment in Finbond Group Limited (Finbond)
(continued)
The fair value of these securities as of September 30, 2015,
represented approximately 1% of the Companys total assets, including these
securities. The Company expects to hold these securities for an extended period
of time and it is not concerned with short-term equity price volatility with
respect to these securities provided that the underlying business, economic and
management characteristics of the company remain sound.
Derivative transactions -
Foreign exchange contracts
As part of the Companys risk management strategy, the Company
enters into derivative transactions to mitigate exposures to foreign currencies
using foreign exchange contracts. These foreign exchange contracts are
over-the-counter derivative transactions. Substantially all of the Companys
derivative exposures are with counterparties that have long-term credit ratings
of BBB or better. The Company uses quoted prices in active markets for similar
assets and liabilities to determine fair value (Level 2). The Company has no
derivatives that require fair value measurement under Level 1 or 3 of the fair
value hierarchy.
The Companys outstanding foreign
exchange contracts are as follows:
As of September 30, 2015
|
|
|
|
|
|
Fair market |
|
|
|
|
|
Notional amount |
|
Strike price |
|
|
value price |
|
|
Maturity |
|
|
EUR 526,263.00 |
|
ZAR 15.3809 |
|
|
ZAR15.5532 |
|
|
October 20,
2015 |
|
|
EUR 509,516.00 |
|
ZAR 15.4728 |
|
|
ZAR15.6435 |
|
|
November 20, 2015 |
|
|
EUR 529,865.00 |
|
ZAR 15.5654 |
|
|
ZAR15.7402 |
|
|
December 21,
2015 |
|
|
EUR 526,663.00 |
|
ZAR 15.6625 |
|
|
ZAR15.8358 |
|
|
January 20, 2016 |
|
10
5. |
Fair value of financial instruments
(continued) |
Financial instruments (continued)
As of June 30, 2015
|
|
|
|
|
|
Fair market |
|
|
|
|
|
Notional amount |
|
Strike price |
|
|
value price |
|
|
Maturity |
|
|
EUR 526,263.00 |
|
ZAR 15.1145 |
|
|
ZAR 13.6275 |
|
|
July 20, 2015 |
|
|
EUR 526,263.00 |
|
ZAR 15.2025 |
|
|
ZAR 13.7062 |
|
|
August 20, 2015 |
|
|
EUR 526,263.00 |
|
ZAR 15.2944 |
|
|
ZAR 13.7898 |
|
|
September 21,
2015 |
|
|
EUR 526,263.00 |
|
ZAR 15.3809 |
|
|
ZAR 13.8683 |
|
|
October 20, 2015 |
|
|
EUR 509,516.00 |
|
ZAR 15.4728 |
|
|
ZAR 13.9540 |
|
|
November 20,
2015 |
|
|
EUR 529,865.00 |
|
ZAR 15.5654 |
|
|
ZAR 14.0397 |
|
|
December 21, 2015 |
|
|
EUR 526,663.00 |
|
ZAR 15.6625 |
|
|
ZAR 14.1239 |
|
|
January 20,
2016 |
|
The following table presents the
Companys assets and liabilities measured at fair value on a recurring basis as
of September 30, 2015, according to the fair value hierarchy:
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business
(included in other long-term assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents |
$ |
1,884 |
|
$ |
- |
|
$ |
- |
|
$ |
1,884 |
|
|
Investment in Finbond (available for
sale assets included in other long-term assets) |
|
- |
|
|
- |
|
|
6,618 |
|
|
6,618 |
|
|
Other |
|
- |
|
|
1,069 |
|
|
- |
|
|
1,069 |
|
|
Total assets at fair
value |
$ |
1,884 |
|
$ |
1,069 |
|
$ |
6,618 |
|
$ |
9,571 |
|
The following table presents the Companys assets and
liabilities measured at fair value on a recurring basis as of June 30, 2015,
according to the fair value hierarchy:
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance
business (included in other long-term assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
1,640 |
|
$ |
- |
|
$ |
- |
|
$ |
1,640 |
|
|
Investment in Finbond
(available for sale assets included in other long-term assets) |
|
- |
|
|
- |
|
|
7,488 |
|
|
7,488 |
|
|
Other |
|
- |
|
|
1,259 |
|
|
- |
|
|
1,259 |
|
|
Total assets at
fair value |
$ |
1,640 |
|
$ |
1,259 |
|
$ |
7,488 |
|
$ |
10,387 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
- |
|
$ |
452 |
|
$ |
- |
|
$ |
452 |
|
|
Total liabilities at fair value |
$ |
- |
|
$ |
452 |
|
$ |
- |
|
$ |
452 |
|
11
5. |
Fair value of financial instruments
(continued) |
Financial instruments (continued)
Changes in the Companys investment in Finbond (Level 3 that
are measured at fair value on a recurring basis) were insignificant during the
three months ended September 30, 2015 and 2014, respectively. There have been no
transfers in or out of Level 3 during the three months ended September 30, 2015
and 2014, respectively.
Assets and liabilities measured
at fair value on a nonrecurring basis
The Company measures its assets at fair value on a nonrecurring
basis when they are deemed to be other-than-temporarily impaired. The Company
has no liabilities that are measured at fair value on a nonrecurring basis. The
Company reviews the carrying values of its assets when events and circumstances
warrant and considers all available evidence in evaluating when declines in fair
value are other-than-temporary. The fair values of the Companys assets are
determined using the best information available, and may include quoted market
prices, market comparables, and discounted cash flow projections. An impairment
charge is recorded when the cost of the assets exceeds its fair value and the
excess is determined to be other-than-temporary. The Company has not recorded
any impairment charges during the reporting periods presented herein.
6. |
Goodwill and intangible assets,
net |
Goodwill
Summarized below is the movement in the
carrying value of goodwill for the three months ended September 30, 2015:
|
|
|
|
|
|
Accumulated |
|
|
Carrying |
|
|
|
|
Gross value |
|
|
impairment |
|
|
value |
|
|
Balance as of June 30, 2015
|
$ |
166,437 |
|
$ |
- |
|
$ |
166,437 |
|
|
Foreign currency
adjustment (1) |
|
(12,143 |
) |
|
- |
|
|
(12,143 |
) |
|
Balance as of September 30, 2015 |
$ |
154,294 |
|
$ |
- |
|
$ |
154,294 |
|
(1) – The foreign currency adjustment represents the effects of the fluctuations between the South African rand and the Korean won, and the U.S. dollar on the carrying value.
Goodwill has been allocated to the
Companys reportable segments as follows:
|
|
|
South |
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
African |
|
|
International |
|
|
inclusion and |
|
|
|
|
|
|
|
transaction |
|
|
transaction |
|
|
applied |
|
|
Carrying |
|
|
|
|
processing |
|
|
processing |
|
|
technologies |
|
|
value |
|
|
Balance as of June 30, 2015
|
$ |
24,579 |
|
$ |
115,519 |
|
$ |
26,339 |
|
$ |
166,437 |
|
|
Foreign currency adjustment
(1) |
|
(3,053 |
) |
|
(6,537 |
) |
|
(2,553 |
) |
|
(12,143 |
) |
|
Balance as of September 30,
2015 |
$ |
21,526 |
|
$ |
108,982 |
|
$ |
23,786 |
|
$ |
154,294 |
|
(1) The foreign currency adjustment represents the effects of
the fluctuations between the South African rand and the Korean won, and the U.S.
dollar on the carrying value.
12
6. |
Goodwill and intangible assets, net
(continued) |
Intangible assets, net
Carrying value and amortization
of intangible assets
Summarized below is the carrying
value and accumulated amortization of the intangible assets as of September 30,
2015 and June 30, 2015:
|
|
|
As of September 30, 2015 |
|
|
As of June 30, 2015 |
|
|
|
|
Gross |
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
Net |
|
|
|
|
carrying |
|
|
Accumulated
|
|
|
carrying |
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
|
|
value |
|
|
amortization |
|
|
value |
|
|
value |
|
|
amortization |
|
|
value |
|
|
Finite-lived intangible
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
$ |
82,160 |
|
$ |
(44,008 |
) |
$ |
38,152 |
|
$ |
88,109 |
|
$ |
(45,312 |
) |
$ |
42,797 |
|
|
Software and unpatented
technology |
|
27,872 |
|
|
(27,491 |
) |
|
381 |
|
|
29,964 |
|
|
(28,323 |
) |
|
1,641 |
|
|
FTS patent |
|
2,731 |
|
|
(2,731 |
) |
|
- |
|
|
3,119 |
|
|
(3,119 |
) |
|
- |
|
|
Exclusive
licenses |
|
4,506 |
|
|
(4,506 |
) |
|
- |
|
|
4,506 |
|
|
(4,506 |
) |
|
- |
|
|
Trademarks |
|
5,589 |
|
|
(3,260 |
) |
|
2,329 |
|
|
6,094 |
|
|
(3,408 |
) |
|
2,686 |
|
|
Total finite-lived intangible
assets |
$ |
122,858 |
|
$ |
(81,996 |
) |
$ |
40,862 |
|
$ |
131,792 |
|
$ |
(84,668 |
) |
$ |
47,124 |
|
Aggregate amortization expense on the finite-lived intangible
assets for the three months ended September 30, 2015 and 2014, was approximately
$3.3 million and $3.9 million, respectively.
Future estimated annual amortization expense for the next five
fiscal years and thereafter, assuming an exchange rate prevailing on September
30, 2015, 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.
|
2016 |
$ |
10,105 |
|
|
2017 |
|
7,929 |
|
|
2018 |
|
7,928 |
|
|
2019 |
|
7,634 |
|
|
2020 |
|
7,463 |
|
|
Thereafter |
$ |
3,088 |
|
7. |
Reinsurance assets and policy holder liabilities under
insurance and investment contracts |
Reinsurance assets and policy holder
liabilities under insurance contracts
Summarized below is the movement in reinsurance assets and
policy holder liabilities under insurance contracts during the three months
ended September 30, 2015:
|
|
|
Reinsurance |
|
|
Insurance |
|
|
|
|
assets (1) |
|
|
contracts (2) |
|
|
Balance as of June 30, 2015 |
$ |
183 |
|
$ |
(567 |
) |
|
Foreign currency adjustment (3)
|
|
(23 |
) |
|
71
|
|
|
Balance
as of September 30, 2015 |
$ |
160 |
|
$ |
(496 |
) |
(1) Included in other long-term assets.
(2) Included in other long-term liabilities.
(3) The foreign currency
adjustment represents the effects of the fluctuations between the ZAR against
the U.S. dollar.
The Company has agreements with reinsurance companies in order
to limit its losses from large insurance contracts, however, if the reinsurer is
unable to meet its obligations, the Company retains the liability.
Policyholders' liabilities under insurance contracts are
derived from actual claims submitted which had not been settled as of September
30, 2015 and June 30, 2015, respectively, and represents managements estimate
of the net present value of future claims and benefits under existing insurance
contracts, offset by probable future premiums to be received (net of expected
service cost).
13
7. |
Reinsurance assets and policy holder liabilities under
insurance and investment contracts (continued) |
Assets and policy holder liabilities
under investment contracts
Summarized below is the movement in assets and policy holder
liabilities under investment contracts during the three months ended September
30, 2015:
|
|
|
|
|
|
Investment |
|
|
|
|
Assets (1) |
|
|
contracts (2) |
|
|
Balance as of June 30, 2015
|
$ |
593 |
|
$ |
(593 |
) |
|
Foreign currency
adjustment (3) |
|
(73 |
) |
|
73 |
|
|
Balance as of September 30, 2015 |
$ |
520 |
|
$ |
(520 |
) |
(1) Included in other long-term assets.
(2) Included in other long-term liabilities.
(3) The foreign currency
adjustment represents the effects of the fluctuations between the ZAR against
the U.S. dollar.
The Company does not offer any investment products with
guarantees related to capital or returns.
8. |
Short-term credit facility |
The Companys short-term credit facilities are described in
Note 12 to the Companys audited consolidated financial statements included in
its Annual Report on Form 10-K for the year ended June 30, 2015.
South Africa
The Companys short-term South African credit facility with
Nedbank Limited comprises an overdraft facility of up to ZAR 50 million and
indirect and derivative facilities of up to ZAR 150 million, which include
letters of guarantee, letters of credit and forward exchange contracts. As of
September 30, 2015, the interest rate on the overdraft facility was 8.35% . As
of each of September 30, 2015 and June 30, 2015, respectively, the Company had
not utilized any of its overdraft facility. As of September 30, 2015, the
Company had utilized approximately ZAR 128.2 million ($9.1 million, translated
at exchange rates applicable as of September 30, 2015) of its ZAR 150 million
indirect and derivative facilities to obtain foreign exchange contracts from the
bank and to enable the bank to issue guarantees, including stand-by letters of
credit, in order for the Company to honor its obligations to third parties
requiring such guarantees (refer to Note 17). As of June 30, 2015, the Company
had utilized approximately ZAR 139.6 million ($11.4 million, translated at
exchange rates applicable as of June 30, 2015) of its indirect and derivative
facilities.
Korea
The Company had not utilized any of its KRW 10 billion ($8.4
million, translated at exchange rates applicable as of September 30, 2015)
overdraft facility as of September 30, 2015 and June 30, 2015. As of September
30, 2015, the interest rate on the overdraft facility was 3.20% . The facility
expires in January 2016.
The Companys Korean senior secured loan facility is described
in Note 13 to the Companys audited consolidated financial statements included
in its Annual Report on Form 10-K for the year ended June 30, 2015. The current
carrying value as of September 30, 2015, is $60.0 million. As of September 30,
2015, the carrying amount of the long-term borrowings approximated fair value.
The interest rate in effect on September 30, 2015, was 4.74% .
Interest expense incurred during the three months ended
September 30, 2015 and 2014, was $0.7 million and $1.1 million, respectively.
Prepaid facility fees amortized during the three months ended September 30, 2015
and 2014, was $0.03 million and $0.1 million, respectively.
The next scheduled principal payment of $8.4 million
(translated at exchange rates applicable as of September 30, 2015) will be made
on April 29, 2016.
14
The following table presents reconciliation between the number
of shares, net of treasury, presented in the unaudited condensed consolidated
statement of changes in equity during the three months ended September 30, 2015
and 2014, respectively, and the number of shares, net of treasury, excluding
non-vested equity shares that have not vested during the three months ended
September 30, 2015 and 2014, respectively:
|
|
|
Sept 30, |
|
|
Sept 30, |
|
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
Number of shares, net of
treasury: |
|
|
|
|
|
|
|
Statement of changes in
equity |
|
47,322,702 |
|
|
46,475,623 |
|
|
Less:
Non-vested equity shares that have not vested (Note 12) |
|
(589,447 |
) |
|
(453,333 |
) |
|
Number
of shares, net of treasury excluding non-vested equity shares that have
not vested |
|
46,733,255 |
|
|
46,022,290 |
|
Common stock repurchases and
transaction with non-controlling interests
The Company did not repurchase any of its shares during the
three months ended September 30, 2015 and 2014, under its share repurchase
authorization. However, on August 27, 2014, the Company entered into a
Subscription and Sale of Shares Agreement with Business Venture Investments No
1567 Proprietary Limited (RF) (BVI), one of the Companys BEE partners, in
preparation for any new potential SASSA tender. Pursuant to the agreement: (i)
the Company repurchased BVIs remaining 1,837,432 shares of the Companys common
stock for approximately ZAR 97.4 million in cash ($9.2 million translated at
exchange rates prevailing as of August 27, 2014) and (ii) BVI has subscribed for
new ordinary shares of Cash Paymaster Services (Pty) Ltd (CPS) representing
12.5% of CPS ordinary shares outstanding after the subscription for ZAR 15.0
million in cash (approximately $1.4 million translated at exchange rates
prevailing as of August 27, 2014). In connection with transactions described
above, the CPS shareholder agreement that was negotiated as part of the original
December 2013 Relationship Agreement became effective.
11. |
Accumulated other comprehensive
loss |
The table below presents the change in accumulated other
comprehensive (loss) income per component during the three months ended
September 30, 2015:
|
|
|
Three months
ended |
|
|
|
|
September 30, 2015 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
Accumulated |
|
|
income on |
|
|
|
|
|
|
|
Foreign |
|
|
asset |
|
|
|
|
|
|
|
currency |
|
|
available for |
|
|
|
|
|
|
|
translation |
|
|
sale, net of |
|
|
|
|
|
|
|
reserve |
|
|
tax |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2015 |
$ |
(140,221 |
) |
$ |
1,040 |
|
$ |
(139,181 |
) |
|
Movement in foreign
currency translation reserve |
|
(43,414 |
) |
|
- |
|
|
(43,414 |
) |
|
Unrealized gain on asset
available for sale, net of tax of $11 |
|
- |
|
|
50 |
|
|
50 |
|
|
Balance as of September 30, 2015 |
$ |
(183,635 |
) |
$ |
1,090 |
|
$ |
(182,545 |
) |
There were no reclassifications from accumulated other
comprehensive loss to comprehensive (loss) income during the three months ended
September 30, 2015 or 2014, respectively.
15
12. |
Stock-based compensation |
Stock option and restricted stock
activity
Options
The following table summarizes stock option activity for the
three months ended September 30, 2015 and 2014:
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
|
average |
|
|
Remaining |
|
|
Aggregate |
|
|
Grant |
|
|
|
|
|
|
|
exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
Date Fair |
|
|
|
|
Number of |
|
|
price |
|
|
Term |
|
|
Value |
|
|
Value |
|
|
|
|
shares |
|
|
($) |
|
|
(in years) |
|
|
($000) |
|
|
($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2015
|
|
2,401,169 |
|
|
15.34 |
|
|
4.74 |
|
|
11,516 |
|
|
|
|
|
Exercised |
|
(323,645 |
) |
|
11.62 |
|
|
|
|
|
2,669 |
|
|
|
|
|
Outstanding September 30, 2015 |
|
2,077,524 |
|
|
15.92 |
|
|
4.33 |
|
|
7,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2014
|
|
2,710,392 |
|
|
14.16 |
|
|
5.38 |
|
|
3,909 |
|
|
|
|
|
Granted under Plan: August 2014
|
|
464,410 |
|
|
11.23 |
|
|
10.00 |
|
|
2,113 |
|
|
4.55 |
|
|
Exercised |
|
(688,633 |
) |
|
8.24 |
|
|
|
|
|
3,697 |
|
|
|
|
|
Outstanding
September 30, 2014 |
|
2,486,169 |
|
|
15.24 |
|
|
5.45 |
|
|
1,820 |
|
|
|
|
No stock options were awarded during the three months ended
September 30, 2015. 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 Companys 250 day volatility. The estimated expected life of the
option was determined based on historical behavior of employees who were granted
options with similar terms. The Company has estimated no forfeitures for options
awarded in August 2014.
The table below presents the range of assumptions used to value
options granted during the three months ended September 30, 2015 and 2014:
|
|
|
Three
months ended |
|
|
|
|
September 30, |
|
|
|
|
2015 |
|
|
2014 |
|
|
Expected volatility |
|
n/a |
|
|
60% |
|
|
Expected dividends |
|
n/a |
|
|
0% |
|
|
Expected life (in years) |
|
n/a |
|
|
3 |
|
|
Risk-free rate |
|
n/a |
|
|
1.0% |
|
There were no forfeitures during each of the three months ended
September 30, 2015 and 2014.
The following table presents stock options vested and expecting
to vest as of September 30, 2015:
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
|
Number of |
|
|
price |
|
|
Term |
|
|
Value |
|
|
|
|
shares |
|
|
($) |
|
|
(in years) |
|
|
($000) |
|
|
Vested and expecting to vest
September 30, 2015 |
|
2,077,524 |
|
|
15.92 |
|
|
4.33 |
|
|
7,509 |
|
These options have an exercise price range of $7.35 to $24.46.
16
12. |
Stock-based compensation
(continued) |
Stock option and restricted stock
activity (continued)
The following table presents stock
options that are exercisable as of September 30, 2015:
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
|
Number of |
|
|
price |
|
|
Term |
|
|
Value |
|
|
|
|
shares |
|
|
($) |
|
|
(in years) |
|
|
($000) |
|
|
Exercisable September 30,
2015 |
|
1,764,931 |
|
|
16.93 |
|
|
3.55 |
|
|
5,496 |
|
During the three months ended September 30, 2015 and 2014,
respectively, 330,967 and 273,633 stock options became exercisable. During the
three months ended September 30, 2015, the Company received approximately $3.8
million from the exercise of 323,645 stock options. During the three months
ended September 30, 2014, the Company received approximately $1.0 million from
the exercise of 116,395 stock options. The remaining 572,238 stock options were
exercised through recipients delivering 336,584 shares of the Companys common
stock to the Company on September 9, 2014, to settle the exercise price due. The
Company issues new shares to satisfy stock option exercises.
Restricted stock
The following table summarizes restricted stock activity for
the three months ended September 30, 2015 and 2014:
|
|
|
|
|
|
Weighted |
|
|
|
|
Number of |
|
|
Average |
|
|
|
|
Shares of |
|
|
Grant Date |
|
|
|
|
Restricted |
|
|
Fair Value |
|
|
|
|
Stock |
|
|
($000) |
|
|
Non-vested June 30, 2015
|
|
341,529 |
|
|
1,759 |
|
|
Granted August 2015 |
|
319,492 |
|
|
581 |
|
|
Vested August 2015
|
|
(71,574 |
)
|
|
6,406 |
|
|
Non-vested September
30, 2015 |
|
589,447 |
|
|
7,622 |
|
|
|
|
|
|
|
|
|
|
Non-vested June 30, 2014 |
|
385,778 |
|
|
3,534 |
|
|
Granted August 2014
|
|
141,707 |
|
|
581 |
|
|
Vested August 2014 |
|
(74,152 |
) |
|
828 |
|
|
Non-vested September 30, 2014 |
|
453,333 |
|
|
3,568 |
|
The August 2015 grants comprise 301,537 and 17,955 shares of
restricted stock awarded to employees and non-employee directors, respectively.
The shares of restricted stock awarded to employees in August 2015 are subject
to time-based and performance-based vesting conditions. In order for any of the
shares to vest, the recipient must remain employed by the Company on a full-time
basis on the date that it files its Annual Report on Form 10-K for the fiscal
year ended June 30, 2018. If that condition is satisfied, then the shares will
vest based on the level of Fundamental EPS the Company achieves for the fiscal
year ended June 30, 2018 (2018 Fundamental EPS), as follows:
|
|
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. |
17
12. |
Stock-based compensation
(continued) |
Stock-based compensation charge and
unrecognized compensation cost
Restricted stock (continued)
At levels of 2018 Fundamental EPS greater $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 the
Companys stock quoted on The Nasdaq Global Select Market on the date of grant.
The August 2014 grants comprise 127,626 and 14,081 shares of
restricted stock awarded to employees and non-employee directors, respectively.
The shares of restricted stock awarded to employees in August 2014 will vest in
full only on the date, if any, the following conditions are satisfied: (1) the
closing price of the Companys common stock equals or exceeds $19.41 (subject to
appropriate adjustment for any stock split or stock dividend) for a period of 30
consecutive trading days during a measurement period commencing on the date that
the Company files its Annual Report on Form 10-K for the fiscal year ended 2017
and ending on December 31, 2017 and (2) the recipient is employed by the Company
on a full-time basis when the condition in (1) is met. If either of these
conditions is not satisfied, then none of the shares of restricted stock will
vest and they will be forfeited.
The shares of restricted stock, other than the shares awarded
to employees in August 2014, have been valued utilizing the closing price of the
Companys stock quoted on The Nasdaq Global Select Market on the date of grant.
The shares of restricted stock awarded to employees in August 2014 are
effectively forward starting knock-in barrier options with a strike price of
zero. The fair value of these shares of restricted stock was calculated
utilizing an adjusted Monte Carlo simulation discounted cash flow model which
was developed for the purpose of the valuation of these shares. For each
simulated share price path, the market share price condition was evaluated to
determine whether or not the shares would vest under that simulation. The
adjustment to the Monte Carlo simulation model incorporates a jump diffusion
process to the standard Geometric Brownian Motion simulation, in order to
capture the discontinuous share price jumps observed in the Companys share
price movements on stock exchanges on which it is listed. Therefore, the
simulated share price paths capture the idiosyncrasies of the observed Company
share price movements.
In scenarios where the shares do not vest, the final vested
value at maturity is zero. In scenarios where vesting occurs, the final vested
value on maturity is the share price on vesting date. The value of the grant is
the average of the discounted vested values. The Company used an expected
volatility of 76.01%, an expected life of approximately three years, a risk-free
rate of 1.27% and no future dividends in its calculation of the fair value of
the shares of restricted stock awarded to employees in August 2014. Estimated
expected volatility was calculated based on the Companys 30 day VWAP share
price using the exponentially weighted moving average of returns.
The fair value of restricted stock vesting during the three
months ended September 30, 2015 and 2014, respectively, was $1.4 million and
$0.8 million.
Stock-based compensation charge and
unrecognized compensation cost
The Company has recorded a stock-based compensation charge of
$0.7 million and $0.9 million, respectively, during the three months ended
September 30, 2015 and 2014, which comprised:
|
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to |
|
|
|
|
|
|
|
processing, |
|
|
selling, general
|
|
|
|
|
Total |
|
|
servicing and |
|
|
and |
|
|
|
|
charge |
|
|
support |
|
|
administration |
|
|
Three months ended September
30, 2015 Stock-based compensation charge |
$ |
726 |
|
$ |
- |
|
$ |
726 |
|
|
Total three months ended September 30, 2015 |
$ |
726 |
|
$ |
- |
|
$ |
726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2014
Stock-based compensation charge |
$ |
916 |
|
$ |
- |
|
$ |
916 |
|
|
Total three months ended September 30, 2014 |
$ |
916 |
|
$ |
- |
|
$ |
916 |
|
The stock-based compensation charges have been allocated to
selling, general and administration based on the allocation of the cash
compensation paid to the employees.
18
12. |
Stock-based compensation
(continued) |
Stock-based compensation charge and
unrecognized compensation cost (continued)
Restricted stock (continued)
As of September 30, 2015, the total unrecognized compensation
cost related to stock options was approximately $1.5 million, which the Company
expects to recognize over approximately three years. As of September 30, 2015,
the total unrecognized compensation cost related to restricted stock awards was
approximately $1.2 million, which the Company expects to recognize over
approximately two years.
As of September 30, 2015 and June 30, 2015, respectively, the
Company has recorded a deferred tax asset of approximately $1.5 million and $1.6
million related to the stock-based compensation charge recognized related to
employees and directors of Net1 as it is able to deduct the grant date fair
value for taxation purposes in the United States.
Basic earnings per share include shares of restricted stock
that meet the definition of a participating security because these shares are
eligible to receive non-forfeitable dividend equivalents at the same rate as
common stock. Basic earnings per share have been calculated using the two-class
method and basic earnings per share for the three months ended September 30,
2015 and 2014, reflects only undistributed earnings. The computation below of
basic earnings per share excludes the net income attributable to shares of
unvested restricted stock (participating non-vested restricted stock) from the
numerator and excludes the dilutive impact of these unvested shares of
restricted stock from the denominator.
Diluted earnings per share have been calculated to give effect
to the number of shares of additional common stock that would have been
outstanding if the potential dilutive instruments had been issued in each
period. Stock options are included in the calculation of diluted earnings per
share utilizing the treasury stock method and are not considered to be
participating securities as the stock options do not contain non-forfeitable
dividend rights. The calculation of diluted earnings per share includes the
dilutive effect of a portion of the restricted stock granted to employees in
February 2012, August 2013, August 2014, November 2014 and August 2015 as these
shares of restricted stock are considered contingently returnable shares for the
purposes of the diluted earnings per share calculation and the vesting
conditions in respect of a portion of the restricted stock had been satisfied.
The vesting conditions are discussed in Note 18 to the Companys audited
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended June 30, 2015.
19
13. |
Earnings per share
(continued) |
The following table presents net income attributable to Net1
(income from continuing operations) and the share data used in the basic and
diluted earnings per share computations using the two-class method:
|
|
|
Three
months ended |
|
|
|
|
September 30, |
|
|
|
|
2015 |
|
|
2014 |
|
|
|
|
(in thousands
except percent |
|
|
|
|
and |
|
|
|
|
per share
data) |
|
|
Numerator: |
|
|
|
|
|
|
|
Net income attributable
to Net1 |
$ |
23,020 |
|
$ |
24,089 |
|
|
Undistributed earnings |
|
23,020 |
|
|
24,089 |
|
|
Percent allocated to
common shareholders (Calculation 1) |
|
99% |
|
|
99% |
|
|
Numerator
for earnings per share: basic and diluted |
$ |
22,817 |
|
$ |
23,847 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
Denominator for
basic earnings per share: weighted-average common shares
outstanding |
|
46,209 |
|
|
46,751 |
|
|
Effect of
dilutive securities: |
|
|
|
|
|
|
|
Stock
options |
|
460 |
|
|
109 |
|
|
Denominator
for diluted earnings per share: adjusted weighted average
common shares
outstanding and assumed conversion |
|
46,669 |
|
|
46,860 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
Basic |
$ |
0.49 |
|
$ |
0.51 |
|
|
Diluted
|
$ |
0.49 |
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
(Calculation 1) |
|
|
|
|
|
|
|
Basic weighted-average
common shares outstanding (A) |
|
46,209 |
|
|
46,751 |
|
|
Basic weighted-average
common shares outstanding and unvested restricted shares
expected to vest
(B) |
|
46,620 |
|
|
47,226 |
|
|
Percent allocated to
common shareholders (A) / (B) |
|
99% |
|
|
99% |
|
Options to purchase 874,443 shares of the Companys common
stock at prices ranging from $22.51 to $24.46 per share were outstanding during
the three months ended September 30, 2015, but were not included in the
computation of diluted earnings per share because the options exercise price
were greater than the average market price of the Companys common stock. The
options, which expire at various dates through August 27, 2018, were still
outstanding as of September 30, 2015.
14. |
Supplemental cash flow
information |
The following table presents supplemental cash flow disclosures
for the three months ended September 30, 2015 and 2014:
|
|
|
Three
months ended |
|
|
|
|
September 30, |
|
|
|
|
2015 |
|
|
2014 |
|
|
Cash received from interest
|
$ |
4,265 |
|
$ |
4,163 |
|
|
Cash paid for interest |
$ |
939 |
|
$ |
1,218 |
|
|
Cash paid for income taxes
|
$ |
4,066 |
|
$ |
5,160 |
|
The sale of the Companys NUETS business is described in Note
19 to its audited consolidated financial statements included in its Annual
Report on Form 10-K for the year ended June 30, 2015. The Company received cash
sale proceeds of $1.9 million related to this transaction in July 2014.
As discussed in Note 12, during the three months ended
September 30, 2014, employees exercised stock options through the delivery
336,584 shares of the Companys common stock at the closing price on September
9, 2014 or $13.93 under the terms of their option agreements.
20
The Company discloses segment information as reflected in the
management information systems reports that its chief operating decision maker
uses in making decisions and to report certain entity-wide disclosures about
products and services, major customers, and the countries in which the entity
holds material assets or reports material revenues. A description of the
Companys operating segments is contained in Note 23 to the Companys audited
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended June 30, 2015.
The reconciliation of the reportable segments revenue to
revenue from external customers for the three months ended September 30, 2015
and 2014, respectively, is as follows:
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
From |
|
|
|
|
Reportable |
|
|
Inter- |
|
|
external |
|
|
|
|
Segment |
|
|
segment |
|
|
customers |
|
|
South African transaction
processing |
$ |
55,639 |
|
$ |
3,627 |
|
$ |
52,012 |
|
|
International transaction processing |
|
41,229 |
|
|
- |
|
|
41,229 |
|
|
Financial inclusion and
applied technologies |
|
67,360 |
|
|
6,128 |
|
|
61,232 |
|
|
Total for the three months ended
September 30, 2015 |
|
164,228 |
|
|
9,755 |
|
|
154,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
60,252 |
|
|
5,121 |
|
|
55,131 |
|
|
International transaction
processing |
|
43,204 |
|
|
- |
|
|
43,204 |
|
|
Financial inclusion and applied technologies
|
|
65,197 |
|
|
7,091 |
|
|
58,106 |
|
|
Total for the
three months ended September 30, 2014 |
$ |
168,653 |
|
$ |
12,212 |
|
$ |
156,441 |
|
The Company does not allocate interest income, interest expense
or income tax expense to its reportable segments. The Company evaluates segment
performance based on segment operating income before acquisition-related
intangible asset amortization which represents operating income before
acquisition-related intangible asset amortization and allocation of expenses
allocated to Corporate/Eliminations, all under GAAP. The reconciliation of the
reportable segments measure of profit or loss to income before income taxes for
the three months ended September 30, 2015 and 2014, respectively, is as follows:
|
|
|
Three
months ended |
|
|
|
|
September 30, |
|
|
|
|
2015 |
|
|
2014 |
|
|
Reportable segments measure
of profit or loss |
$ |
36,608 |
|
$ |
38,595 |
|
|
Operating income:
Corporate/Eliminations |
|
(5,393 |
) |
|
(5,470 |
) |
|
Interest income
|
|
4,275 |
|
|
4,090 |
|
|
Interest expense |
|
(974 |
) |
|
(1,312 |
) |
|
Income
before income taxes |
$ |
34,516 |
|
$ |
35,903 |
|
The following tables summarize segment information which is
prepared in accordance with GAAP for the three months ended September 30, 2015
and 2014:
|
|
|
Three
months ended |
|
|
|
|
September 30, |
|
|
|
|
2015 |
|
|
2014 |
|
|
Revenues |
|
|
|
|
|
|
|
South African transaction
processing |
$ |
55,639 |
|
$ |
60,252 |
|
|
International transaction processing |
|
41,229 |
|
|
43,204 |
|
|
Financial inclusion and
applied technologies |
|
67,360 |
|
|
65,197 |
|
|
Total |
|
164,228 |
|
|
168,653 |
|
|
Operating income (loss) |
|
|
|
|
|
|
|
South
African transaction processing |
|
13,511 |
|
|
13,639 |
|
|
International transaction
processing |
|
6,543 |
|
|
7,349 |
|
|
Financial
inclusion and applied technologies |
|
16,554 |
|
|
17,607 |
|
|
Subtotal:
Operating segments |
|
36,608 |
|
|
38,595 |
|
|
Corporate/Eliminations |
|
(5,393 |
) |
|
(5,470 |
) |
|
Total |
$ |
31,215 |
|
$ |
33,125 |
|
21
15. |
Operating segments
(continued) |
|
|
|
Three
months ended |
|
|
|
|
September 30, |
|
|
|
|
2015 |
|
|
2014 |
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
South African transaction
processing |
$ |
1,795 |
|
$ |
1,722 |
|
|
International
transaction processing |
|
4,696 |
|
|
4,372 |
|
|
Financial inclusion and applied
technologies |
|
240 |
|
|
179 |
|
|
Subtotal: Operating
segments |
|
6,731 |
|
|
6,273 |
|
|
Corporate/Eliminations |
|
3,384 |
|
|
3,901 |
|
|
Total |
|
10,115 |
|
|
10,174 |
|
|
Expenditures for long-lived assets |
|
|
|
|
|
|
|
South African
transaction processing |
|
1,447 |
|
|
682 |
|
|
International transaction
processing |
|
8,038 |
|
|
8,327 |
|
|
Financial
inclusion and applied technologies |
|
1,213 |
|
|
369 |
|
|
Subtotal:
Operating segments |
|
10,698 |
|
|
9,378 |
|
|
Corporate/Eliminations |
|
- |
|
|
- |
|
|
Total |
$ |
10,698 |
|
$ |
9,378 |
|
The segment information as reviewed by the chief operating
decision maker does not include a measure of segment assets per segment as all
of the significant assets are used in the operations of all, rather than any
one, of the segments. The Company does not have dedicated assets assigned to a
particular operating segment. Accordingly, it is not meaningful to attempt an
arbitrary allocation and segment asset allocation is therefore not presented.
It is impractical to disclose revenues from external customers
for each product and service or each group of similar products and services.
Income tax in interim periods
For the purposes of interim financial reporting, the Company
determines the appropriate income tax provision by first applying the effective
tax rate expected to be applicable for the full fiscal year to ordinary income.
This amount is then adjusted for the tax effect of significant unusual or
extraordinary items, for instance, changes in tax law, valuation allowances and
non-deductible transaction-related expenses that are reported separately, and
have an impact on the tax charge. The cumulative effect of any change in the
enacted tax rate, if and when applicable, on the opening balance of deferred tax
assets and liabilities is also included in the tax charge as a discrete event in
the interim period in which the enactment date occurs.
For the three months ended September 30, 2015, the tax charge
was calculated using the expected effective tax rate for the year. The Companys
effective tax rate for the three months ended September 30, 2015, was 31.6% and
was higher than the South African statutory rate as a result of a valuation
allowance for foreign tax credits and non-deductible expenses (including
consulting and legal fees).
The Companys effective tax rate for the three months ended
September 30, 2014, was 32.4%, and was higher than the South African statutory
rate primarily as a result of non-deductible expenses (including interest
expense related to the Companys long-term Korean borrowings and stock-based
compensation charges).
Uncertain tax positions
The Company increased its unrecognized tax benefits by
approximately $0.1 million during the three months ended September 30, 2015. As
of September 30, 2015, the Company had accrued interest related to uncertain tax
positions of approximately $2.3 million on its balance sheet.
The Company does not expect changes related to its unrecognized
tax benefits will have a significant impact on its results of operations or
financial position in the next 12 months.
22
16. |
Income tax (continued) |
Uncertain tax positions (continued)
As of September 30, 2015 and June 30, 2015, the Company has
unrecognized tax benefits of $2.4 million and $2.3 million, respectively, all of
which would impact the Companys effective tax rate. The Company files income
tax returns mainly in South Africa, South Korea, India, the United Kingdom,
Botswana and in the U.S. federal jurisdiction. As of September 30, 2015, the
Companys South African subsidiaries are no longer subject to income tax
examination by the South African Revenue Service for periods before June 30,
2011. The Company is subject to income tax in other jurisdictions outside South
Africa, none of which are individually material to its financial position,
results of operations or cash flows.
17. |
Commitments and
contingencies |
Guarantees
The South African Revenue Service and certain of the Companys
customers, suppliers and other business partners have asked the Company to
provide them with guarantees, including standby letters of credit, issued by a
South African bank. The Company is required to procure these guarantees for
these third parties to operate its business.
Nedbank has issued guarantees to these third parties amounting
to ZAR 124.9 million ($8.9 million, translated at exchange rates applicable as
of September 30, 2015) and thereby utilizing part of the Companys short-term
facility. The Company in turn has provided nonrecourse, unsecured
counter-guarantees to Nedbank for ZAR 124.9 million ($8.9 million, translated at
exchange rates applicable as of September 30, 2015). The Company pays commission
of between 0.2% per annum to 2.0% per annum of the face value of these
guarantees and does not recover any of the commission from third parties.
The Company has not recognized any obligation related to these
counter-guarantees in its consolidated balance sheet as of September 30, 2015
and June 30, 2015. The maximum potential amount that the Company could pay under
these guarantees is ZAR 124.9 million ($8.9 million, translated at exchange
rates applicable as of September 30, 2015). The guarantees have reduced the
amount available for borrowings under the Companys short-term credit facility
described in Note 8.
Contingencies
Dismissal of U.S. Securities
Litigation
On September 16, 2015, the United States District Court for the
Southern District of New York dismissed the purported securities class action
litigation originally filed on December 24, 2013, against the Company, its Chief
Executive Officer and its Chief Financial Officer. In its opinion, the District
Court provided plaintiff with 30 days to file a second amended complaint. This
deadline passed without plaintiff taking any action. Accordingly, the case has
been closed. Plaintiff may file a notice of appeal until November 23, 2015. The
Company intends to vigorously defend any appeal of the District Courts ruling.
The Company is subject to a variety of insignificant claims and
suits that arise from time to time in the ordinary course of business.
Management currently believes that the resolution of these
matters, individually or in the aggregate, will not have a material adverse
impact on the Companys financial position, results of operations or cash flows.
23
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our
Annual Report on Form 10-K for the year ended June 30, 2015, and the unaudited
condensed consolidated financial statements and the accompanying notes included
in this Form 10-Q.
Forward-looking statements
Some of the statements in this Form 10-Q constitute
forward-looking statements. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our or our industrys actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed, implied or
inferred by these forward-looking statements. Such factors include, among other
things, those listed under Item 1A.Risk Factors and elsewhere in our Annual
Report on Form 10-K for the year ended June 30, 2015. In some cases, you can
identify forward-looking statements by terminology such as may, will,
should, could, would, expects, plans, intends, anticipates,
believes, estimates, predicts, potential or continue or the negative
of such terms and other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we do not know whether we can achieve
positive future results, levels of activity, performance, or goals. Actual
events or results may differ materially. We undertake no obligation to update
any of the forward-looking statements after the date of this Form 10-Q to
conform those statements to reflect the occurrence of unanticipated events,
except as required by applicable law.
You should read this Form 10-Q and the documents that we
reference herein and the documents we have filed as exhibits hereto and thereto
and which we have filed with the Securities and Exchange Commission completely
and with the understanding that our actual future results, levels of activity,
performance and achievements may be materially different from what we expect. We
qualify all of our forward-looking statements by these cautionary statements.
Recent Developments
Cancellation of SASSA
Tender
In late 2014, the South African Social Security Agency SASSA,
or SASSA, issued a request for proposal, or RFP, as ordered by the South African
Constitutional Court. In May 2015, after careful consideration of all the
relevant factors, we decided to withdraw from the tender process and did not
submit a bid.
On October 15, 2015, SASSA filed an update on the tender
process with the Constitutional Court, which reported that the Chief Executive
Officer, or CEO, of SASSA decided not to award the SASSA tender, in accordance
with the recommendation received from the Bid Adjudication Committee, or BAC.
The BAC recommended that the tender not be awarded as a result of the
non-responsiveness of all the bids received with the mandatory requirements
contained in the RFP.
Accordingly, the BAC recommended that the CEO should allow our
current SASSA contract to continue until completion of the five-year period for
which the contract was initially awarded (March 31, 2017), in accordance with
the Constitutional Courts judgment of April 2014. The BAC also recommended that
the CEO should file a report with the Constitutional Court within 14 days of the
decision not to award the tender, setting out all the relevant information on
whether and when SASSA will be ready to assume the duty to pay grants itself.
Accordingly, we expect that we will continue to provide our
social grants payment service to SASSA through March 31, 2017. We cannot predict
at this time whether or not we will continue to provide our service after that
date. We are committed to continue with the provision of a high level service to
SASSA and the social grant beneficiaries in accordance with the service level
agreement and the Constitutional Courts order.
Introduction of EasyPay
Everywhere EPE and EPE ATMs in South Africa
In June 2015, we began the rollout of EPE our
business-to-consumer, or B2C, offering in South Africa and had opened
approximately 350,000 bank accounts as at the end of October 2015. EPE is a
fully transactional account created to serve the needs of South Africas
unbanked and under-banked population, and is available to all consumers
regardless of their financial or social status. The EPE account offers customers
a comprehensive suite of financial and various financial inclusion services,
such as prepaid products, in an economical, convenient and secure solution. EPE
provides account holders with a UEPS-EMV debit MasterCard, mobile and internet
banking services, ATM and POS services, as well as loans, insurance and other
financial products and value-added services.
24
To support the rollout of EPE, we have deployed ATMs, which are
both EMV-and UEPS-compliant, and provided biometric verification as well as
proof of life functionality, in South Africa. We placed these ATMs with our
merchant partners and within our own branches, creating a new delivery channel
for our products and services that did not previously exist. ATM rollout has
continued to make a positive contribution to our reported results and we have
been able to expand our customer base because our ATMs accept all EMV-compliant
cards. We currently have approximately 750 operational ATMs, and are actively
deploying more ATMs in high demand areas. We will continue to expand our ATM
footprint in fiscal 2016.
Smart Life resumes writing new
insurance policies
We have complied with all the conditions imposed by the South
African Financial Services Board, or FSB, to uplift the suspension of Smart
Lifes license to provide long-term insurance products, which resulted in the
FSB withdrawing the prohibition to conduct new business issued by it
approximately two years ago. In September 2015, we resumed marketing and
business development activities in selected areas for the distribution of our
simple, low-cost life insurance products and have sold approximately 5,700 new
policies as at the end of October 2015. We are currently recruiting staff
members to expand our marketing activities across South Africa during fiscal
2016.
Critical Accounting Policies
Our unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. GAAP, which requires management to make
estimates and assumptions about future events that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities. As
future events and their effects cannot be determined with absolute certainty,
the determination of estimates requires managements judgment based on a variety
of assumptions and other determinants such as historical experience, current and
expected market conditions and certain scientific evaluation techniques.
Critical accounting policies are those that reflect significant
judgments or uncertainties, and potentially may result in materially different
results under different assumptions and conditions. Management has identified
the following critical accounting policies that are described in more detail in
our Annual Report on Form 10-K for the year ended June 30, 2015:
|
|
Business combinations and the recoverability of goodwill;
|
|
|
Intangible assets acquired through acquisitions;
|
|
|
Deferred taxation; |
|
|
Stock-based compensation and equity instrument issued
pursuant to BEE transaction; |
|
|
Accounts receivable and allowance for doubtful accounts
receivable; and |
|
|
Research and development. |
25
Recent accounting pronouncements
adopted
Refer to Note 1 to our unaudited condensed consolidated
financial statements for a full description of recent accounting pronouncements
adopted, including the dates of adoption and the effects on our condensed
consolidated financial statements.
Recent accounting pronouncements not
yet adopted as of September 30, 2015
Refer to Note 1 to our unaudited condensed consolidated
financial statements for a full description of recent accounting pronouncements
not yet adopted as of September 30, 2015, including the expected dates of
adoption and effects on our financial condition, results of operations and cash
flows.
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and at
the end of the periods presented were as follows:
Table 1 |
|
Three
months ended |
|
|
Year ended |
|
|
|
September 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
ZAR : $ average exchange rate |
|
12.9702 |
|
|
10.7581 |
|
|
11.4494 |
|
Highest ZAR : $ rate during period |
|
14.0282 |
|
|
11.2641 |
|
|
12.5779 |
|
Lowest ZAR : $ rate during period |
|
12.1965 |
|
|
10.5128 |
|
|
10.5128 |
|
Rate at end of period |
|
14.0282 |
|
|
11.2641 |
|
|
12.2854 |
|
|
|
|
|
|
|
|
|
|
|
KRW : $ average exchange rate |
|
1,169 |
|
|
1,027 |
|
|
1,078 |
|
Highest KRW : $ rate during period |
|
1,203 |
|
|
1,051 |
|
|
1,139 |
|
Lowest KRW : $ rate during period |
|
1,118 |
|
|
1,009 |
|
|
1,009 |
|
Rate at end of period |
|
1,196 |
|
|
1,051 |
|
|
1,128 |
|
26
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 months ended September 30, 2015 and 2014, 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 |
|
|
Year ended |
|
|
|
September 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
Income and expense items: $1
= ZAR |
|
12.9583 |
|
|
10.7431 |
|
|
11.4275 |
|
Income and expense items: $1 = KRW |
|
1,167 |
|
|
1,029 |
|
|
1,073 |
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR |
|
14.0282 |
|
|
11.2641 |
|
|
12.2854 |
|
Balance sheet items: $1 = KRW
|
|
1,196 |
|
|
1,051 |
|
|
1,128 |
|
Results of operations
The discussion of our consolidated overall results of
operations is based on amounts as reflected in our unaudited condensed
consolidated financial statements which are prepared in accordance with U.S.
GAAP. We analyze our results of operations both in U.S. dollars, as presented in
the consolidated financial statements, and supplementally in ZAR, because ZAR is
the functional currency of the entities which contribute the majority of our
profits and is the currency in which the majority of our transactions are
initially incurred and measured. Due to the significant impact of currency
fluctuations between the U.S. dollar and ZAR on our reported results and because
we use the U.S. dollar as our reporting currency, we believe that the
supplemental presentation of our results of operations in ZAR is useful to
investors to understand the changes in the underlying trends of our
business.
Our operating segment revenue presented in Results of
operations by operating segment represents total revenue per operating segment
before inter-segment eliminations. Reconciliation between total operating
segment revenue and revenue presented in our consolidated financial statements
is included in Note 15 to those statements.
27
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.
First quarter of fiscal 2016
compared to first quarter of fiscal 2015
The following factors had a significant influence on our
results of operations during the first quarter of fiscal 2016 as compared with
the same period in the prior year:
|
|
Unfavorable impact from the strengthening of the
U.S. dollar against primary functional currencies: The U.S. dollar
appreciated by 21% against the ZAR and 13% against the KRW during the
first quarter of fiscal 2016, which negatively impacted our reported
results; |
|
|
Increased contribution by KSNET: Our
results were positively impacted by growth in our Korean operations;
|
|
|
Continued growth in financial inclusion services:
We continued to grow our financial inclusion services offerings
during the first quarter of fiscal 2016 which has resulted in higher
revenues and operating income, primarily from more sales of low-margin
prepaid airtime and an increase in transaction fees; |
|
|
Increase in the number of SASSA grants paid:
Our revenue and operating income have increased as a result of the
higher number of SASSA UEPS/EMV beneficiaries paid during fiscal 2016
compared with 2015; and |
|
|
Launch of EPE and Smart Life: During the first quarter of
fiscal 2016 we launched our EPE and Smart Life offerings, which
contributed to a marginal increase in revenue in ZAR, as well as an
associated increase in establishment costs. |
Consolidated overall results of
operations
This discussion is based on the amounts
which were 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 United
States Dollars |
|
Table 3 |
|
(U.S. GAAP) |
|
|
|
Three months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
$ % |
|
|
|
$ 000 |
|
|
$ 000 |
|
|
change |
|
Revenue |
|
154,473 |
|
|
156,441 |
|
|
(1% |
) |
Cost of goods sold, IT processing, servicing
and support |
|
77,382 |
|
|
74,406 |
|
|
4% |
|
Selling, general and
administration |
|
35,761 |
|
|
38,736 |
|
|
(8% |
) |
Depreciation and amortization |
|
10,115 |
|
|
10,174 |
|
|
(1% |
) |
Operating income |
|
31,215 |
|
|
33,125 |
|
|
(6% |
) |
Interest income |
|
4,275 |
|
|
4,090 |
|
|
5% |
|
Interest expense |
|
974 |
|
|
1,312 |
|
|
(26% |
) |
Income before income tax expense |
|
34,516 |
|
|
35,903 |
|
|
(4% |
) |
Income tax expense |
|
10,897 |
|
|
11,648 |
|
|
(6% |
) |
Net income before earnings from
equity-accounted investments |
|
23,619 |
|
|
24,255 |
|
|
(3% |
) |
Earnings from
equity-accounted investments |
|
188 |
|
|
92 |
|
|
104% |
|
Net income |
|
23,807 |
|
|
24,347 |
|
|
(2% |
) |
Less net income attributable
to non-controlling interest |
|
787 |
|
|
258 |
|
|
205% |
|
Net income attributable to us |
|
23,020 |
|
|
24,089 |
|
|
(4% |
) |
28
|
|
In South
African Rand |
|
Table 4 |
|
(U.S. GAAP) |
|
|
|
Three months ended September 30,
|
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
ZAR |
|
|
ZAR |
|
|
ZAR % |
|
|
|
000 |
|
|
000 |
|
|
change |
|
Revenue |
|
2,001,707 |
|
|
1,680,661 |
|
|
19% |
|
Cost of goods sold, IT processing, servicing
and support |
|
1,002,739 |
|
|
799,351 |
|
|
25% |
|
Selling, general and
administration |
|
463,402 |
|
|
416,145 |
|
|
11% |
|
Depreciation and amortization |
|
131,073 |
|
|
109,300 |
|
|
20% |
|
Operating income |
|
404,493 |
|
|
355,865 |
|
|
14% |
|
Interest income |
|
55,397 |
|
|
43,939 |
|
|
26% |
|
Interest expense |
|
12,621 |
|
|
14,095 |
|
|
(10% |
) |
Income before income tax expense |
|
447,269 |
|
|
385,709 |
|
|
16% |
|
Income tax expense |
|
141,207 |
|
|
125,136 |
|
|
13% |
|
Net income before earnings from
equity-accounted investments |
|
306,062 |
|
|
260,573 |
|
|
17% |
|
Earnings from
equity-accounted investments |
|
2,436 |
|
|
988 |
|
|
147% |
|
Net income |
|
308,498 |
|
|
261,561 |
|
|
18% |
|
Less net income attributable
to non-controlling interest |
|
10,198 |
|
|
2,772 |
|
|
268% |
|
Net income attributable to us |
|
298,300 |
|
|
258,789 |
|
|
15% |
|
The increase in revenue in ZAR was primarily due to higher
prepaid airtime sales, more low-margin transaction fees generated from
cardholders using the South African National Payment System, more fees generated
from our new EPE and ATM offerings, an increase in the number of SASSA UEPS/ EMV
beneficiaries paid, a higher contribution from KSNET and more ad hoc terminal
sales, offset by lower UEPS-loans fees.
The increase in cost of goods sold, IT processing, servicing
and support was primarily due to higher expenses incurred from increased usage
of the South African National Payment System by beneficiaries, expenses incurred
to roll-out our new EPE and ATM offerings, and more prepaid airtime sold.
In ZAR, our selling, general and administration expense
increased due to a higher staff complement resulting from our EPE roll-out as
well as increases in goods and services purchased from third parties.
Our operating income margin for first quarter of fiscal 2016
and 2015 was 20% and 21% respectively. We discuss the components of operating
income margin under Results of operations by operating segment. The decrease
is primarily attributable to the higher cost of goods sold, IT processing,
servicing and support referred to above and an increase in depreciation
expenses.
In ZAR, depreciation and amortization were higher primarily as
a result of an increase in depreciation related to more terminals used to
provide transaction processing in Korea and the roll-out of EPE ATMs.
Interest on surplus cash increased to $4.3 million (ZAR 55.4
million) from $4.1 million (ZAR 43.9 million), due primarily to higher average
daily ZAR cash balances.
Interest expense decreased to $1.0 million (ZAR 12.6 million)
from $1.3 million (ZAR 14.1 million), due to a lower average long-term debt
balance on our South Korean debt and a lower interest rate.
Fiscal 2016 tax expense was $10.9 million (ZAR 141.2 million)
compared to $11.6 million (ZAR 125.1 million) in fiscal 2015. Our effective tax
rate for fiscal 2016, was 31.6% and was higher than the South African statutory
rate as a result of a valuation allowance for foreign tax credits and
non-deductible expenses (including consulting and legal fees). Our effective tax
rate for fiscal 2015, was 32.4% and was higher than the South African statutory
rate as a result of non-deductible expenses (including interest expense related
to our long-term Korean borrowings and stock-based compensation charges).
29
Results of operations by operating
segment
The composition of revenue and the contributions of our
business activities to operating income are illustrated below
Table 5 |
|
|
|
|
In United States Dollars (U.S.
GAAP) |
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
2015 |
|
|
% of |
|
|
2014 |
|
|
% of |
|
|
% |
|
Operating Segment
|
$ |
000 |
|
|
total |
|
$ |
000 |
|
|
total |
|
|
change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
55,639 |
|
|
36% |
|
|
60,252 |
|
|
39% |
|
|
(8% |
) |
International transaction processing |
|
41,229 |
|
|
27% |
|
|
43,204 |
|
|
28% |
|
|
(5% |
) |
Financial inclusion and
applied technologies |
|
67,360 |
|
|
44% |
|
|
65,197 |
|
|
42% |
|
|
3% |
|
Subtotal:
Operating segments |
|
164,228 |
|
|
107% |
|
|
168,653 |
|
|
109% |
|
|
(3% |
) |
Intersegment eliminations |
|
(9,755 |
) |
|
(7% |
) |
|
(12,212 |
) |
|
(9% |
) |
|
(20% |
) |
Consolidated
revenue |
|
154,473 |
|
|
100% |
|
|
156,441 |
|
|
100% |
|
|
(1% |
) |
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
13,511 |
|
|
43% |
|
|
13,639 |
|
|
41% |
|
|
(1% |
) |
International transaction
processing |
|
6,543 |
|
|
21% |
|
|
7,349 |
|
|
22% |
|
|
(11% |
) |
Financial inclusion and applied technologies
|
|
16,554 |
|
|
53% |
|
|
17,607 |
|
|
53% |
|
|
(6% |
) |
Subtotal: Operating segments |
|
36,608 |
|
|
117% |
|
|
38,595 |
|
|
116% |
|
|
(5% |
) |
Corporate/Eliminations |
|
(5,393 |
) |
|
(17% |
) |
|
(5,470 |
) |
|
(16% |
) |
|
(1% |
) |
Consolidated operating income |
|
31,215 |
|
|
100% |
|
|
33,125 |
|
|
100% |
|
|
(6% |
)
|
Table 6 |
|
|
|
|
In South African Rand (U.S. GAAP)
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
ZAR |
|
|
% of |
|
|
ZAR |
|
|
% of |
|
|
% |
|
Operating Segment |
|
000 |
|
|
total |
|
|
000 |
|
|
total |
|
|
change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
720,987 |
|
|
36% |
|
|
647,293 |
|
|
39% |
|
|
11% |
|
International transaction processing |
|
534,258 |
|
|
27% |
|
|
464,145 |
|
|
28% |
|
|
15% |
|
Financial inclusion and
applied technologies |
|
872,871 |
|
|
44% |
|
|
700,418 |
|
|
42% |
|
|
25% |
|
Subtotal:
Operating segments |
|
2,128,116 |
|
|
107% |
|
|
1,811,856 |
|
|
109% |
|
|
17% |
|
Intersegment eliminations |
|
(126,409 |
) |
|
(7% |
) |
|
(131,195 |
) |
|
(9% |
) |
|
(4% |
) |
Consolidated
revenue |
|
2,001,707 |
|
|
100% |
|
|
1,680,661 |
|
|
100% |
|
|
19% |
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
175,080 |
|
|
43% |
|
|
146,525 |
|
|
41% |
|
|
19% |
|
International transaction
processing |
|
84,786 |
|
|
21% |
|
|
78,951 |
|
|
22% |
|
|
7% |
|
Financial inclusion and applied technologies
|
|
214,512 |
|
|
53% |
|
|
189,154 |
|
|
53% |
|
|
13% |
|
Subtotal: Operating segments |
|
474,378 |
|
|
117% |
|
|
414,630 |
|
|
116% |
|
|
14% |
|
Corporate/Eliminations |
|
(69,884 |
) |
|
(17% |
) |
|
(58,765 |
) |
|
(16% |
) |
|
19% |
|
Consolidated operating income |
|
404,494 |
|
|
100% |
|
|
355,865 |
|
|
100% |
|
|
14% |
|
South African transaction processing
In ZAR, the increase in segment revenue was primarily due to
more low-margin transaction fees generated from card holders using the South
African National Payment System and an increase in the number of social welfare
grants distributed, offset by fewer inter-segment transaction processing
activities.
Our operating income margin for the first quarter of fiscal
2016 and 2015 was 24% and 23%, respectively, and has increased primarily due to
an increase in the number of beneficiaries paid in fiscal 2016 and a modest
increase in the margin of transaction fees generated from cardholders using the
South African National Payment System.
International transaction-based
activities
Revenue increased in constant currency primarily due to higher
transaction volume at KSNET during the first quarter of fiscal 2016. Operating
income during the first fiscal quarter of 2016 was higher due to increase in
revenue contribution from KSNET and a positive contribution by XeoHealth, but
was partially offset by ongoing ZAZOO start-up costs in the UK and India.
Operating income margin for the first quarter of fiscal 2016 and 2015 was 16%
and 17%, respectively.
30
Financial inclusion and applied
technologies
In ZAR, Financial inclusion and applied
technologies revenue and operating income increased primarily due to higher
prepaid airtime and other value-added services sales, more ad hoc terminal and card
sales and, in ZAR, an increase in inter-segment revenues. Operating income for
the first quarter of fiscal 2016, was adversely impacted by establishment costs
for EPE and Smart Life.
The South African National Credit Act, or NCA, made certain
industry-wide amendments, which became effective March 13, 2015. These
amendments were introduced primarily to address over-indebtedness of South
African consumers and require lenders to perform a stricter affordability
assessment. Compliance with the amended legislation had a modest negative impact
on our UEPS-based lending businesses in the first quarter of fiscal 2016.
Operating income margin for the
Financial inclusion and applied technologies segment was 25% and 27%,
respectively, during the first quarter of fiscal 2016 and 2015, and has
decreased primarily due to the sale of more low-margin prepaid airtime and
establishment costs for EPE and Smart Life.
Corporate/ Eliminations
Our corporate expenses generally include acquisition-related
intangible asset amortization; expenditure related to compliance with the
Sarbanes-Oxley Act of 2002; non-employee directors fees; employee and executive
bonuses; stock-based compensation; legal fees; audit fees; directors and
officers insurance premiums; telecommunications expenses; property-related
expenditures including utilities, rental, security and maintenance; and
elimination entries.
In USD, our corporate expenses have decreased primarily due to
the impact of the stronger USD on goods and services procured in other
currencies, primarily the ZAR, and lower amortization costs, partially offset by
modest increases in USD denominated goods and services purchased from third
parties and directors fees.
Liquidity and Capital Resources
At September 30, 2015, our cash balances were $125.6 million,
which comprised mainly ZAR-denominated balances of ZAR 1.4 billion ($101.0
million), U.S. dollar-denominated balances of $16.1 million and other currency
deposits, primarily euros and British pounds of $8.5 million. The increase in
our cash balances from June 30, 2015, was primarily due to the expansion of all
of our core businesses, offset by provisional tax payments, capital expenditures
and the strengthening of the U.S. dollar against our primary functional
currencies.
We currently believe that our cash and credit facilities are
sufficient to fund our future operations for at least the next four
quarters.
We generally invest the surplus cash held by our South African
operations in overnight call accounts that we maintain at South African banking
institutions, and surplus cash held by our non-South African companies in the
U.S. money markets. We have invested surplus cash in Korea in short-term
investment accounts at Korean banking institutions.
Historically, we have financed most of our operations, research
and development, working capital, capital expenditures and acquisitions through
our internally generated cash. When considering whether to borrow under our
financing facilities, we consider the cost of capital, cost of financing,
opportunity cost of utilizing surplus cash and availability of tax efficient
structures to moderate financing costs.
We have a short-term South African credit facility with Nedbank
Limited of ZAR 400 million ($28.5 million), which consists of (i) a primary
amount of up to ZAR 200 million, which is immediately available, and (ii) a
secondary amount of up to ZAR 200 million, which is not immediately available.
The primary amounts comprises an overdraft facility of up to ZAR 50 million and
indirect and derivative facilities of up to ZAR 150 million, which includes
letters of guarantee, letters of credit and forward exchange contracts. As of
September 30, 2015, we have used none of the overdraft and ZAR 128.2 million
($9.1 million) of the indirect and derivative facilities to obtain foreign
exchange contracts and to support guarantees issued by Nedbank to various third
parties on our behalf. Refer to Note 12 to our audited consolidated financial
statements included in our Annual Report on Form 10-K for the year ended June
30, 2015, for additional information related to our short-term facilities.
As of September 30, 2015, we had outstanding long-term debt of
KRW 68.1 billion (approximately $56.9 million translated at exchange rates
applicable as of September 30, 2015) under credit facilities with a group of
South Korean banks. The loans bear interest at the South Korean CD rate in
effect from time to time (1.64% as of September 30, 2015) plus a margin of 3.10%
for one of the term loan facilities and the revolver. Scheduled remaining
repayments of the term loans and loan under the revolving credit facility are as
follows: April 2016, 2017 and 2018 (KRW 10 billion each) and October 2018 (KRW
30 billion plus all outstanding loans under our revolving credit facility).
Refer to Note 9 to our unaudited condensed consolidated financial statements for
the three months ended September 30, 2015, for additional information related to
our long-term borrowings.
31
Cash flows from operating activities
First quarter of fiscal 2016 and
2015
Net cash provided by operating activities for the first quarter
of fiscal 2016 was $28.1 million (ZAR 364.2 million) compared to cash provided
by operating activities of $39.5 million (ZAR 424.6 million) for the first
quarter of fiscal 2015. Excluding the impact of interest received, interest paid
under our Korean debt and taxes presented in the table below, the decrease in
cash from operating activities resulted from the timing of receipts of cash from
customers.
During the first quarter of fiscal 2016, we made an additional
tax payment of $3.4 million (ZAR 46.8 million) related to our 2015 tax year in
South Africa. We paid dividend withholding taxes of $0.8million (ZAR 10 million)
during the first quarter of fiscal 2016. We also paid taxes totaling $0.02
million in other tax jurisdictions, primarily South Korea. During the first
quarter of fiscal 2015, we made an additional tax payment of $2.4 million (ZAR
26.4 million) related to our 2014 tax year in South Africa. We also paid taxes
totaling $2.8 million in other tax jurisdictions, primarily South Korea.
Taxes paid during the first quarter of
fiscal 2016 and 2015 were as follows:
Table 7 |
|
Three months ended September
30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
$ |
|
|
$ |
|
|
ZAR |
|
|
ZAR |
|
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
Taxation paid related to
prior years |
|
3,436 |
|
|
2,408 |
|
|
46,840 |
|
|
26,392 |
|
Taxation refunds received |
|
(176 |
) |
|
(34 |
) |
|
(2,402 |
) |
|
(365 |
) |
Dividend withholding taxation
|
|
789 |
|
|
- |
|
|
10,000 |
|
|
- |
|
Total South
African taxes paid |
|
4,049 |
|
|
2,374 |
|
|
54,438 |
|
|
26,027 |
|
Foreign taxes paid, primarily South Korea |
|
17 |
|
|
2,786 |
|
|
232 |
|
|
30,170 |
|
Total
tax paid |
|
4,066 |
|
|
5,160 |
|
|
54,670 |
|
|
56,197 |
|
We expect to pay our first provisional payments in South Africa
related to our 2016 tax year in the second quarter of fiscal 2016.
Cash flows from investing activities
First quarter of fiscal 2016 and
2015
Cash used in investing activities for the first quarter of
fiscal 2016 includes capital expenditure of $10.7 million (ZAR 138.8 million),
primarily for the acquisition of payment processing terminals in Korea and the
rollout of ATMs in South Africa.
Cash used in investing activities for the first quarter of
fiscal 2015 includes capital expenditure of $9.4 million (ZAR 101.9 million),
primarily for the acquisition of payment processing terminals in Korea.
Cash flows from financing activities
First quarter of fiscal 2016 and
2015
During the first quarter of fiscal 2016, we received
approximately $3.8 million from the exercise of stock options and utilized
approximately $0.7 million of our Korean borrowings to pay quarterly interest
due.
During the first quarter of fiscal 2015, we repurchased BVIs
remaining 1,837,432 shares of Net1 common stock for approximately $9.2 million
and BVI paid $1.4 million for 12.5% of CPS issued and outstanding ordinary
shares. We also utilized approximately $1.1 million of our Korean borrowings to
pay quarterly interest due and received approximately $1.0 million from the
exercise of stock options during the first quarter of fiscal 2015.
Off-Balance Sheet Arrangements
We have no off-balance sheet
arrangements.
32
Capital Expenditures
We expect capital spending for the second quarter of fiscal
2016 to primarily include the acquisition of payment terminals for the expansion
of our operations in Korea and expansion of ATMs infrastructure and branch
network in South Africa.
Our historical capital expenditures for the first quarter of
fiscal 2016 and 2015 are discussed under Liquidity and Capital ResourcesCash
flows from investing activities. All of our capital expenditures for the past
three fiscal years were funded through internally-generated funds. We had
outstanding capital commitments as of September 30, 2015, of $1.5 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 September 30, 2015:
Table 8 |
|
Payments due by Period, as of
September 30, 2015(in $ 000s) |
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
than 1 |
|
|
1-3 |
|
|
3-5 |
|
|
than 5 |
|
|
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
Long-term debt obligations
(A) |
|
61,774 |
|
|
2,983 |
|
|
20,595 |
|
|
38,196 |
|
|
- |
|
Operating lease obligations |
|
9,638 |
|
|
4,325 |
|
|
5,000 |
|
|
313 |
|
|
- |
|
Purchase obligations |
|
4,763 |
|
|
4,763 |
|
|
- |
|
|
- |
|
|
- |
|
Capital commitments |
|
1,521 |
|
|
1,521 |
|
|
- |
|
|
- |
|
|
- |
|
Other long-term obligations
(B)(C) |
|
2,178 |
|
|
- |
|
|
- |
|
|
- |
|
|
2,178 |
|
Total |
|
79,874 |
|
|
13,592 |
|
|
25,595 |
|
|
38,509 |
|
|
2,178 |
|
|
(A) |
Includes $56.9 million of long-term debt and interest
payable at the rate applicable on September 30, 2015, under our Korean
debt facility. |
|
(B) |
Includes policy holder liabilities of $1 million
related to our insurance business. |
|
(C) |
We have excluded cross-guarantees in the aggregate
amount of $9.1 million issued as of September 30, 2015, to Nedbank to
secure guarantees it has issued to third parties on our behalf as the
amounts that will be settled in cash are not known and the timing of any
payments is uncertain. |
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
In addition to the tables below, see Note 5 to the unaudited
condensed consolidated financial statements for a discussion of market risk.
The following table illustrates the effect on our annual
expected interest charge, translated at exchange rates applicable as of
September 30, 2015, as a result of changes in the Korean CD. The effect of a
hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in each of
the Korean CD rate as of September 30, 2015, are shown. The selected 1%
hypothetical change does not reflect what could be considered the best or worst
case scenarios.
|
|
As of September 30, 2015 |
|
Table 9 |
|
|
|
|
Hypothetical |
|
|
Estimated annual
|
|
|
|
|
|
|
change in |
|
|
expected interest
|
|
|
|
|
|
|
Korean CD |
|
|
charge after |
|
|
|
|
|
|
rate or South |
|
|
hypothetical change
in |
|
|
|
Annual |
|
|
Africa |
|
|
Korean CD rate or
|
|
|
|
expected |
|
|
overdraft |
|
|
South African |
|
|
|
interest |
|
|
facility rate,
|
|
|
overdraft facility
rate, |
|
|
|
charge |
|
|
as |
|
|
as appropriate
|
|
|
|
($ 000) |
|
|
appropriate |
|
|
($ 000) |
|
Interest on Korean long-term
debt |
|
2,698 |
|
|
1% |
|
|
3,267 |
|
|
|
|
|
|
(1% |
) |
|
2,129 |
|
33
The following table summarizes our exchange-traded equity
securities with equity price risk as of September 30, 2015. The effects of a
hypothetical 10% increase and a 10% decrease in market prices as of September
30, 2015, is also shown. The selected 10% hypothetical change does not reflect
what could be considered the best or worst case scenarios.
|
|
As of September 30, 2015 |
|
Table 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical |
|
|
|
|
|
|
|
|
|
Estimated fair
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
value after |
|
|
Increase |
|
|
|
Fair |
|
|
|
|
|
hypothetical |
|
|
(Decrease) in |
|
|
|
value |
|
|
Hypothetical |
|
|
change in price
|
|
|
Shareholders |
|
|
|
($ 000) |
|
|
price change |
|
|
($ 000) |
|
|
Equity |
|
Exchange-traded equity
securities |
|
6,618 |
|
|
10% |
|
|
7,280 |
|
|
0.14% |
|
|
|
|
|
|
(10% |
) |
|
5,956 |
|
|
(0.14% |
)
|
Item 4. Controls and Procedures
Evaluation of disclosure controls
and procedures
Under the supervision and with the participation of our
management, including our chief executive officer and our chief financial
officer, we conducted an evaluation of our disclosure controls and procedures,
as such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended, as of September 30, 2015. Management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on this evaluation, the
chief executive officer and the chief financial officer concluded that our
disclosure controls and procedures were effective as of September 30, 2015.
Changes in Internal Control over
Financial Reporting
There have not been any changes in our internal control over
financial reporting during the fiscal quarter ended September 30, 2015, that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
34
Part II. Other Information
Item 1. Legal Proceedings
Constitutional Court Proceedings
Relating to SASSA Tender Process
See disclosure under Managements Discussion and Analysis of
Financial Condition and Results of OperationsRecent DevelopmentsCancellation
of SASSA Tender for an update regarding the proceedings in the Constitutional
Court in connection with the SASSA tender process.
United States securities
litigation
On September 16, 2015, the United States District Court for the
Southern District of New York dismissed the purported securities class action
litigation originally filed on December 24, 2013, against us, our Chief
Executive Officer and our Chief Financial Officer. In its opinion, the District
Court provided plaintiff with 30 days to file a second amended complaint. This
deadline passed without plaintiff taking any action. Accordingly, the case has
been closed. Plaintiff may file a notice of appeal until November 23, 2015. We
intend to vigorously defend any appeal of the District Courts ruling.
Item 6. Exhibits
The following exhibits are filed as
part of this Form 10-Q:
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 November 5, 2015.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Dr. Serge C.P. Belamant
Dr. Serge C.P. Belamant
Chief
Executive Officer, Chairman of the Board and Director
By: /s/ Herman Gideon Kotzé
Herman Gideon Kotzé
Chief
Financial Officer, Treasurer and Secretary, Director
35
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
RULES 13A-14(A) AND 15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED
I, Serge Belamant, certify that:
1. I have reviewed this quarterly
report on Form 10-Q of Net 1 UEPS Technologies, Inc. (Net1) for the quarter
ended September 30, 2015;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of Net1 as of, and for, the periods presented in this report;
4. Net1s other certifying officer and
I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for Net1 and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to Net1, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of Net1s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in Net1s internal
control over financial reporting that occurred during Net1s most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, Net1s internal control over financial reporting; and
5. Net1s other certifying officer and
I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to Net1s auditors and the Audit Committee of Net1s Board
of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect Net1s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in Net1s internal
control over financial reporting.
Date: November 5, 2015 |
/s/ Dr. Serge C. P. Belamant |
|
Dr. Serge C. P. Belamant |
|
Chief executive officer
|
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
RULES 13A-14(A) AND 15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED
I, Herman Kotzé, certify that:
1. I have reviewed this quarterly
report on Form 10-Q of Net 1 UEPS Technologies, Inc. (Net1) for the quarter
ended September 30, 2015;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of Net1 as of, and for, the periods presented in this report;
4. Net1s other certifying officer and
I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for Net1 and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to Net1, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of Net1s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in Net1s internal
control over financial reporting that occurred during Net1s most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, Net1s internal control over financial reporting; and
5. Net1s other certifying officer and
I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to Net1s auditors and the Audit Committee of Net1s Board
of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect Net1s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in Net1s internal
control over financial reporting.
Date: November 5, 2015 |
/s/ Herman Gideon Kotzé |
|
Herman Gideon Kotzé |
|
Chief financial officer
|
Exhibit 32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Net 1 UEPS
Technologies, Inc. (Net1) on Form 10-Q for the quarter ended September 30,
2015, as filed with the Securities and Exchange Commission on the date hereof
(the Report), Dr. Serge Belamant and Herman Kotzé, Chief Executive Officer and
Chief Financial Officer, respectively, of Net1, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that to
their knowledge:
|
1. |
The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and |
|
|
|
|
2. |
The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of Net1. |
Date: November 5, 2015 |
/s/: Dr. Serge C. P. Belamant |
|
Name: Dr. Serge C. P. Belamant |
|
Chief Executive Officer and Chairman |
|
of the Board |
|
|
Date: November 5, 2015 |
/s/: Herman Kotzé |
|
Name: Herman Kotzé |
|
Chief Financial Officer, Treasurer and |
|
Secretary |
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