Net 1 UEPS Technologies, Inc. CEO’s Letter for 2017 Annual Report
Dear Fellow Shareholders,
It is my privilege to address you as Net1’s CEO. This past year has been one of the most challenging in our history, but as always,
we have addressed these challenges head on and moved forward. During my first 100 days in office, we have engaged with our
various internal and external stakeholders, reviewed and consolidated our products, services, businesses and geographies, and
commenced a strategic review to determine the appropriate approach to drive long-term growth (both in South Africa and
internationally), optimize capital allocation and ultimately improve shareholder returns.
During the year, we had a number of key developments that will shape Net1 for the future:
• Management and Board changes: Our founder and CEO Serge Belamant retired effective May 31, 2017 following
which I was appointed as CEO of Net1. Additionally, Chris Seabrooke was appointed as Non-Executive Chairman, and
Alfred Mockett joined our Board as an independent director. We are currently looking to appoint a new Chief Financial
Officer and a Chief Communications Officer ;
• Closure of DOJ investigation: In July 2017, we received a letter from the US Department of Justice closing its FCPA
investigation. This investigation commenced in 2012 as a result of allegations levied by a losing bidder for our SASSA
contract. The DOJ closure letter was the last remaining outstanding item in this joint investigation with the SEC in the
U.S., in addition to the Hawks in South Africa also closing their enquiries in 2015;
• Cell C and DNI investments: In early August 2017, we acquired a 15% interest in Cell C and a 45% interest in DNI for
a total consideration of approximately $220 million, which was funded with existing cash reserves and approximately
$95 million in debt. The strategic rationale for these investments is to create new, relevant and affordable mobile-based
products and further expand the reach of our South African business;
• Extension of SASSA contract: Our five-year contract with SASSA was scheduled to expire on March 31, 2017. Based
on further instructions from the Constitutional Court, the contract was extended to March 31, 2018. During this extension
period, SASSA is required to either become paymaster itself or find an interim solution until it is able to provide the
distribution of grants and must file quarterly progress reports with the Court. In June 2017, the Court appointed an expert
panel of ten seasoned practitioners to provide further oversight. In its most recent filing on September 15, 2017, SASSA
indicated a preference to use the South African Post Office (SAPO) as an interim measure where applicable, and issue
fresh tenders where required. SASSA indicated that it is committed to work with SAPO and is currently performing due
diligence to determine SAPO’s capabilities. SASSA indicated that it may issue separate tenders for any services that
SAPO may not be able to provide and also outlined certain services that will be insourced over the next twelve months to
reduce SASSA’s dependence on third parties
We have provided our full commitment to SASSA to assist with any transition process and prevent any disruptions in service
delivery to beneficiaries. The distribution of social grants is a significant expenditure item for the South African government
given that over 40% of the country’s population benefits from welfare support, and therefore, we expect the political, regulatory
and judicial interest in this activity to continue for the foreseeable future, or until such time that SASSA has finally assumed the
responsibility of grant distribution as a government function.
In the meantime, our effort to scale our independent financial inclusion business in South Africa - centered around EasyPay
Everywhere (“EPE”) - continues to gain traction and we now have over two million customers, 150 branches, over 1,000
UEPS/EMV ATMs, and more than 1,800 dedicated staff. We believe our Cell C and DNI investments will likely help drive
growth of our South African businesses over the next three years.
Internationally, KSNET’s revenue and profits were adversely impacted by lower pricing resulting from new interchange
regulations enacted last year. On the other hand, the new regulations have squeezed some of the smaller players, resulting in
larger ones such as KSNET picking up additional volume, and limitations on providing terminals to merchants as an incentive has
dramatically reduced our capital expenditures and substantially increased our cash flows. We believe the regulatory impact on
revenue and margin should be slightly dilutive to flat year over year in fiscal 2018 but that we should return to growth as we get
closer to the end of the year.
We have consolidated a number of our other international businesses in order to use our various licenses to provide a one-stop
banking, issuing, acquiring and processing solution. We have also invested $26 million into MobiKwik in India, one of the
country’s leading digital wallets. We expect to launch our virtual card offering into their customer base during the upcoming
quarter and have an exclusive arrangement to deploy our banking system in the coming twelve months. Finally, we are working
on building a dedicated international business development team that will focus exclusively on selling our core UEPS/EMV
solution in developing countries around the world.
Net1’s core competency is financial payment technology – the ability to deliver financial benefits and services through the use of
payment technology. Our strategic goal remains to become a globally recognized and respected provider of meaningful and
comprehensive financial inclusion products and services through our innovative payment technologies.
Financial Overview and Key Metrics. In fiscal 2017, our US dollar-based results were favorably impacted by a 5% year-over-
year appreciation in the South African Rand, which remains volatile due to political and macroeconomic forces. In constant
currency1, revenue declined 2% and Fundamental EPS2 decreased 19%, including the impact of issuing approximately 10 million
shares to the IFC during Q4 2016 and five million shares in fiscal 2017, which was partially offset by the repurchase of
approximately four million shares during the year. The constant currency decline in revenue was primarily due to lower prepaid
airtime sales, fewer ad hoc terminal sales, and a lower contribution from KSNET due to the regulatory changes discussed above,
which was partially offset by more fees generated from our EPE and ATM offerings, improved lending and insurance activities,
the inclusion of Masterpayment’s businesses, and an increase in the number of SASSA UEPS/EMV beneficiaries paid.
Consolidated operating income margin for fiscal 2017 was 16% compared with 19% a year ago and decreased primarily due to a
$8.0 million separation payment to our former CEO and higher cost of goods sold, IT processing, servicing and support, which
was partially offset by a decrease in depreciation expenses. Our fiscal 2017 margin was 18% excluding the separation payment.
By operating segment, South African transaction processing posted revenue of $249 million, or 11% higher in ZAR, driven by
higher EPE transaction revenue from increased usage of our ATMs, increased inter-segment transaction processing activities, and
a modest growth in the number of social welfare grants distributed, while segment operating margin remained constant at 24%.
International transaction processing generated revenue of $177 million, up 4%, primarily due to the inclusion of T24 and
Masterpayment in fiscal 2017, which growth was partially offset by a lower contribution from KSNET. Segment operating
margin declined to 8% from 14% last year, as a result of lower KSNET revenue; losses incurred by Masterpayment as it grows its
staff complement to execute its expansion plan into new markets and an allowance for credit losses related to a specific customer
of $3.8 million; and ongoing ZAZOO start-up costs in the UK and India, all of which was partially offset by a positive
contribution by T24. Lastly, our financial inclusion and applied technologies segment reported revenue of $236 million, or 10%
lower in ZAR, primarily due to the introduction of our new biometric linking feature for prepaid airtime and other value-added
services, which adversely impacted sales, as well as fewer ad hoc terminal sales, partially offset by increased volumes in our
lending and insurance businesses, an increase in inter-segment revenues and higher card sales. This segment’s operating income
margin increased from 22% to 24% as a result of improved revenues from our lending and insurance businesses and an increase in
inter-segment revenues and fewer low margin prepaid product sales, offset by fewer ad hoc terminal sales and annual salary
increases granted to our South African employees.
Continuously Innovating. Net1 prides itself in its ability to remain at the cutting edge of product and technology innovation and
our scope has widened following our investments in DNI, Cell C and MobiKwik to expand our mobile-based solutions.
Innovation highlights over the past year include the certification of our contactless UEPS/EMV application, which we plan to
offer to our millions of cardholders to provide them with an improved, convenient transacting experience. In addition, we
completed development of our multi-currency debit card platform, which allows users to transact in up to 16 currencies and
provides the flexibility of prioritizing the various currencies available for transacting purposes.
We have continued to expand our product suite aimed at providing our customer base, especially our EPE customers, with those
products that are in high demand, but often difficult to obtain. Our offering now includes bank accounts, life insurance,
microloans, online banking, mobile banking, pre-paid utilities and mobile voice and data packages.
1 Constant currency revenue is a non-GAAP measure and is calculated as GAAP revenue multiplied by the average USD:ZAR exchange rate
during the fiscal year.
2 Fundamental EPS is a non-GAAP measure. Refer to —“Forward looking statements and use of non-GAAP measures—Use of non-GAAP
measures in our Annual Report” for further information regarding these non-GAAP measures.
Management and Governance. We remain committed to expanding our management team and over the past year continued to
add several seasoned industry veterans through the organic expansion of our business and through acquisitions. A large part of
our focus in fiscal 2018 will be on building out management, and hiring product, sales and geographic specialists required to
support our product-driven strategy, which should in turn drive higher and sustainable revenue and earnings. Our Board of
Directors continues to provide valuable, insightful and tireless support to the success of the Company.
Corporate Social Investment. We are acutely aware of the difficult living conditions of most of our cardholders, especially those
who live in rural areas. Our mission to provide financial inclusion to our target market extends beyond the provision of affordable
products and services and we are passionate about our corporate social initiatives to improve the lives of our customers,
particularly through community services. During the past year, we proudly contributed ZAR 54 million through our many
initiatives. Basic financial educational and awareness is the cornerstone of any successful financial inclusion initiative. We have
compiled a user-friendly collection of educational material in multiple languages to distribute to our target market through various
channels, including printed booklets (of which more than 1.5 million free copies have already been distributed) and digital
streaming of relevant content in our branches.
Appreciation. To our stakeholders, we have tried to systematically address the external pressures on our share price over the past
few years, which has been due to the apparent uncertainty surrounding the long-term sustainability of some of our businesses, the
volatility of the South African Rand, and the evolving political and regulatory dynamics in South Africa. We remain fully
committed to the South African government and its citizens and will continue to build a sustainable global business.
I would also like to specifically thank our founder, Serge Belamant, for his significant contribution in building Net1 into a
meaningful player on a global scale. We wish him all the best for his future endeavors.
I would like to extend my deepest gratitude to my colleagues on the Board, Net1’s management team and all of our employees for
their support and unwavering dedication during a very challenging period in our Company’s history. We have much to be proud
of and much left to achieve.
Lastly, to our customers - thank you for your ongoing support. Our continued success is premised on your high expectations for
us to deliver innovative, convenient and lifestyle-enhancing products and services.
Sincerely,
_____________________________
Herman G. Kotzé
Chief Executive Officer
Financial results at a glance
Consolidated results (refer also Item 6 to our Annual Report on Form 10-K included in this Annual Report)
(in United States dollar thousands, except percentages, per share data and number of employees)
Revenue ........................................................
Operating income .........................................
Operating income margin .............................
Net income Net1 ...........................................
Earnings per share:
Basic ($) ..................................................
Diluted ($) ...............................................
Fundamental net income3 .............................
Fundamental earnings per share3:
Basic ($) ..................................................
Number of employees ...................................
Cash flows provided by operating activities .
Cash and cash equivalents .................................
Total assets ............................................................
Total equity ...........................................................
Operating segments information
(in United States dollar thousands)
2017
610,066
97,043
16%
72,954
1.34
1.33
94,721
Year Ended June 30
2015
625,979
128,519
21%
94,735
2016
590,749
114,368
19%
82,454
2014
581,656
101,798
18%
70,111
2013
452,147
23,162
5%
12,977
1.72
1.71
92,113
2.03
2.02
108,205
1.51
1.50
100,539
0.28
0.28
34,822
1.74
5,358
97,161
258,457
1,450,756
708,007
1.92
5,701
116,552
223,644
1,263,500
603,220
2.32
4,764
135,258
117,583
1,316,956
478,785
2.16
4,415
37,145
58,672
0.76
4,307
55,917
53,665
1,363,375 1,302,662
339,969
441,748
Operating Segment
Revenue:
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Intersegment eliminations ............................
Consolidated revenue .................................
Operating income (loss):
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Corporate/Eliminations ......................................
Consolidated operating income ............
2017
2016
2015
2014
2013
Year Ended June 30,
249,144
176,729
235,901
661,774
(51,708)
610,066
59,309
13,705
57,785
130,799
(33,756)
97,043
212,574
169,807
249,403
631,784
(41,035)
590,749
51,386
23,389
54,999
129,774
(15,406)
114,368
236,452
164,554
272,600
673,606
(47,627)
625,979
51,008
26,805
72,725
150,538
(22,019)
128,519
261,577
152,725
207,595
621,897
(40,241)
581,656
61,401
21,952
60,685
144,038
(42,240)
101,798
242,739
135,954
108,001
486,694
(34,547)
452,147
(21,316)
14,208
57,491
50,383
(27,221)
23,162
Refer to Item 7 of our Annual Report on Form 10-K included in this Annual Report for a detailed discussion of our results per
operating segment.
3 Fundamental net income and earnings per share are non-GAAP measures. Refer to —“Forward looking statements and use of
non-GAAP measures—Use of non-GAAP measures in this Annual Report” for further information regarding these non-GAAP
measures.
Corporate social responsibility report
Net1 makes a record contribution to social upliftment
With a firm belief in enabling truly sustainable financial inclusion, we continue to contribute to and participate in social programs
which empower developing communities and businesses by advancing their education, employment and financial security. In
fiscal 2017, we proudly contributed ZAR 53.9 million to these initiatives, our largest annual contribution to date. We have strict
guidelines and diligence requirements that govern any contribution made under our corporate social responsibility program and
all contributions are approved by a Corporate Social Investment Committee and reported to our Audit Committee.
We focused our efforts on the Information and Communication Technology sector, partnering with organizations that bring
technology and education to communities and businesses. In addition, we aided the upliftment of South Africa’s most vulnerable
citizens, in an effort to better their lives and encourage sustainable economic participation.
Our contributions for fiscal 2017 are presented in the table below:
Category
Enterprise and Supplier Development .............................................................................
Socio-Economic Development Initiatives .......................................................................
Learnerships .....................................................................................................................
Total ........................................................................................................................
ZAR
‘000
32,536
13,551
7,878
53,965
Enterprise and Supplier Development
The majority, or ZAR 32.5 million, of our fiscal 2017 corporate social responsibility contributions were applied towards
enterprise and supplier development. The purpose of these initiatives includes supporting the development of our current suppliers
as well as to further benefit the economy through investment in new market entrants. Our contributions are directed towards
businesses we have identified operating primarily in the Information and Communications Technology sector, or the funds are
assigned to a particular project that these businesses are working on collectively. These organizations spend the funds at their own
discretion, depending on their identified needs; purchasing goods and services ranging from new equipment to further training for
business owners or the contributed funds are allocated to a specific work project (such as the Early Childhood Development
(“ECD”) project mentioned below).
The number of business that benefited from our enterprise and supplier development contributions and the average amount spent
per initiative during fiscal 2017 are presented in the table below:
Enterprise development .........................................................................................................
Supplier development ............................................................................................................
Collective projects .................................................................................................................
Total ..............................................................................................................................
Building Facilities for ECD Project
Businesses
Supported
11
5
3
19
Average
Spent
ZAR
‘000
1,788
1,660
1,523
1,712
We contributed ZAR 4.6 million to ECI Civils, Kuyashesha Construction and Dukada Investments for the completion of a
construction project in Umlazi, KwaZulu-Natal, South Africa. Four classrooms, offices, ablutions and a parking area were built
by the teams as part of an ECD project to benefit the local community.
Bringing Solar Labs to Schools
We continue to successfully collaborate with GiveITback and contributed ZAR 1.6 million to their projects this year. Since we
first partnered with them in 2013, 17,740 learners from 18 schools across South Africa have benefited from our contributions. The
organization provides computer access to underprivileged schools in the country. Solar-powered computer labs are built inside
shipping containers, each one housing 20 computers, all the required software, internet access and furniture, ensuring that teachers
and learners have an environment conducive to constructive learning. In addition, we contributed towards GiveITback’s BrITe
box product, a portable bank of 40 tablets which effectively turns a classroom into a fully functional PC lab, with offline access
and tablet tracking capabilities to recover lost equipment. In addition to aiding mathematics, science and computer literacy
lessons, these resources have enabled students to write their own HTML websites at a young age and even develop prototypes for
participation in national robotics competitions.
Socio-Economic Development Initiatives
We aim to facilitate access to the mainstream economy for underprivileged citizens through our socio-economic development
projects. We believe these contributions greatly improve the lives of the people in local communities; alleviating daily struggles
and providing resources and training they can use to improve their skills and general quality of life. Efforts include the provision
of capital for proposed community projects that we believe will be valuable and sustainable to the community. Approved
foundations then ensure that the funds are spent optimally in local communities, regularly reporting on the progress and results of
these efforts. In total, 53 different foundations benefited from our ZAR 13.6 million in contributions during fiscal 2017. The table
below presents the number of initiatives support and the average spent per initiative during fiscal 2017:
Foundations/ Programs ...............................................................................................
Reach for a Dream
Average
Spent
ZAR
‘000
256
Initiatives
Supported
53
Once again, we contributed towards the Reach for a Dream Foundation, an organization that endeavors to fulfill the dreams of
children with life-threatening illnesses. We contributed ZAR 0.7 million to this noble cause to enrich the lives of children when it
is needed most.
Building Computer Labs
As part of the 67 schools for 67 minutes initiative for Mandela Day, we contributed ZAR 0.5 million to the Melisizwe Computer
Lab Project. This initiative addresses the inequality in the South African schooling system by providing much needed access to
computers for learners at underprivileged schools. Since the project’s inception in 2012, 5,000 young people’s lives have been
positively impacted as they are now computer literate, drastically improving their employability and involvement in the economy.
Enabling e-Learning
In a drive to improve access to quality education by providing free educational content to teachers, learners and parents, we
partnered with e-Classroom. Our contribution of ZAR 0.4 million was used to develop and maintain their online platform which
enables learners to improve their mathematics and science skills by providing online support material, including lesson support
material and mock exam papers.
Upskilling Intellectually Disabled Women
Through Sally’s Workshop, we contributed ZAR 0.2 million towards training for 38 intellectually challenged women from the
San Salvador home in the Alexandra township. During this workshop, the women make and sell handicraft, while also providing
services to local businesses. The initiative allows for the development and upliftment of the participants, aiding their employment.
In addition, meals and medical and social work services are offered to further help improve their circumstances.
Learnerships
We partnered with the Business School of South Africa and LFP Training Consultants to offer learnerships to certain members of
our staff and underprivileged citizens at a campus in Randburg, Johannesburg. This is our first year funding this worthwhile
initiative and our ZAR 7.8 million contributed was used to train a total of 188 learners including 94 members of our staff and 94
unemployed South African youth (of which 35 are disabled). The 12 month learnership sees participants acquiring valuable skills
such as bookkeeping and project management through frequent lessons and mentoring, of which we receive regular progress
reports. The unemployed learners are also granted a monthly allowance for the duration of the learnership. We believe that the
provision of valuable skills helps the learners increase their competency and employability, ultimately improving their financial
security, self-confidence and sense of self-worth.
The table below presents split between employed and unemployed learners and the average spent per learner during fiscal 2017:
Employed Learners ................................................................................................................
Unemployed Learners ............................................................................................................
Total ..............................................................................................................................
Additional information
Average
Spent
ZAR
‘000
52
32
42
Learners
94
94
188
Further details of our corporate social investment initiatives are available on our website at www.net1.com.
Report Assurance
We have not obtained independent third party assurance of this corporate social responsibility report for the 2017 reporting
period.
Forward looking statements and use of non-GAAP measures
Forward looking statements
This Annual Report contains forward-looking statements that involve risks and uncertainties that could cause our actual results to
differ materially from those projected, anticipated or implied in the forward-looking statements. 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. For more information about the factors that could cause our actual results to differ materially from current
expectations, you should refer to the section entitled “Risk Factors” in our 2017 Annual Report on Form 10-K and in our
Quarterly Reports on Form 10-Q that we file from time to time with the United States Securities and Exchange Commission.
Use of non-GAAP measures in this Annual Report
US securities laws require that when we publish any non-GAAP measures, we disclose the reason for using the non-GAAP
measure and provide reconciliation to the directly comparable GAAP measure. The presentation of fundamental net income and
fundamental earnings per share and headline earnings per share are non-GAAP measures.
Why we use non-GAAP measures
Management believes that the fundamental net income and earnings per share metric enhances its own evaluation, as well as an
investor’s understanding, of our financial performance.
How we calculate our non-GAAP measures
Fundamental net income and earnings per share is GAAP net income and earnings per share adjusted for (1) the amortization of
acquisition-related intangible assets (net of deferred taxes), (2) stock-based compensation charges and (3) unusual non-recurring
items (refer to captions included in the table below).
Reconciliation of GAAP net income to fundamental net income
The table below presents the reconciliation between GAAP net income to fundamental net income for our last five fiscal years:
GAAP ....................................................................................................
2017
72,954
Net income (USD’000)
2015
94,735
2016
82,454
2014
70,111
Intangible asset amortization, net of tax ........................................... 10,491
5,200
Former CEO separation payment, net of tax.....................................
3,347
Transaction-related costs ..................................................................
1,982
Stock-based compensation charge ....................................................
1,172
South African debt-related guarantee fees expensed ........................
(643)
Refund for KSNET litigation ............................................................
122
US government investigations-related and US lawsuit expenses .....
96
Facility fees for KSNET debt ...........................................................
-
Gain resulting from acquisition of Transact24 .................................
-
Accounting change for Finbond .......................................................
BEE equity instruments charge .........................................................
-
Net loss on deconsolidation of subsidiaries and business, net of tax
-
Fundamental ...........................................................................
94,721
8,413
-
1,018
3,598
-
133
138
(1,909)
(1,732)
-
-
92,113
11,263
-
-
3,195
(1,354)
158
208
-
-
-
-
108,205
12,490
-
77
2,914
-
2,579
657
-
-
11,268
443
100,539
2013
12,977
13,679
-
69
3,907
-
3,888
302
-
-
-
-
34,822
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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
(State or other jurisdiction
of incorporation or organization)
98-0171860
(I.R.S. Employer
Identification No.)
President Place, 4th Floor, Cnr. Jan Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South Africa
(Address of principal executive offices)
Registrant’s telephone number, including area code: 27-11-343-2000
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class
Common Stock,
par value $0.001 per share
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act.
Yes [ ] No [X]
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 filings 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
Yes [X] No [ ]
the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405)
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act (Check one):
[ ] Large accelerated filer
[ ] Non-accelerated filer
(Do not check if a smaller reporting company)
[ ] Emerging growth company
[X] Accelerated filer
[ ]
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes [ ] No [X]
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of
December 31, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter),
based upon the closing price of the common stock as reported by The Nasdaq Global Select Market on such
date, was $279,962,886. This calculation does not reflect a determination that persons are affiliates for any
other purposes.
As of August 21, 2017, 56,343,902 shares of the registrant’s common stock, par value $0.001 per share were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
NET 1 UEPS TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended June 30, 2017
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
Signatures
Financial Statements
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F-1
1
FORWARD LOOKING STATEMENTS
PART I
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties that could cause our actual results to differ materially from those projected, anticipated or implied in the
forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those
discussed in Item 1A—“Risk Factors.” 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. You should not place undue reliance
on these forward-looking statements, which reflect our opinions only as of the date of this Annual Report. We undertake no
obligation to release publicly any revisions to the forward-looking statements after the date of this Annual Report. You should
carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by us during our 2018 fiscal year, which runs from
July 1, 2017 to June 30, 2018.
ITEM 1. BUSINESS
Overview
We are a leading provider of payment solutions, transaction processing services and financial technology across multiple
industries and in a number of emerging and developed economies.
We have developed and market a comprehensive transaction processing solution that encompasses our smart card-based
alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction
channels. Our market-leading system can enable the billions of people globally who generally have limited or no access to a
bank account to enter affordably into electronic transactions with each other, government agencies, employers, merchants and
other financial service providers. Our universal electronic payment system, or UEPS, and UEPS/EMV derivative discussed
below, uses biometrically secure smart cards that operate in real-time but offline, unlike traditional payment systems offered by
major banking institutions that require immediate access through a communications network to a centralized computer. This
offline capability means that users of our system can conduct transactions at any time with other card holders in even the most
remote areas so long as a smart card reader, which is often portable and battery powered, is available. Our off-line systems also
offer the highest level of availability and affordability by removing any elements that are costly and are prone to outages. Our
latest version of the UEPS technology has been certified by the EuroPay, MasterCard and Visa global standard, or EMV, which
facilitates our traditionally proprietary UEPS system to interoperate with the global EMV standard and allows card holders to
transact at any EMV-enabled point of sale terminal or automated teller machine, ATM. The UEPS/EMV technology has been
deployed on an extensive scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our social
welfare grant customers. In addition to effecting purchases, cash-backs and any form of payment, our system can be used for
banking, healthcare management, international money transfers, voting and identification.
We also provide secure financial technology solutions and services, by offering transaction processing, financial and
clinical risk management solutions to various industries. We have extensive expertise in secure online transaction processing,
cryptography, mobile telephony, integrated circuit card (chip/smart card) technologies, and the design and provision of financial
and value-added services to our cardholder base.
Our technology is widely used in South Africa today, where we distribute pension and welfare payments, using our
biometrically enabled UEPS/EMV technology, to over ten million recipient cardholders across the entire country, process debit
and credit card payment transactions on behalf of a wide range of retailers through our EasyPay system, process value-added
services such as bill payments and prepaid airtime and electricity for the major bill issuers and local councils in South Africa,
and provide mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of
third-party and associated payroll payments in South Africa through our FIHRST service. We provide financial inclusion
services such as microloans, insurance, mobile transacting and prepaid utilities to our cardholder base.
In addition, through KSNET, we are one of the top three value-added network, or VAN, processors in South Korea, and
we offer card processing, payment gateway and banking value-added services in that country. We have expanded our card
issuing and acquiring capabilities through the acquisition of Transact24 in Hong Kong. Our Masterpayment subsidiary in
Germany provides value added payment services and working capital finance to online retailers across Europe. Our XeoHealth
service provides funders and providers of healthcare in United States with an on-line real-time management system for
healthcare transactions.
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Our Net1 Solutions business unit is responsible for the worldwide technical development and commercialization of our
array of web and mobile applications and payment technologies, such as Mobile Virtual Card, or MVC, Chip and GSM
licensing and Virtual Top Up, or VTU, and has deployed solutions in many countries, including South Africa, the United
Kingdom, Namibia, Nigeria, Malawi, Cameroon, the Philippines, India and Colombia.
All references to “the Company,” “we,” “us,” or “our” are references to Net 1 UEPS Technologies, Inc. and its
consolidated subsidiaries, collectively, and all references to “Net1” are to Net 1 UEPS Technologies, Inc. only, except as
otherwise indicated or where the context indicates otherwise.
Market Opportunity
Services for the under-banked: According to the latest World Bank’s Global Findex Database, 62% of adults worldwide
have a bank account. As a result, two billion adults around the world remain entirely excluded from the financial system. This
situation arises when banking fees are either too high relative to an individual’s income, a bank account provides little or no
meaningful benefit or there is insufficient infrastructure to provide financial services economically in the individual’s
geographic location. We refer to these people as the unbanked and the under-banked. These individuals typically receive wages,
welfare benefits, money transfers or loans in the form of cash, and conduct commercial transactions, including the purchase of
food and clothing, in cash.
The use of cash, however, presents significant risks. In the case of recipient cardholders, they generally have no secure
way of protecting their cash other than by converting it immediately into goods, carrying it with them or hiding it. In cases
where an individual has access to a bank account, the typical deposit, withdrawal and account fees meaningfully reduce the
money available to meet basic needs. For government agencies and employers, using cash to pay welfare benefits or wages
results in significant expense due to the logistics of obtaining that cash, moving it to distribution points and protecting it from
theft.
Our target under-banked customer base in most emerging economies, and particularly in sub-Saharan Africa, has limited
access to formal financial services and therefore relies heavily on the unregulated informal sector for such services. By
leveraging our smart card and mobile technologies, we are able to offer affordable, secure and reliable financial services such as
transacting accounts, loans and insurance products to these consumers and alleviate some of the challenges they face in dealing
with the informal sector.
With over 30 million cards issued in more than ten developing countries around the world, our track record and scale
uniquely positions us to continue further geographical penetration of our technology in additional emerging countries.
Online transaction processing services: The continued global growth of retail credit and debit card transactions is reflected
in the May 2017 Nilson Report, according to which worldwide annual general purpose card dollar volume increased 6.4% to
$26 trillion in 2016, while transaction volume increased by 13.3% to 257 billion transactions and cards issued increased by
9.4% to 11.15 billion cards during the same period. General purpose cards include the major card network brands such as
MasterCard, Visa, UnionPay and American Express. In South Africa, we operate the largest bank-independent transaction
processing service through EasyPay, where we have developed a suite of value-added services such as bill payment, airtime top-
up, gift card, money transfer and prepaid utility purchases that we offer as a complete solution to merchants and retailers. In
South Korea, through KSNET, we are one of the top three VAN processors, and we provide card processing, banking value-
added services and payment gateway functionality to more than 237,000 retailers. Transact24 and Masterpayment are
established, growing processors with experienced management teams which offer a variety of value-added online transaction
processing services. Our expertise in on-line transaction processing and value-added services provides us with the opportunity
to participate globally in this rapidly growing market segment.
Mobile payments: The rapid growth of online commerce and the emergence of mobile devices as the preferred access
channel for transacting online has created a global opportunity for the provision of secure payment services to online retailers
and service providers. Our Net1 Solutions business unit is focused on providing secure payment solutions for all card-not-
present transactions through the application of our MVC and other proprietary solutions.
Despite lacking access to formal financial services, large proportions of the under-banked customer segment own and
utilize mobile phones. The World Bank’s research has confirmed the rising popularity of using mobile phones to transfer money
and for banking that often does not require setting up an account at a brick-and-mortar bank. The World Bank has stated that
mobile banking, which allows account holders to pay bills, make deposits or conduct other transactions via text messaging, has
rapidly expanded in Sub-Saharan Africa, where traditional banking has been hampered by transportation and other infrastructure
problems. A World Bank report states that 1% of adults globally use a mobile money account and nothing else, while in Sub-
Saharan Africa 12% of adults (64 million adults) have mobile money accounts (compared to just 2% worldwide) and 45% of
these people only have a mobile money account.
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Mobile phones are therefore increasingly viewed as a channel through which this underserved population can gain access
to formal financial and other services. Today, most mobile payment solutions offered by various participants in the industry
largely provide access to information and basic services, such as allowing consumers to check account balances or transfer
funds between existing accounts with the financial institution, but they offer limited functionality and ability to use the mobile
device as an actual payments and banking instrument. Our UEPS and MVC solutions are enabled to run on the SIM cards in or
as applications on mobile phones and provide our users with secure payment and banking functionality.
Healthcare: Given the lack of broad-based healthcare services in many emerging economies, governments are increasingly
focused on driving initiatives to provide affordable and accessible healthcare services to their populations. Similarly, countries
such as the United States are embarking on expansive overhauls of their existing healthcare systems.
Through our XeoHealth service we utilize our real-time rules engine and claims processing technology to offer
governments, funders and providers of healthcare a comprehensive solution that offers a completely automated healthcare rules
adjudication and payment system, reducing both cost and time.
Our Core Proprietary Technologies
UEPS and UEPS/EMV
We developed our core UEPS technology to enable the affordable delivery of financial products and services to the
world’s unbanked and under-banked populations. Our native UEPS technology is designed to provide the secure delivery of
these products and services in the most under-developed or rural environments, even in those that have little or no
communications infrastructure. Unlike a traditional credit or debit card where the operation of the account occurs on a
centralized computer, each of our smart cards effectively operates as an individual bank account for all types of transactions. All
transactions that take place through our system occur between two smart cards at the point of service, or POS, as all of the
relevant information necessary to perform and record transactions reside on the smart cards.
The transfer of money or other information can take place without any communication with a centralized computer since
all validation, creation of audit records, encryption, decryption and authorization take place on, or are generated between, the
smart cards themselves. Importantly, the cards are protected through the use of biometric fingerprint identification, which is
designed to ensure the security of funds and card holder information and is more secure than traditional PIN identification.
Transactions are generally settled by merchants and other commercial participants in the system by sending transaction data to a
mainframe computer on a batch basis. Settlements can be performed online or offline. The mainframe computer provides a
central database of transactions, creating a complete audit trail that enables us to replace lost smart cards while preserving the
notional account balance, and to identify fraud.
Our UEPS technology includes functionality that allows the following:
• Transparent and automatic recovery of transactions;
• Transaction cancellation;
• Refunds;
• Multiple audit trails;
• Offline loading and spending;
• Biometric identification;
• Continuous debit;
• Multiple wallets;
•
• Automatic credit;
• Automatic debit;
•
•
“Morphing” of other common payment systems, such as EMV;
Interest calculations; and
“Milking” / batching of large transaction volumes in an off-line environment.
Our UEPS technology incorporates the software, smart cards, payment terminals, back-end processing infrastructure,
biometric systems and transaction security to provide a complete payment and transaction processing solution.
Within industry verticals, our UEPS technology is applied to electronic commerce transactions in the fields of social
security, wage distribution, banking, medical and patient management, money transfers, voting and identification systems.
Market sectors include government and non-government organizations, or NGOs, healthcare, telecoms, financial institutions,
retailers, petroleum distributors and utilities.
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Our latest version of the UEPS technology is interoperable with the global EMV standard, allowing the cards to be used
wherever EMV cards are accepted, while also providing all the additional functionality offered by UEPS. This UEPS/EMV
functionality is especially relevant in areas where there is an established payment system and provides flexibility to our
customers to be serviced at any POS, including point of sale devices and ATMs. Our UEPS/EMV solution therefore expands
our addressable market to include developed economies with established payment networks. The UEPS/EMV technology
removes the hurdle, often perceived in developed economies, of operating a proprietary or “closed-loop” system by providing a
truly inter-operable payment solution.
Mobile Virtual Card
We developed MVC, an innovative mobile phone-based payment solution that enables secure purchases with no disruption
to existing merchant infrastructures and provides significant incentives for all stakeholders.
MVC utilizes existing and traditional payment methods but enhances them by replacing or tokenizing plastic card data
with one-time-use virtual card data, hence eliminating the risk of theft, phishing, skimming, spoofing, etc. The virtual card data
replaces, digit-for-digit, the credit (or debit) card number, the expiration date and the card verification value with only the issuer
bank identification number (first 6-digit) remaining constant.
MVC uses the mobile phone to generate virtual cards offline. The mobile phone is the most available, cost-effective,
secure and portable platform for generating virtual cards for remote payments (online purchasing, money transfers, phone and
catalogue orders).
Following a simple registration process, the virtual card application is activated over-the-air, enabling the phone to
generate virtual card numbers completely off-line. MVCs are used like traditional plastic credit or debit cards, except that as
soon as the transaction is authorized, the generated card number expires once the preset monetary amount has been utilized or
after completion of the specific transaction that it was generated for. While MVC has been focused primarily on card-not-
present transactions for internet payments in our initial deployments, we are constantly expanding the applicability of the
software to incorporate new trends such as presentation through near field communication, or NFC, or Quick Response, or QR,
Codes.
Consumers can easily generate a new card on their mobile phone to shop on the internet or to place a catalogue or
telephone order. MVCs are completely secure and can also be sent in a single click to family, friends, and service providers.
Once the authorization request reaches the issuing bank processor, our servers decrypt the virtual card data, authenticate the
consumer and pass the transaction request to the card issuer for authorization. MVC can be offered as a prepaid solution or
directly linked to a subscriber’s credit or debit card or other funding account. Subscribers can load prepaid virtual accounts with
cash at participating locations, or electronically via their bank accounts, direct deposit or other electronic wallets.
The benefits of MVC include, for:
• Card issuers—increased transactional revenues from existing accounts, driving more transactional revenues and
elimination of fraudulent card use.
• Mobile network operators—revenues from payments, reduced churn and opportunities for powerful co-branding
schemes.
• Consumers—convenience, peace of mind, ease of use and rewards.
• Merchants—elimination of charge-backs and fraud at no extra cost.
Our Strategy
We intend to provide the leading transacting system for the billions of unbanked and under-banked people in the world to
engage in electronic transactions, to be the provider of choice for secure mobile payment and other card-not-present transactions
and to provide our transaction processing, value-added services processing and healthcare processing services globally. To
achieve these goals, we are pursuing the following strategies:
Build on our significant and established infrastructures—We control significant components of the payment infrastructure
in South Africa, South Korea, Botswana and Namibia and we believe that we are well-positioned to leverage our existing asset
base to continue to gain market share and build upon the critical mass that we have developed.
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For example, in South Africa, we are one of the leading independent transaction processors, the national provider of social
welfare payment distribution services to the country’s large unbanked and under-banked population, the largest third-party
processor of retail merchant transactions and the leading processor of third-party payroll payments. We believe that our large
cardholder base, specialized technology and payment infrastructure, together with our strong business relationships, position us
at the epicenter of commerce in the country. Through our national distribution platform and relationships with a number of
leading companies across multiple industries, we believe that we can provide many of the services consumed by our cardholders
who would normally not have access to these services or would otherwise have to rely on the informal sector. We have already
introduced several services to our cardholder and merchant base, such as low cost, high functionality bank accounts, microloans,
life insurance, bill payment, prepaid mobile top-up and prepaid utility services. We have a network of mobile ATMs to provide
services to our cardholders, and we have established a national fixed ATM and POS network. We aim to increase the adoption
of our existing services by expanding our cardholder base and our transacting network, and we aim to increase our service
offerings by developing new products and distribution networks and by forging partnerships with industry participants who
share our vision and can accelerate the implementation of our business plan. Our core focus remains the development and
provision of our technological expertise. We have established significant operational assets to ensure the rapid deployment of
our technology. As these deployments mature, we may share or dispose of these operational assets if we believe this will result
in higher efficiencies and synergistic benefits where we are able to provide technology to an expanded base of clients and
operations.
Our latest product, EasyPay Everywhere, provides our target market with an affordable all-inclusive transactional bank
account with access to financially inclusive services such as microloans, life insurance, remittances, value added services such
as prepaid utilities and bill payments through their mobile phones and our national network of ATMs and POS devices.
We plan to follow a similar approach in the other markets where we have an established infrastructure, taking into account
the specific requirements of the local legislation, the composition of the local payment system and the specific components that
we own or control. In markets where we do not have an established infrastructure, we intended to collaborate with local partners
to provide a similar end-to-end solution.
Leveraging our new payment technologies to gain access to developed and developing economies—While our business has
traditionally focused on marketing products and services to the world’s unbanked and under-banked population, we have
developed and acquired proprietary technology, with a specific focus on mobile payments, that is particularly relevant to
developed economies as well. Our MVC application for mobile telephones, for example, is designed to eliminate fraud
associated with card-not-present credit card transactions effected by telephone or over the internet and are prevalent in
developed economies such as the United States. We believe that mobile payments, mobile wallets and the related applications
should be a critical component of a payment processor’s future strategy and we have dedicated a significant portion of our
research and development and business development resources to ensure that we remain at the forefront of this rapidly evolving
technological space. While some of our mobile solutions are more relevant in developed markets such as the United States and
Europe, we are targeting our mobile payment solutions at developing economies, where mobile transacting is seen as the best
solution to rapidly leapfrog the antiquated payment solutions typically available in these countries at minimal cost. We plan to
expand our market share in the mobile solutions and card-not-present processing markets by pursuing partnerships or supply
relationships with online merchants, virtual card issuers, payment services processors, mobile remittance providers and other
online service providers.
Pursue strategic acquisition opportunities or partnerships to gain access to new markets or complementary product— We
will continue to pursue acquisition opportunities and partnerships that provide us with an entry point for our existing products
into a new market, or provide us with technologies or solutions complementary to our current offerings. Our recent investment
in MobiKwik, an Indian mobile wallet provider, for example, provides us with access to the large Indian mobile transacting and
e-commerce market. Our acquisitions of Transact24 Limited, Masterpayment and our proposed investment in Bank Frick
provide us with access to the leading global card issuers, acquirers and processors such as Visa, Mastercard, China UnionPay,
Alipay, SWIFT and SEPA and enable us to provide small and medium e-commerce enterprises with a complete service offering,
including bank accounts, card issuing and acquiring, processing and value-added products such as working capital financing. In
addition, we expect to leverage our relationship with the International Finance Corporation, or IFC to pursue strategic and
synergistic acquisition opportunities and partnerships in developing markets.
Our Business Units
Our company is organized into the following business units:
Net1 Solutions
Our Net1 Solutions business unit is managed from Johannesburg, South Africa with business development support
branches in the United Kingdom and India. This business unit is responsible for the technical development and
commercialization of our array of web and mobile applications and payment technologies.
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Net1 Solutions offers an array of products and services that cater for the needs of the global market and comprises of the
following key business lines:
• MVC & Verification—Our internationally patented MVC technology is a market leading innovation which addresses
the needs of the modern mobile payment market. It is the easiest, most secure and most convenient way to pay for
goods and services online directly from a mobile phone. Our MVC technology provides a completely secure, off-line
payment solution for card-not-present transactions, such as payments made for internet purchases. The MVC
technology runs as an application on any mobile phone and utilizes our patented cryptographic card generator to secure
and tokenize any payment transaction. The advent of new technologies such as NFC or QR Codes also enables the
utilization of our MVC technology for card present payments.
•
•
• Third Party Payments—Through FIHRST we are the largest provider of third party and payroll associated payments in
South Africa, servicing over 2,050 employee groups that represent approximately 650,000 employees. Our market
leading position is due to our ability to move informed money (the movement of money and its corresponding data to
third party organizations). This allows us to provide one of the most comprehensive suites of financial services,
ranging from garnishee orders to payment modules and collections. We also offer the PayPlus service, providing
employees with access to prepaid airtime, electricity and other value added services, or VAS.
Prepaid Vending —Our Prepaid Vending business line handles multichannel distribution of electronic products and
services aimed at a variety of markets. Across Africa and abroad, our VTU solutions create a separate revenue stream
for Mobile Network Operators, or MNOs, and other clients. The stability and scalability of our VTU offerings enables
our customers to facilitate more than 100 million monthly transactions.
MNOs Solutions—We provide specialized solutions for MNOs that boost average revenue per user, increase
subscriber activity, and collect valuable profiling data. Our solutions range from Advance Airtime and Mobile Wallet
technology to SMS Mega Promotions, tailor-made for each MNO with a focus to maximize subscriber activity, brand
perception and profitability.
Chip & SIM—Through our partnerships with MNOs as well as card and semiconductor manufacturers, we provide a
strong lineup of feature rich chip and SIM solutions. All of these offerings include our wide range of GSM Masks and
custom software that enables mobile telephony, transactions and on-chip VAS. We support the above chip and SIM
developments with dedicated chip-card based commerce frameworks. These incorporate POS, terminal and interbank
transaction switching and clearance aimed at national government, petroleum and retail industries.
• Custom Development—The Custom Development business line produces solutions that span across Web, Mobile,
Server, POS and Desktop environments. These solutions have been developed by addressing the needs of various
industries and now form an integral pillar of our product and service portfolio. We develop both client-facing and
background services, with coverage on every relevant platform including Mobile (Android, iOS, Windows Phone 8 and
J2ME) and Web (with full cross-browser compatibility).
•
• Cryptography—Our Cryptography business line focuses on security-orientated products which include our range of
PIN encryption devices, card acceptance modules and Hardware Security Modules. These focus on financial, retail,
telecommunications, utilities and petroleum sectors. In order to constantly enhance and improve our product offerings,
special attention is placed on the development of security initiatives including Triple Data Encryption Algorithm, also
known as TDES, EMV and Payment Card Industry, or PCI. We are a member of the STS Association, actively
participating in developing new and improved standards that address the needs of the modern cryptographic market.
This business unit has been allocated to our South African processing, International transaction processing, and Financial
inclusion and applied technologies reporting segments.
KSNET
Our KSNET business unit is based in Seoul, South Korea, and is a national payment solutions provider. KSNET has one of
the broadest product offerings in the South Korean payment solutions market, a base of approximately 237,000 merchants and
an extensive direct and indirect sales network. KSNET’s core operations comprise three project offerings, namely card VAN,
payment gateway, or PG, and banking VAN. KSNET is able to realize significant synergies across these core operations
because it is the only payment solutions provider that offers all three of these offerings in South Korea. Over 90% of KSNET’s
revenue comes from the provision of payment processing services to merchants and card issuers through its card VAN.
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KSNET’s core product offerings are described in more detail below:
• Card VAN—KSNET’s card VAN offering manages credit and other non-cash alternative payment mechanisms for
retail transaction processing for a wide range of merchants and every credit card issuer in South Korea. Non-cash
alternative payment mechanisms for which KSNET provides processing services include all credit and debit cards and
e-currency (K-cash and TMoney). KSNET also records cash transactions for the South Korean National Tax Service in
the form of cash receipts.
• PG—KSNET offers PG services to the rapidly growing number of merchants that are moving online in South Korea.
PG provides these merchants with a host of alternative payment solutions including the ability to accept credit and
debit cards, gift and other prepaid cards, and bank account transfers. PG also provides virtual account capabilities.
PG offers us an attractive growth opportunity as e-commerce transactions represent a growing component of payments,
driven by increased wire-line and wireless broadband penetration, merchants moving online, and the enhanced security
of online transactions driving consumer acceptance. We believe that KSNET can become the leading provider in the
PG industry by leveraging its existing merchant base and entering into new markets earlier than competitors.
• Banking VAN—KSNET’s banking VAN operations currently include account transaction processing services,
payment and collections to banks, corporate firms, governmental bodies, and educational institutions. We distinguish
card VAN from banking VAN because in the South Korean VAN market, banking VAN is recognized as a distinct
service from card VAN. We are the only card VAN provider that also provides banking VAN services. Because the
banking VAN business industry is at a nascent stage, the market is relatively small.
This business unit has been allocated to our International transaction processing reporting segment.
Masterpayment
Our Masterpayment business unit is based in Munich, Germany, and is a specialist payment services processor.
Masterpayment provides payment and acquiring services for all major European debit and credit cards; and invoicing for online
retail, digital goods and content. Masterpayment currently has a client portfolio of approximately 1,000 registered merchants.
In collaboration with Bank Frick & Co. AG, or Bank Frick, a Liechtenstein-based bank, Masterpayment provides its e-
commerce merchants with working capital optimization by providing a flexible form of financing, which employs a trading
transaction instead of traditional bank credit. Masterpayment’s “Finetrading” product enables the seamless financing of a
merchant’s inventory orders, resulting in accelerated payment settlement and the elimination of the requirement for a merchant
to maintain rolling reserves or cash advances.
This business unit has been allocated to our International transaction processing reporting segment.
Transact24
Our Transact24 business unit is based in Hong Kong, China, and is a payment services provider.
Transact24’s primary business activities include:
• Chinese debit card acquiring—Transact24 has processing relationships with China UnionPay, Alipay and five other
Chinese gateways;
• Credit card acquiring—Transact24 has acquiring relationships with banks and processing institutions in the United
Kingdom, Germany, Australia and Mauritius and has Payment Intermediary Services Licenses in Mauritius and an
Electronic Money Institution License in the United Kingdom. Transact24 also offers a white-labeled credit card
acquiring gateway to entities who wish to outsource the technical integration and operations of their acquiring
gateways;
• Automated clearing house, or ACH processing—Transact24 provides ACH processing for Tribal and State-licensed
lenders in the U.S.; and
• Prepaid card issuing and processing—Transact24 issues U.S. dollar-denominated Visa prepaid cards and Hong Kong
dollar-denominated China UnionPay prepaid cards.
This business unit has been allocated to our International transaction processing reporting segment.
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Cash Paymaster Services
Our CPS business unit is based in Johannesburg, South Africa, and deploys our UEPS/EMV–Social Grant Distribution
technology to distribute social welfare grants on a monthly basis to over ten million recipient cardholders in South Africa. These
social welfare grants are distributed on behalf of the South African Social Security Agency, or SASSA. During our 2017, 2016
and 2015 fiscal years, we derived approximately 22%, 21%, and 24% of our revenues respectively, from CPS’ social welfare
grant distribution business.
CPS provides a secure and affordable transacting channel between social welfare grant recipient cardholders, beneficiaries,
SASSA and formal businesses. CPS enrolls social welfare grant recipient cardholders and, as appropriate, the respective
beneficiaries by issuing the recipient cardholder with a UEPS/EMV smart card that digitally stores their biometric fingerprint
templates on the card, enabling them to access their social welfare grants securely at any time or place and providing them with
a fully-fledged bank account.
The smart card is issued to the recipient cardholder on site and utilizes optical fingerprint sensor technology to identify and
verify a recipient cardholder. The recipient cardholder simply inserts a smart card into the POS device and is prompted to
present his fingerprint. If the fingerprint matches the one stored on the smart card, the smart card is loaded with the value
created for that particular smart card and the card holder has access to all the UEPS/EMV functionality, including cash
withdrawals, retail purchases and, upon application, financial inclusion services.
Our UEPS/EMV–Social Grant Distribution technology provides numerous benefits to government agencies, recipient
cardholders and beneficiaries. The system offers government a reliable service at a reasonable price. For recipient cardholders
and, as appropriate, the beneficiaries, our smart card offers financial inclusion, convenience, security, affordability, flexibility
and accessibility. They can avoid long waiting lines at payment locations and do not have to get to payment locations on
scheduled payment dates to receive cash. They do not lose money if they lose their smart cards, since a lost smart card is
replaceable and the biometric fingerprint or voice identification technology helps prevent fraud. Their personal security risks are
reduced since they do not have to safeguard their cash. Recipient cardholders have access to affordable financial services, can
save money on their smart cards and can perform money transfers to friends and relatives living in other provinces. Finally,
recipient cardholders pay no transaction fees when they use our CPS infrastructure to load their smart cards, perform balance
inquiries, purchase goods or effect monthly debit orders. For us, the system allows us to reduce our operating costs by reducing
the amount of cash we have to transport.
This business unit has been allocated to our South African transaction processing and Financial inclusion and applied
technologies reporting segments.
EasyPay
Our EasyPay business unit operates the largest bank-independent financial switch in South Africa and is based in
Cape Town, South Africa. EasyPay focuses on the provision of high-volume, secure and convenient payment, prepayment and
value-added services to the South African market. EasyPay’s infrastructure connects into all major South African banks and
switches both debit and credit card EFT transactions for some of South Africa’s leading retailers and petroleum companies. It is
a South African Reserve Bank, or SARB, approved third-party payment processor. In addition to its core transaction processing
and switching operations, EasyPay provides a complete end-to-end reconciliation and settlement service to its customers. This
service includes dynamic reconciliation as well as easy-to-use report and screen-query tools for down-to-store-level,
management and control purposes.
The EasyPay suite of services includes:
• EFT—EasyPay switches credit, debit and fleet card transactions for leading South African retailers and petroleum
companies.
• EasyPay bill payment—EasyPay offers consumers a point-of-sale bill payment service which is integrated into a large
number of national retailers, the internet, self service kiosks and mobile handsets. EasyPay processes monthly account
payment transactions for a number of bill issuers including major local authorities, telephone companies, utilities,
medical service providers, traffic departments, mail order companies, banks and insurance companies.
• EasyPay prepaid electricity—EasyPay enables local utility companies such as Eskom Holdings Limited and a growing
number of local authorities on a national basis to sell prepaid electricity to their customers.
• Prepaid airtime—EasyPay vends airtime at retail POS terminals for all the South African mobile telephone network
operators.
• Electronic gift voucher—EasyPay supports the electronic generation, issuance and redemption of paper or card-based
gift vouchers.
9
• EasyPay licenses—EasyPay enables the issuance of new South African Broadcasting Corporation, or SABC,
television licenses and the capturing of existing license details within retail environments via a web-based user
interface.
• Third party switching and processing support—EasyPay switches transactions from retail POS systems to the relevant
back-end systems.
• Hosting services—EasyPay’s infrastructure supports the hosting of payment or back-up servers and applications on
behalf of third parties, including utility companies.
• EasyPay Kiosk—We have developed a biometrically enabled self service kiosk that allows our customers to access all
the value-added services provided by EasyPay and to create and load their EasyPay virtual wallets with value.
• EasyPay Web and Mobile—This service enables EasyPay customers to access all the value-added services provided by
EasyPay, such as bill payments and the purchase of prepaid airtime and utilities through a secure website that may be
accessed through personal computers or through mobile handsets.
EasyPay provides 24x7 monitoring and support services, reconciliation, automated clearing bureau settlement, reporting,
full disaster recovery and redundancy services.
This business unit has been allocated to our South African transaction processing reporting segment.
Financial Services
We have developed a suite of financial services that is offered to customers utilizing our payment solutions. We are
able to provide our UEPS/EMV cardholders with competitive transacting accounts, microfinance, life insurance and money
transfer products based on our understanding of their risk profiles, demographics and lifestyle requirements. Our financial
services offerings are designed on the principles of simplicity and cost-efficiency as they bring financial inclusion to our
millions of cardholders who were previously unable to access any formal financial services. Our latest product, EasyPay
Everywhere, provides our target market with an affordable all-inclusive transactional bank account with unfettered access to
financial services such as microloans, life insurance, remittances, value added services such as prepaid utilities and bill
payments through their mobile phones and our national network of ATMs and POS devices.
Our largest financial services offering is the provision of short-term microloans to our South African UEPS/EMV
cardholders, where we provide the loans using our surplus cash reserves and earn revenue from the service fees charged on
these loans. We believe our loans are the most affordable form of credit available to our target market as, unlike our
competitors, we do not charge interest, initiation fees or credit life insurance premiums on our loans. Our Smart Life business
unit owns a life insurance license and offers our customer base affordable insurance products applicable to this market segment,
focusing on group life and funeral insurance policies.
This business unit has been allocated to our Financial inclusion and applied technologies reporting segment.
Applied Technology
Our Applied Technology business unit is managed from Johannesburg, South Africa, and is responsible for the
deployment of our South African ATM and POS network and the sale of biometric and POS solutions to various South African
banks, retailers and financial services providers.
Our ATM network is fully EMV-compliant and integrated into the South African national payment system. We deploy
our ATMs in areas where our UEPS/EMV cardholders have limited access to the national payment system, or where the cost of
accessing the national payment system through other service providers is prohibitive for our cardholders.
This business unit has been allocated to our South African transaction processing and Financial inclusion and applied
technologies reporting segments.
XeoHealth
Our XeoHealth business unit operates in the U.S. from Frederick, Maryland, and offers our XeoRules real time
adjudication, or RTS, solutions for the end-to-end electronic processing of medical claims information in the United States.
XeoHealth has won a number of projects in the United States either as the primary contractor for the provision of our RTS
solution to customers, or as a sub-contractor to parties contracted to provide an adjudication solution.
This business unit has been allocated to our International transaction processing reporting segment.
10
Corporate
The Corporate unit provides global support services to our business units, joint ventures and investments for the following
activities:
• Group executive—Responsible for the overall company management, defining our global strategy, investor relations
and corporate finance activities.
• Finance and administration—Provides company-wide support in the areas of accounting, treasury, human resources,
administration, legal, secretarial, taxation, compliance and internal audit.
• Group information technology—Defines our overall IT strategy and the overall systems architecture and is responsible
•
for the identification and management of the group’s research and development activities.
Joint ventures and investments unit—Provides governance support to our joint ventures and assists with the evaluation
of new investment opportunities.
Competition
In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing
payment systems and the providers of financial services, there are a number of other products that use smart card technology in
connection with a funds transfer system. While it is impossible for us to estimate the total number of competitors in the global
payments marketplace, we believe that the most competitive product in this marketplace is EMV, a system that is promoted by
most of the major card companies such as Visa, MasterCard, JCB and American Express. The competitive advantage of our
UEPS offering is that our technology can operate real-time, but in an off-line environment, using biometric identification
instead of the standard PIN methodology employed by our competitors. We have enhanced our competitive advantage through
the development of our latest version of the UEPS technology that has been certified by EMV, which facilitates our traditionally
proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled
point of sale terminal or ATM. The UEPS/EMV technology has been deployed on an extensive scale in South Africa through
the issuance of MasterCard-branded UEPS/EMV cards to our social welfare grant recipient cardholders. We estimate that we
process less than 1% of all global payment transactions in the international marketplace.
In South Africa, and specifically in the payment of salaries and wages and our affordable EasyPay Everywhere
transactional account and our financial services offering, our competitors include the local banks, insurance companies, micro-
lenders and other transaction processors. The South African banks and the South African Post Office, or SAPO, also offer low
cost bank accounts that enable account holders to receive their salaries, wages or social grants through the formal banking
payment networks.
The payment of social welfare grants in South Africa has historically been determined through a highly competitive tender
process managed by SASSA. The participants in SASSA’s tender processes have historically included the local banks, other
payment processors, SAPO and mobile operators. Our current SASSA contract expires at the end of March 2018 and SASSA
has indicated that it intends to internalize all material aspects related to grant payment and administration in collaboration with
SAPO.
EasyPay’s competitors include BankservAfrica, UCS, eCentric and Transaction Junction. BankservAfrica is the largest
transaction processor in South Africa which processes all transactions on behalf of the South African banks and processes more
than 2,5 billion transactions valued at trillions of ZAR per annum.
In the South African ATM network market, we compete against the South African banks, ATM Solutions and Spark ATM
Systems, who collectively have a market share in excess of 90%.
We have identified 13 major card VAN companies in South Korea, of which KSNET is one of the three largest. The other
two large VAN companies are NICE Information & Telecommunication Inc. and Korea Information & Communications
Company, Inc. Entities operating in the VAN industry in South Korea compete on pricing and customer service.
In addition to our traditional competitors, we expect that we will increasingly compete with a number of emerging entities
in the mobile payments industry. While the industry is still rapidly evolving, a number of entities are establishing their presence
in this space. Specifically identified entities include traditional payment networks such as Visa, MasterCard and American
Express; commercial banks such as Barclays and Citigroup; established technology companies such as Apple, Google, Samsung
and PayPal; mobile operators such as AT&T, Verizon, Vodafone, MTN and Bharti Airtel; as well as companies specifically
focused on mobile payments such as M-Pesa and Square.
11
Research and Development
During fiscal 2017, 2016 and 2015, we incurred research and development expenditures of $2.0 million, $2.3 million and
$2.4 million, respectively. These expenditures consist primarily of the salaries of our software engineers and developers. Our
research and development activities relate primarily to the continual revision and improvement of our core UEPS and
UEPS/EMV software and its functionality as well as the design and development of our MVC concept and mobile payment
applications. For example, we continually improve our security protocols and algorithms as well as develop new UEPS features
that we believe will enhance the attractiveness of our product and service offerings. Our research and development efforts also
focus on taking advantage of improvements in hardware platforms that are not proprietary to us but form part of our system.
Intellectual Property
Our success depends in part on our ability to develop, maintain and protect our intellectual property. We rely on a
combination of patents, copyrights, trademarks and trade secret laws, as well as non-disclosure agreements to protect our
intellectual property. We seek to protect new intellectual property developed by us by filing new patents worldwide. We hold a
number of trademarks in various countries.
Financial Information about Geographical Areas and Operating Segments
Note 23 to our consolidated financial statements included in this annual report contains detailed financial information
about our operating segments for fiscal 2017, 2016 and 2015. Revenues based on the geographic location from which the sale
originated and geographic location where long-lived assets are held for the years ended June 30, are presented in the table
below:
2017
$’000
434,124
153,403
22,539
610,066
Revenue
2016
$’000
422,022
158,609
10,118
590,749
2015
$’000
461,425
160,853
3,701
625,979
2017
$’000
74,370
192,473
77,723
344,566
Long-lived assets
2016
$’000
69,213
221,459
49,105
339,777
2015
$’000
72,467
230,109
20,058
322,634
South Africa ...................
South Korea ...................
Rest of world .................
Total ...........................
Employees
Our number of employees allocated on a segmental basis as of the years ended June 30, are presented in the table below:
Number of employees
2016
2017
2015
Management ..................................................................
South African transaction processing ............................
International transaction processing ..............................
Financial inclusion and applied technologies(1) .............
Total ...........................................................................
236
2,487
354
2,281
5,358
241
2,571
310
2,576
5,701
217
2,579
242
1,726
4,764
(1) Financial inclusion and applied technologies includes employees allocated to corporate/ eliminations activities.
On a functional basis, six of our employees were part of executive management, 156 were employed in sales and
marketing, 257 were employed in finance and administration, 312 were employed in information technology and 4,627 were
employed in operations.
As of June 30, 2017, approximately 56 of the 2,487 and three of the 2,281 employees we have in South Africa who were
performing transaction-based and financial inclusion activities, respectively, were members of the South African Commercial
Catering and Allied Workers Union and approximately 188 of the 247 employees we have in South Korea who perform
international transaction-based activities were members of the KSNET Union. We believe that we have a good relationship with
our employees and these unions.
12
Corporate history
Net1 was incorporated in Florida in May 1997. In June 2004, Net1 acquired Net1 Applied Technology Holdings Limited,
or Aplitec, a public company listed on the Johannesburg Stock Exchange, or JSE. In 2005, Net1 completed an initial public
offering and listed on the Nasdaq Stock Market. In October 2008, Net1 listed on the JSE in a secondary listing, which enabled
the former Aplitec shareholders (as well as South African residents generally) to hold Net1 common stock directly.
Available information
We maintain a website at www.net1.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports are available free of charge through the “SEC filings” portion of our
website, as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. The information
contained on, or accessible through, our website is not incorporated into this Annual Report on Form 10-K.
Executive Officers of the Registrant
The table below presents our executive officers, their ages and their titles:
Name
Herman G. Kotzé
Philip S. Meyer
Phil-Hyun Oh
Nanda Pillay
Nitin Soma
Age
47
60
58
46
50
Title
Chief Executive Officer, Chief Financial Officer, Treasurer,
Secretary and Director
Managing Director of Transact24 Limited
Chief Executive Officer and President, KSNET, Inc.
Managing Director: Southern Africa
Chief Technology Officer
Herman Kotzé has been our Chief Executive Officer since May 2017 and our Chief Financial Officer, Secretary and
Treasurer since June 2004. From January 2000 until June 2004, he served on the board of Aplitec as Group Financial Director.
Mr. Kotzé joined Aplitec in November 1998 as a strategic financial analyst. Prior to joining Aplitec, Mr. Kotzé was a business
analyst at the Industrial Development Corporation of South Africa. Mr. Kotzé has a bachelor of commerce honors degree, a post
graduate diploma in treasury management, a higher diploma in taxation, completed his articles at KPMG, and is a member of
the South African Institute of Chartered Accountants.
Philip Meyer has been the Managing Director of Transact24 Limited since he founded the company in 2006. Mr. Meyer
has worked in the payments industry for over 20 years. Prior to incorporating Transact24, he was employed by Naspers, a global
media group, as its Chief Executive: Information Technology and New Media and was responsible for all existing and new
technology and media for Naspers. Mr. Meyer is a qualified engineer with a masters in engineering (electronic) and has a
postgraduate diploma in strategic management. Mr. Meyer is registered with the Engineering Counsel of South Africa, is a
member of the South Africa Institute of Electrical Engineers and is also a member of the Digital, Information &
Telecommunications Committee and Asia & Africa Committee, Hong Kong General Chamber of Commerce.
Phil-Hyun Oh has served as Chief Executive Officer and President of KSNET since 2007. He is the Chairman of the VAN
Association in South Korea. Prior to that, he was the Managing Partner at Dasan Accounting Firm and was the Head of the
Investment Banking Division at Daewoo Securities. Mr. Oh is responsible for the day to day operations of KSNET and as its
Chief Executive Officer and President is instrumental in setting and implementing its strategy and objectives.
Nanda Pillay joined us in May 2000 and is responsible for our Southern African operations, including CPS, Financial
Services, EasyPay, Net1 Solutions and SmartSwitch Botswana.
Nitin Soma has served as our Chief Technology Officer since June 2004. Mr. Soma joined Aplitec in 1997. He specializes
in transaction switching and interbank settlements and designed the Stratus back-end system for Aplitec. Mr. Soma has over
20 years of experience in the development and design of smart card payment systems. Mr. Soma has a bachelor of science
(computer science and applied mathematics) degree.
13
ITEM 1A. RISK FACTORS
OUR OPERATIONS AND FINANCIAL RESULTS ARE SUBJECT TO VARIOUS RISKS AND
UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW, THAT COULD ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS, AND THE TRADING PRICE
OF OUR COMMON STOCK.
Risks Relating to Our Business
Our SASSA contract has been extended and now expires at the end of March 2018 following an
order issued by the Constitutional Court on March 17, 2017. It is unclear to us whether SASSA will
issue a new grants payment tender or whether it intends to take over the distribution of social grants
when our contract expires. We derive a significant portion of our revenue from our SASSA contract,
which we will lose if and when we no longer provide a service to SASSA.
We derive a significant portion of our revenues from our contract with SASSA for the payment of social grants. Our
SASSA contract, which we were awarded through a competitive tender process in 2012, was scheduled to expire in March
2017. However, in March 2017, the Constitutional Court of South Africa, Constitutional Court, which retained oversight of
SASSA as a result of litigation regarding the original award of the contract to us on 2012, held that SASSA and CPS have a
constitutional obligation to continue to pay social welfare grants and ordered that the contract be extended for another year.
Refer to “Item 3—Legal Proceedings” for a summary of the Constitutional Court’s order.
We will lose the SASSA revenues after March 2018 if we then no longer have a contract with SASSA, which would occur
if SASSA follows a tender process and awards the tender to a new service provider or providers or performs the social grants
distribution service itself. Unless we are able to replace most or all of these revenues from other sources, our results of
operations, financial position, cash flows and future growth are likely to suffer materially.
It is possible that SASSA might request us to enter a transition agreement in order to phase out our services. The
Constitutional Court reaffirmed in its March 2017 ruling that CPS is deemed to be an “organ of state” for the purposes of the
contract between SASSA and CPS, and that CPS has “constitutional obligations” that go beyond its contractual obligations. It is
not clear what these obligations may entail in respect of the current and any potential future government contract in South
Africa. We cannot predict what the financial or other implications may be if we are required to provide our services without a
valid contract, or during any transitional period required for the orderly transfer of our services to SASSA or to a new
contractor.
Our South African business practices have come under intense scrutiny in the South African
media, especially during the last several months. We have attempted to publicly refute what we believe
to be misleading or factually incorrect statements that have damaged our reputation. However, our
ability to operate effectively and efficiently in South Africa in the future will be adversely impacted if we
are unable to communicate persuasively that our business practices comply with South African law and
are fair to the customers who purchase our financial services products.
Our contract with SASSA was expected to expire on March 31, 2017, and by the end of February 2017, it became apparent
that SASSA did not intend to bring the social welfare payment service in-house after the contract expiration. The risk of there
being no payment service, or a limited service, to social welfare grant recipients in April 2017 and beyond, resulted in a public
furor in South Africa in March 2017, despite SASSA’s continued assurance that grants would be paid on time in April 2017.
The South African public, media, non-governmental organizations and political parties were particularly angered by SASSA’s
failure to have a plan to perform the service itself and utilized a number of platforms, including social media, to express their
dissatisfaction with the state of affairs. They specifically accused us of bearing responsibility for SASSA’s inability to bring the
payment service in-house. In addition, we were publicly accused of illegally providing our services and defrauding social
welfare grant recipients. We have publicly denied these accusations and believe they have no merit.
Our reputation in South Africa has been tarnished as a result of these accusations. We have attempted to refute the
accusations made against us and have appointed a public relations firm to assist us in communicating effectively to the public
and our stakeholders that our business practices comply with South African law and are fair to the social welfare grant recipients
who purchase the financial services products that we offer. However, it is difficult to quantify to what extent we have been
successful in effectively repudiating these unsubstantiated allegations against us. If we are unable to communicate persuasively
that our business practices comply with South African law and are fair to the customers who purchase our financial services
products, our ability to operate effectively and efficiently in South Africa in the future will be adversely impacted, and our
results of operations, financial position and cash flows would be adversely affected.
14
SASSA continues to challenge our ability to conduct certain aspects of our financial services
business in a commercial manner through its interpretation of recently adopted regulations under the
Social Assistance Act. We are in litigation with SASSA over its interpretation of these regulations. If
SASSA were to prevail in this legal proceeding, our business will suffer.
As described under “Item 3—Legal Proceedings— Litigation Regarding Legality of Debit Orders under Social Assistance
Act Regulations,” the High Court of the Republic of South Africa Gauteng Division, Pretoria, or Pretoria High Court, has issued
the declaratory order sought by us that the Social Assistance Act and Regulations do not restrict social grant recipients in the
operation of their banks accounts. SASSA continues to challenge our ability to operate certain aspects of our financial services
business in a commercial manner in the South African courts. The Black Sash has also served applications petitioning the South
African Supreme Court of Appeal, or the Supreme Court, to grant them leave to appeal the Pretoria High Court order through
either the Supreme Court or to a full bench of the Pretoria High Court.
If SASSA or the Black Sash were to prevail with their legal actions, our ability to operate our business, specifically our
micro-lending and insurance activities in a commercially viable manner would be impaired, which would likely have a material
adverse effect on our business and might harm our reputation. Regardless of the outcome, management will be required to
devote further time and resources to these legal proceedings, which may impact their ability to focus their attention on our
business.
We are, and in the future may be, subject to litigation in which private parties may seek to recover,
on behalf of SASSA, amounts paid to us under our SASSA contract. If such litigation were to be
successful and require us to repay substantial monies to SASSA, such repayment would adversely affect
our results of operations, financial position and cash flows.
In April 2015, Corruption Watch, a South African non-profit civil society organization, commenced a legal proceeding in
the High Court of South Africa, seeking an order from the Court to review and set aside the decision of SASSA’s Chief
Executive Officer to approve a payment to us of approximately ZAR 317 million including VAT, or approximately ZAR 277
million excluding VAT. Corruption Watch claims that there was no lawful basis for the decision to make the payment to us, and
that the decision was unreasonable and irrational and did not comply with South African law. We are named as a respondent in
this proceeding.
The payments being challenged by Corruption Watch represent amounts paid to us by SASSA for the costs we incurred in
performing additional beneficiary registrations and gathering information beyond those that we were contractually required to
perform under our SASSA contract. SASSA requested us to biometrically register all social grant beneficiaries (including all
child beneficiaries), in addition to the grant recipients who were issued with the SASSA-branded UEPS/EMV smart cards. As a
result, we performed approximately 11 million additional registrations that did not form part of its monthly service fee. These
amounts were paid in full settlement of the claim we submitted to SASSA for these additional costs. We believe that Corruption
Watch’s claim is without merit and we are defending it vigorously. However, we cannot predict how the Court will rule on the
matter.
In addition, the April 2014 Constitutional Court ruling ordering SASSA to re-run the tender process required us to file with
the Court, after completion of our SASSA contract in March 2017, an audited statement of our expenses, income and net profit
under the contract. We filed the required information with the Constitutional Court on May 30, 2017. The March 2017
Constitutional Court order contains a similar requirement that we file an audited statement of our expenses, income and net
profit under our amended contract that expires in March 2018. It is conceivable that one or more third parties may in the future
institute litigation challenging our right to retain a portion of the amounts we will have received from SASSA under our
contract. We cannot predict whether any such litigation will be instituted, or if it is, whether it would be successful.
Any successful challenge to our right to receive and retain payments from SASSA that requires substantial repayments
would adversely affect our results of operations, financial position and cash flows.
15
We have disclosed competitively sensitive information as a result of the AllPay litigation, which
could adversely affect our competitive position in the future.
In connection with the litigation challenging the award of the SASSA tender to us in fiscal 2012 through fiscal 2015, we
included our entire 2011 SASSA tender submission in the court record, which court record is in the public domain. Our tender
submission contains competitively sensitive business information. As a result of this disclosure, our existing and future
competitors have access to this information which could adversely affect our competitive position in any future similar tender
submissions to the extent that such information continues to remain competitively sensitive.
In order to meet our obligations under our current SASSA contract, we are required to deposit
government funds with financial institutions in South Africa before commencing the payment cycle and
are exposed to counterparty risk.
In order to meet our obligations under our current SASSA contract, we are required to deposit government funds, which
will ultimately be used to pay social welfare grants, with financial institutions in South Africa before commencing the payment
cycle. If these financial institutions are unable to meet their commitments to us, in a timely manner or at all, we would be unable
to discharge our obligations under our SASSA contract and could be subject to financial losses, penalties, loss of reputation and
potentially, the cancellation of our contract. As we are unable to influence these financial institutions’ operations, including their
internal information technology structures, capital structures, risk management, business continuity and disaster recovery
programs, or their regulatory compliance systems, we are exposed to counterparty risk.
We may undertake acquisitions or make strategic investments that could increase our costs or
liabilities or be disruptive to our business.
Acquisitions and strategic investments are an integral part of our long-term growth strategy as we seek to grow our
business internationally and to deploy our technologies in new markets both inside and outside South Africa. However, we may
not be able to locate suitable acquisition or investment candidates at prices that we consider appropriate. If we do identify an
appropriate acquisition or investment candidate, we may not be able to successfully negotiate the terms of the transaction,
finance it or, if the transaction occurs, integrate the new business into our existing business. These transactions may require debt
financing or additional equity financing, resulting in additional leverage or dilution of ownership. For instance, in July 2017, we
invested in Cell C utilizing a combination of existing cash reserves and external debt from South African banks – refer also to
Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Developments During
Fiscal 2017—Strategic investments.”
Acquisitions of businesses or other material operations and the integration of these acquisitions or their businesses will
require significant attention from our senior management which may divert their attention from our day to day business. The
difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating
personnel with disparate business backgrounds and combining different corporate cultures. We also may not be able to maintain
key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits that we anticipated
when selecting our acquisition candidates.
In addition, we may need to record write-downs from future impairments of goodwill or other intangible assets, which
could reduce our future reported earnings. Finally, acquisition candidates may have liabilities or adverse operating issues that
we fail to discover through due diligence prior to the acquisition.
We may not achieve the expected benefits from our recent Cell C and DNI investments.
We have recently invested more than $220 million in the aggregate to acquire a 15% interest in Cell C Proprietary Limited
and a 45% interest in DNI-4PL Contracts Proprietary Limited, or DNI. We believe that there are potential synergies that we can
derive from these transactions, including the ability to integrate our service offerings to certain of our customers with those of
Cell C and DNI, which we would then expect to help expand the businesses of Cell C and DNI as well. However, we may not
realize the benefits we expect to achieve from these investments. First, attempting to integrate these service offerings may be
disruptive to us and we may not be able to integrate these offerings successfully. Even if we are able to achieve this integration,
our customers may not use these services to the extent that we hope they will. Any such failure could adversely impact our own
business as well as Cell C’s and DNI’s, which could then reduce the value of our investments. Additionally, attempting to
integrate Cell C’s and DNI’s offerings with our own may adversely impact our other business and operational relationships. Our
inability to achieve the expected synergies from the Cell C and DNI transactions may have a material adverse effect on our
business, results of operations or financial condition. For example, our revenues and operating income may be adversely
affected and we could be required to impair all, or a part of, our investment.
16
We have a significant amount of indebtedness that requires us to comply with restrictive and
financial covenants. If we are unable to comply with these covenants, we could default on this debt,
which would have a material adverse effect on our business and financial condition.
We financed our recent investment in Cell C through South African bank borrowings of ZAR 1.25 billion ($95.7 million,
translated at exchange rates applicable as of June 30, 2017). The loans are secured by intercompany cross-guarantees and a
pledge by Net1 Applied Technologies South Africa Proprietary Limited, or Net1 SA, of its entire equity interests in Cell C and
DNI. The terms of the lending arrangement contain customary covenants that require Net1 SA to maintain a specified total net
leverage ratio and restrict the ability of Net1 SA, and certain of its subsidiaries to make certain distributions with respect to their
capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make investment above specified levels,
engage in certain business combinations and engage in other corporate activities.
In addition, as of June 30, 2017, we had approximately KRW 18.6 billion ($16.2 million, translated at exchange rates
applicable as of June 30, 2017) of outstanding indebtedness, which we incurred to finance our acquisition of KSNET in October
2010. These loans are secured by a pledge by Net1 Korea of its entire equity interest in KSNET and a pledge by the immediate
parent of Net1 Korea (also one of our subsidiaries) of its entire equity interest in Net1 Korea. The terms of the loan facility
require Net1 Korea and its consolidated subsidiaries to maintain certain specified financial ratios (including a leverage ratio and
a debt service coverage ratio) and restrict Net1 Korea’s ability to make certain distributions with respect to its capital stock,
prepay other debt, encumber its assets, incur additional indebtedness, or engage in certain business combinations.
Although these covenants only apply to certain of our South African subsidiaries and our South Korean subsidiaries,
respectively, these security arrangements and covenants may reduce our operating flexibility or our ability to engage in other
transactions that may be beneficial to us. If we are unable to comply with the covenants in South Africa or South Korea, we
could be in default and the indebtedness could be accelerated. If this were to occur, we might not be able to obtain waivers of
default or to refinance the debt with another lender and as a result, our business and financial condition would suffer.
We face competition from the incumbent retail banks in South Africa and SAPO in the unbanked
market segment, which could limit growth in our transaction-based activities segment.
Certain South African banks have also developed their own low-cost banking products targeted at the unbanked and under-
banked market segment. According to the 2016 FinScope survey, which is an annual survey conducted by the FinMark Trust, a
non-profit independent trust, 77% of South Africans are banked (58% if SASSA account holders are excluded). As the
competition to bank the unbanked in South Africa intensifies, we may not be successful in marketing our low-cost EasyPay
Everywhere product to our target population. Moreover, as our product offerings increase, gain market acceptance and pose a
competitive threat in South Africa, especially our UEPS/EMV product with biometric verification and our financial services
offerings, the banks and SAPO may seek governmental or other regulatory intervention if they view us as disrupting their
transactional or other businesses.
Our microlending loan book exposes us to credit risk and our allowance for doubtful finance loans
receivable may not be sufficient to absorb future write-offs.
All of these microfinance loans made are for a period of six months or less. We have created an allowance for doubtful
finance loans receivable related to this book. Management has considered factors including the period of the finance loan
outstanding, creditworthiness of the customers and the past payment history of the borrower when creating the allowance. We
consider this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and
changes in our customer payment patterns. However, additional allowances may be required should the ability of our customers
to make payments when due deteriorate in the future. A significant amount of judgment is required to assess the ultimate
recoverability of these finance loan receivables, including on-going evaluation of the creditworthiness of each customer.
Our Mastertrading working capital financing and supply chain solutions receivables expose us to
credit risk and our allowance for doubtful working capital finance loans receivable may not be
sufficient to absorb future write-offs.
We have created an allowance for doubtful working capital finance receivables related to our Mastertrading business. We
have considered factors including the period of the working capital receivable outstanding, creditworthiness of the customers
and the past payment history of the borrower when creating the allowance. A significant amount of judgment is required to
assess the ultimate recoverability of these working capital finance receivables because this is a new offering and we continue to
refine and improve our processes, including the maximum amount of exposure per customer that we are willing to accept and
the on-going evaluation of the creditworthiness of each customer.
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A determination that requires a change in our allowance for doubtful working capital finance receivables, or a failure by
one or more of our customers to pay a significant portion of outstanding working capital finance receivables, could have a
negative impact on our business, operating results, cash flows and financial condition.
We have obtained short-term financing from Bank Frick to fund our Mastertrading working
capital and supply chain solutions offering in Europe. We may need to utilize existing cash reserves to
settle these short-term facilities if our working capital customers do not repay us under the terms of our
agreements with them.
As of June 30, 2017, we had utilized CHF 15.9 million of our CHF 20 million short-term facility from Bank Frick to fund
the growth of the majority of the European working capital receivables. The facility does not have a fixed term, however it may
be terminated by either party with six months written notice at the end of a calendar month. Certain of our working capital
finance agreements are for a period of up to nine months and if Bank Frick were to terminate its lending facility with six months
notice, we may be required to utilize our existing cash reserves to settle a portion of the Bank Frick facility which could have an
adverse impact on our business, operating results, cash flows and financial condition. We have also provided Bank Frick a
corporate guarantee as security for this CHF 20 million facility as well as a EUR 40 million facility obtained from Bank Frick.
We may face competition from other companies that offer smart card technology, other innovative
payment technologies and payment processing, which could result in loss of our existing business and
adversely impact our ability to successfully market additional products and services.
Our primary competitors in the payment processing market include other independent processors, as well as financial
institutions, independent sales organizations, and, potentially card networks. Many of our competitors are companies who are
larger than we are and have greater financial and operational resources than we have. These factors may allow them to offer
better pricing terms or incentives to customers, which could result in a loss of our potential or current customers or could force
us to lower our prices as well. Either of these actions could have a significant effect on our revenues and earnings.
In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing
payment systems and the providers of financial services and low cost bank accounts, there are a number of other products that
use smart card technology in connection with a funds transfer system. During the past several years, smart card technology has
become increasingly prevalent. We believe that the most competitive product in this marketplace is EMV, a system that is
promoted by most of the major card companies such as Visa, MasterCard, JCB and American Express. Also, governments and
financial institutions are, to an increasing extent, implementing general-purpose reloadable prepaid cards as a low-cost
alternative to provide financial services to the unbanked population. Moreover, as the acceptance of using a mobile phone to
facilitate financial services has increased exponentially, other companies have introduced such services to the marketplace
successfully and customers may prefer those services to ours, based on technology, price or other factors.
A prolonged economic slowdown or lengthy or severe recession in South Africa or elsewhere could
harm our operations.
A prolonged economic downturn or recession could materially impact our results from operations. A recessionary
economic environment could have a negative impact on mobile phone operators, our cardholders and retailers and could reduce
the level of transactions we process and the take-up of financial services we offer, which would, in turn, negatively impact our
financial results. If financial institutions and retailers experience decreased demand for their products and services our hardware,
software and related technology sales will reduce, resulting in lower revenue.
The loss of the services of certain of our executive officers would adversely affect our business.
Our future financial and operational performance depends, in large part, on the continued contributions of our senior
management, in particular, Mr. Herman Kotzé, our Chief Executive and Chief Financial Officer. Many of our key
responsibilities in South Africa are currently performed by Mr. Kotzé, as well as by Messrs. Nanda Pillay, our Managing
Director: Southern Africa and Nitin Soma, our Senior Vice President of Information Technology. We are actively seeking to
appoint a new Chief Financial Officer, and until this executive has been appointed there is a risk that Mr. Kotzé may become
overburdened with his multiple executive responsibilities. The loss of the services of any of these executives would disrupt our
development efforts or business relationships and our ability to continue to innovate and to meet customers’ needs, which could
have a material adverse effect on our business and financial performance.
In addition, the success of our KSNET business depends heavily on the continued services of its president, Phil-Hyun Oh
and the other senior members of the KSNET management team. Mr. Oh’s current contract expired in June 2017, and has not
been renewed and therefore he may terminate his employment at any time. We do not maintain any “key person” life insurance
policies.
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We face a highly competitive employment market and may not be successful in attracting and
retaining a sufficient number of skilled employees, particularly in the technical and sales areas and
senior management.
Our future success depends on our ability to continue to develop new products and to market these products to our target
users. In order to succeed in our product development and marketing efforts, we need to identify, attract, motivate and retain
sufficient numbers of qualified technical and sales personnel. An inability to hire and retain such technical personnel would
adversely affect our ability to enhance our existing intellectual property, to introduce new generations of technology and to keep
abreast of current developments in technology. Demand for personnel with the range of capabilities and experience we require
is high and there is no assurance that we will be successful in attracting and retaining these employees. The risk exists that our
technical skills and sales base may be depleted over time because of natural attrition. Furthermore, social and economic factors
in South Africa have led, and continue to lead, to numerous qualified individuals leaving the country, thus depleting the
availability of qualified personnel in South Africa. In addition, our multi-country strategy will also require us to hire and retain
highly qualified managerial personnel in each of these markets. If we cannot recruit and retain people with the appropriate
capabilities and experience and effectively integrate these people into our business, it could negatively affect our product
development and marketing activities.
System failures, including breaches in the security of our system, could harm our business.
We may experience system failures from time to time, and any lengthy interruption in the availability of our back-end
system computer could harm our revenues and profits, and could subject us to the scrutiny of our customers.
Frequent or persistent interruptions in our services could cause current or potential customers and users to believe that our
systems are unreliable, leading them to avoid our technology altogether, and could permanently harm our reputation and brands.
These interruptions would increase the burden on our engineering staff, which, in turn, could delay our introduction of new
applications and services. Finally, because our customers may use our products for critical transactions, any system failures
could result in damage to our customers’ businesses. These customers could seek significant compensation from us for their
losses. Even if unsuccessful, this type of claim could be time consuming and costly for us to address.
Although our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they
remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist
attacks, computer viruses, computer denial-of-service attacks and similar events. Some of our systems are not fully redundant,
and our disaster recovery planning may not be sufficient for all eventualities.
Protection against fraud is of key importance to the purchasers and end users of our solutions. We incorporate security
features, including encryption software, biometric identification and secure hardware, into our solutions to protect against fraud
in electronic transactions and to provide for the privacy and integrity of card holder data. Our solutions may be vulnerable to
breaches in security due to defects in the security mechanisms, the operating system and applications or the hardware platform.
Security vulnerabilities could jeopardize the security of information transmitted using our solutions. If the security of our
solutions is compromised, our reputation and marketplace acceptance of our solutions will be adversely affected, which would
cause our business to suffer, and we may become subject to damage claims. We have not yet experienced any significant
security breaches affecting our business.
Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems with our system
could result in lengthy interruptions in our services. Our current business interruption insurance may not be sufficient to
compensate us for losses that may result from interruptions in our service as a result of system failures.
The period between our initial contact with a potential customer and the sale of our UEPS products
or services to that customer tends to be long and may be subject to delays which may have an impact on
our revenues.
The period between our initial contact with a potential customer and the purchase of our UEPS products and services is
often long and subject to delays associated with the budgeting, approval and competitive evaluation processes that frequently
accompany significant capital expenditures. A lengthy sales cycle may have an impact on the timing of our revenues, which
may cause our quarterly operating results to fall below investor expectations. A customer’s decision to purchase our products
and services is often discretionary, involves a significant commitment of resources, and is influenced by customer budgetary
cycles. To sell our products and services successfully we generally must educate our potential customers regarding the uses and
benefits of our products and services, which can require the expenditure of significant time and resources; however, there can be
no assurance that this significant expenditure of time and resources will result in actual sales of our products and services.
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Our proprietary rights may not adequately protect our technologies.
Our success depends in part on our obtaining and maintaining patent, trade secret, copyright and trademark protection of
our technologies in the United States and other jurisdictions as well as successfully enforcing this intellectual property and
defending this intellectual property against third-party challenges. We will only be able to protect our technologies from
unauthorized use by third parties to the extent that valid and enforceable intellectual property protections, such as patents or
trade secrets, cover them. In particular, we place considerable emphasis on obtaining patent and trade secret protection for
significant new technologies, products and processes. Furthermore, the degree of future protection of our proprietary rights is
uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or
keep our competitive advantage.
We cannot predict the breadth of claims that may be allowed or enforced in our patents. For example, we might not have
been the first to make the inventions covered by each of our patents and patent applications or to file patent applications and it is
possible that none of our pending patent applications will result in issued patents. It is possible that others may independently
develop similar or alternative technologies. Also, our issued patents may not provide a basis for commercially viable products,
or may not provide us with any competitive advantages or may be challenged, invalidated or circumvented by third parties.
We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or
obtainable. However, trade secrets are difficult to protect. We have confidentiality agreements with employees, and consultants
to protect our trade secrets and proprietary know-how. These agreements may be breached and or may not have adequate
remedies for such breach. While we use reasonable efforts to protect our trade secrets, our employees, consultants or others may
unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally
obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the outcome
would be unpredictable. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it
will be more difficult for us to enforce our rights and our business could be harmed. If we are not able to defend the patent or
trade secret protection position of our technologies, then we will not be able to exclude competitors from developing or
marketing competing technologies.
We also rely on trademarks to establish a market identity for some of our products. To maintain the value of our
trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or
dilutive of our registered or unregistered trademarks. Also, we might not obtain registrations for our pending trademark
applications, and might have to defend our registered trademark and pending trademark applications from challenge by third
parties.
Defending our intellectual property rights or defending ourselves in infringement suits that may be
brought against us is expensive and time-consuming and may not be successful.
Litigation to enforce our patents, trademarks or other intellectual property rights or to protect our trade secrets could result
in substantial costs and may not be successful. Any loss of, or inability to protect, intellectual property in our technology could
diminish our competitive advantage and also seriously harm our business. In addition, the laws of certain foreign countries may
not protect our intellectual property rights to the same extent as do the laws in countries where we currently have patent
protection. Our means of protecting our intellectual property rights in countries where we currently have patent or trademark
protection, or any other country in which we operate, may not be adequate to fully protect our intellectual property rights.
Similarly, if third parties claim that we infringe their intellectual property rights, we may be required to incur significant costs
and devote substantial resources to the defense of such claims. We may be required to discontinue using and selling any
infringing technology and services, to expend resources to develop non-infringing technology or to purchase licenses or pay
royalties for other technology. In addition, if we are unsuccessful in defending any such third-party claims, we could suffer
costly judgments and injunctions that could materially adversely affect our business, results of operations or financial condition.
Our strategy of partnering with companies outside South Africa may not be successful.
In order for us to expand our operations into foreign markets, it may be necessary for us to establish partnering
arrangements with companies outside South Africa, such as the one we have co-established in Namibia and our non-controlling
investments in Nigeria and with MobiKwik in India. The success of these endeavors is, however, subject to a number of factors
over which we have little or no control, such as finding suitable partners with the appropriate financial, business and technical
backing and continued governmental support for planned implementations. In some countries, finding suitable partners and
obtaining the appropriate support from the government involved may take a number of years before we can commence
implementation. Some of these partnering arrangements may take the form of joint ventures in which we receive a non-
controlling interest. Non-controlling ownership carries with it numerous risks, including dependence on partners to provide
knowledge of local market conditions and to facilitate the acquisition of any necessary licenses and permits, as well as the
inability to control the joint venture vehicle and to direct its policies and strategies.
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Such a lack of control could result in the loss of all or part of our investment in such entities. In addition, our foreign
partners may have different business methods and customs which may be unfamiliar to us and with which we disagree. Our
joint venture partners may not be able to implement our business model in new areas as efficiently and quickly as we have been
able to do in South Africa. Furthermore, limitations imposed on our South African subsidiaries by South African exchange
control regulations, as well as limitations imposed on us by the Investment Company Act of 1940, may limit our ability to
establish partnerships or entities in which we do not obtain a controlling interest.
We may have difficulty managing our growth.
We continue to experience growth, both in the scope of our operations and size of our organization. This growth is placing
significant demands on our management. Continued growth would increase the challenges involved in implementing
appropriate operational and financial systems, expanding our technical and sales and marketing infrastructure and capabilities,
providing adequate training and supervision to maintain high quality standards, and preserving our culture and values.
International growth, in particular, means that we must become familiar and comply with complex laws and regulations in other
countries, especially laws relating to taxation.
Additionally, continued growth will place significant additional demands on our management and our financial and
operational resources, and will require that we continue to develop and improve our operational, financial and other internal
controls. If we cannot scale and manage our business appropriately, we will not experience our projected growth and our
financial results may suffer.
We pre-fund certain merchant and customer payments in South Africa, South Korea and Botswana
and a significant level of payment defaults by these merchants or customers would adversely affect us.
We pre-fund social welfare grants through the merchants who participate in our merchant acquiring system in the South
African provinces where we operate. We also pre-fund the settlement of funds to certain customers in South Korea and pre-fund
our customer that utilizes our UEPS system to pay old age grants in Botswana. These pre-funding obligations expose us to the
risk of default by these merchants and customers. Although we have not experienced any material defaults by merchants or
customers in the return of pre-funded amounts to us, we cannot guarantee that material defaults will not occur in the future. A
material level of merchant or customer defaults could have a material adverse effect on us, our financial position and results of
operations.
We may incur material losses in connection with our distribution of cash to recipient cardholders of
social welfare grants in South Africa.
Many social welfare recipient cardholders use our services to access cash using their smart cards. We use armored vehicles
and our own fixed ATM infrastructure to deliver large amounts of cash to rural areas across South Africa to enable these
welfare recipient cardholders to receive this cash. In some cases, we also store the cash that will be delivered by the armored
vehicles in depots overnight or over the weekend to facilitate delivery to these rural areas. We cannot insure against certain risks
of loss or theft of cash from our delivery vehicles, ATMs or depots and we will therefore bear the full cost of certain uninsured
losses or theft in connection with the cash handling process, and such losses could materially and adversely affect our financial
condition, cash flows and results of operations. We have not incurred any material losses resulting from cash distribution in
recent years, but there is no assurance that we will not incur material losses in the future.
We depend upon third-party suppliers, making us vulnerable to supply shortages and price
fluctuations, which could harm our business.
We obtain our smart cards, ATMs, POS devices and the other hardware we use in our business from a limited number of
suppliers, and do not manufacture this equipment ourselves. We generally do not have long-term agreements with our
manufacturers or component suppliers. If our suppliers become unwilling or unable to provide us with adequate supplies of
parts or products when we need them, or if they increase their prices, we may not be able to find alternative sources in a timely
manner and could be faced with a critical shortage. This could harm our ability to implement new systems and cause our
revenues to decline. Even if we are able to secure alternative sources in a timely manner, our costs could increase. A supply
interruption or an increase in demand beyond current suppliers’ capabilities could harm our ability to distribute our equipment
and thus, to acquire a new source of customers who use our UEPS technology. Any interruption in the supply of the hardware
necessary to operate our technology, or our inability to obtain substitute equipment at acceptable prices in a timely manner,
could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
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Shipments of our electronic payment systems may be delayed by factors outside of our control,
which can harm our reputation and our relationships with our customers.
The shipment of payment systems requires us or our manufacturers, distributors or other agents to obtain customs or other
government certifications and approvals and, on occasion, to submit to physical inspection of our systems in transit. Failure to
satisfy these requirements, and the very process of trying to satisfy them, can lead to lengthy delays in the delivery of our
solutions to our direct or indirect customers. Delays and unreliable delivery by us may harm our reputation and our relationships
with our customers.
Our Smart Life business exposes us to risks typically experienced by life assurance companies.
Smart Life is a life insurance company and exposes us to risks typically experienced by life assurance companies. Some of
these risks include the extent to which we are able to continue to reinsure our risks at acceptable costs, reinsurer counterparty
risk, maintaining regulatory capital adequacy, solvency and liquidity requirements, our ability to price our insurance products
appropriately, the risk that actual claims experience may exceed our estimates, the ability to recover policy premiums from our
customers and the competitiveness of the South African insurance market. If we are unable to maintain our desired level of
reinsurance at prices that we consider acceptable, we would have to either accept an increase in our exposure risk or reduce our
insurance writings. If our reinsurers are unable to meet their commitments to us in a timely manner, or at all, we may be unable
to discharge our obligations under our insurance contracts. As such, we are exposed to counterparty, including credit, risk of
these reinsurers. Our product pricing includes long-term assumptions regarding investment returns, mortality, morbidity,
persistency and operating costs and expenses of the business. Using the wrong assumptions to price our insurance products
could materially and adversely affect our financial position, results of operations and cash flows.
If our actual claims experience is higher than our estimates, our financial position, results of operations and cash flows
could be adversely affected. Finally, the South African insurance industry is highly competitive. Many of our competitors are
well-established, represented nationally and market similar products and we may not be able to effectively penetrate the South
African insurance market.
Risks Relating to Operating in South Africa and Other Foreign Markets
If we do not achieve applicable broad-based black economic empowerment objectives in our South
African businesses, we risk losing our government and private contracts. In addition, it is possible that
we may be required to increase black shareholding of our company in a manner that could dilute your
ownership.
The legislative framework for the promotion of broad-based black economic empowerment, or BEE, in South Africa has
been established through the Broad-Based Black Economic Empowerment Act, No. 53 of 2003, as amended in 2013, and
amended BEE codes of good practice, or BEE Codes, the sector-specific codes of good practice, or Sector Codes, and sector-
specific transformation charters, or Transformation Charters, published pursuant thereto. Sector Codes are sector-specific codes
of good practice that are aligned with the BEE Codes and share the same status as the BEE Codes which were initially published
by the South African government in February 2007. Sector Codes are fully binding between and among businesses operating in
an industry. Achievement of BEE objectives is measured by a scorecard which establishes a weighting for the various
components of BEE. Scorecards are independently reviewed by accredited BEE verification agencies which issue a certificate
that presents an entity’s BEE Recognition Level, or BEE status.
The BEE Codes were reviewed by the South African Department of Trade and Industry, or dti, and a new set of BEE
Codes were promulgated in October 2013. The new BEE Codes came into effect on May 1, 2015, and have different
requirements and emphasis to the old codes of good practice. Furthermore, on May 15, 2015, the dti issued a Notice of
Clarification which further extended the transitional period for the alignment of Sector Codes with the new BEE Codes. The dti
stated in its notice that it would consider repealing any Sector Codes that are not aligned to a date yet to be announced.
Certain of our South African businesses are subject to either the Information and Communications Technology Sector
Code, or ICT Sector Code, or the Financial Services Sector Code. The ICT Sector Code has been amended and aligned with the
new BEE Codes, and a new ICT Sector Code was promulgated on November 7, 2016. In November 2012, the South African
government promulgated the Financial Services Code. The Financial Services Code is in the process of being amended to align
it with the BEE Codes and the amendments have not yet been finalized.
Some of our businesses will have to adhere to these amended Sector Codes, and in the case of the Financial Sector Codes,
only once the amendment is gazetted. Compliance with the requirements of the amended ICT Sector Codes and the amended
Financial Sector Codes, may negatively affect our future BEE status.
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We have taken a number of actions as a company to increase empowerment of black South Africans. However, it is
possible that these actions may not be sufficient to enable us to achieve applicable BEE objectives. In that event, in order to
avoid risking the loss of our government and private contracts, we may have to seek to comply through other means, including
by selling or placing additional shares of Net1 or of our South African subsidiaries to black South Africans. Such sales of shares
could have a dilutive impact of your ownership interest, which could cause the market price of our stock to decline.
We expect that our BEE status will be important for us to remain competitive in the South African marketplace and we
continually seek ways to improve our BEE status, especially the equity component of our BEE status. For instance, in April
2014, we implemented a BEE transaction pursuant to which we issued 4.4 million shares of our common stock to our BEE
partners for ZAR 60.00 per share, which represented a 25% discount to the market price of our shares at the time that we
negotiated the transaction. We entered into this transaction to improve the equity component of our BEE status. We provided
funding to the BEE partners in order for them to buy these shares from us. In June 2014, and in accordance with the terms of
agreements, we repurchased approximately 2.4 million of these shares of our common stock in order for the BEE partners to
repay the loans we provided to them. Furthermore, in August 2014, we entered into a Subscription and Sale of Shares
Agreement with Business Venture Investments No 1567 Proprietary Limited (RF), or BVI, one of our BEE partners, in
preparation for any new potential SASSA tender. Pursuant to the agreement, we repurchased BVI’s remaining shares of Net1
common stock and BVI subscribed for new ordinary shares of CPS, representing approximately 12.5% of CPS’ ordinary shares
outstanding after the subscription.
It is possible that we may find it necessary to issue additional shares to improve our BEE status. If we enter into further
BEE transactions that involve the issuance of equity, we cannot predict what the dilutive effect of such a transaction would be
on your ownership or how it would affect the market price of our stock.
Fluctuations in the value of the South African rand have had, and will continue to have, a
significant impact on our reported results of operations, which may make it difficult to evaluate our
business performance between reporting periods and may also adversely affect our stock price.
The South African rand, or ZAR, is the primary operating currency for our business operations while our financial results
are reported in U.S. dollars. This means that as long as the ZAR remains our primary operating currency, depreciation in the
ZAR against the U.S. dollar, and to a lesser extent, the South Korean won against the U.S. dollar, would negatively impact our
reported revenue and net income, while a strengthening of the ZAR and the South Korean won would have the opposite effect.
Depreciation in the ZAR may negatively impact the prices at which our stock trades. The U.S. dollar/ZAR exchange rate has
historically been volatile and we expect this volatility to continue. We provide detailed information about historical exchange
rates in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Currency
Exchange Rate Information.”
Due to the significant fluctuation in the value of the ZAR and its impact on our reported results, you may find it difficult to
compare our results of operations between financial reporting periods even though we provide supplemental information about
our results of operations determined on a ZAR basis. This difficulty may increase as we expand our business internationally and
record additional revenue and expenses in the euro and other currencies. It may also have a negative impact on our stock price.
We generally do not engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign
currency exchange rates on our results of operations, other than economic hedging relating to our inventory purchases which are
settled in U.S. dollars or euros. We have used forward contracts in order to hedge our economic exposure to the ZAR/U.S.
dollar and ZAR/euro exchange rate fluctuations from these foreign currency transactions. We cannot guarantee that we will
enter into hedging transactions in the future or, if we do, that these transactions will successfully protect us against currency
fluctuations.
South Africa’s high levels of poverty, unemployment and crime may increase our costs and impair
our ability to maintain a qualified workforce.
While South Africa has a highly developed financial and legal infrastructure, it also has high levels of crime and
unemployment, relative to peer countries in Africa and other emerging economies, and there are significant differences in the
level of economic and social development among its people, with large parts of the population, particularly in the rural areas,
having limited access to adequate education, healthcare, housing and other basic services, including water and electricity. In
addition, South Africa has a high prevalence of HIV/AIDS and tuberculosis. Government policies aimed at alleviating and
redressing the disadvantages suffered by the majority of citizens under previous governments may increase our costs and reduce
our profitability, all of which could negatively affect our business. These problems may prompt emigration of skilled workers,
hinder investment into South Africa and impede economic growth. As a result, we may have difficulties attracting and retaining
qualified employees.
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We may not be able to effectively and efficiently manage the electricity supply disruptions in South
Africa which could adversely affect our results of operations, financial position, cash flows and future
growth.
Our businesses in South Africa are dependent on electricity generated and supplied by the state-owned utility, Eskom, in
order to operate. In recent years, Eskom has been unable to generate and supply the amount of electricity required by South
Africans, and the entire country experienced significant and largely unpredictable electricity supply disruptions. Eskom has
implemented a number of short- and long-term mitigation plans to correct these issues and the number of supply disruptions has
decreased since calendar 2016.
As part of our business continuity programs, we have installed back-up diesel generators in order for us to continue to
operate our core data processing facilities in Cape Town and Johannesburg in the event of intermittent disruptions to our
electricity supply. We have to perform regular monitoring and maintenance of these generators as well as sourcing and
managing diesel fuel levels. We may also be required to replace these generators on a more frequent basis due to the additional
burden placed on them.
Our results of operations, financial position, cash flows and future growth could be adversely affected if Eskom is unable
to commission new electricity-generating power stations in accordance with its plans, or at all, or if we are unable to effectively
and efficiently test, maintain, source fuel for and replace our generators.
The economy of South Africa is exposed to high inflation and interest rates which could increase
our operating costs and thereby reduce our profitability.
The economy of South Africa in the past has been, and in the future may continue to be, characterized by rates of inflation
and interest rates that are substantially higher than those prevailing in the United States and other highly developed economies.
High rates of inflation could increase our South African-based costs and decrease our operating margins. Although higher
interest rates would increase the amount of income we earn on our cash balances, they would also adversely affect our ability to
obtain additional cost-effective debt financing in South Africa.
South African exchange control regulations could hinder our ability to make foreign investments
and obtain foreign-denominated financing.
South Africa’s exchange control regulations restrict the export of capital from South Africa, the Republic of Namibia and
the Kingdoms of Lesotho and Swaziland, known collectively as the Common Monetary Area, without the prior approval of
SARB. While the South African government has relaxed exchange controls in recent years, it is difficult to predict whether or
how it will further relax or abolish exchange control measures in the foreseeable future.
Although Net1 is a U.S. corporation and is not itself subject to South African exchange control regulations, these
regulations do restrict the ability of our South African subsidiaries to raise and deploy capital outside the Common Monetary
Area, to borrow money in currencies other than the South African rand and to hold foreign currency. Exchange control
restrictions may also affect the ability of these subsidiaries to pay dividends to Net1 unless the affected subsidiary can show that
any payment of such dividend will not place it in an over-borrowed position. As of June 30, 2017, approximately 56% of our
cash and cash equivalents were held by our South African subsidiaries. Exchange control regulations could make it difficult for
our South African subsidiaries to: (i) export capital from South Africa; (ii) hold foreign currency or incur indebtedness
denominated in foreign currencies without the approval of SARB; (iii) acquire an interest in a foreign venture without the
approval of SARB and first having complied with the investment criteria of SARB; or (iv) repatriate to South Africa profits of
foreign operations. These regulations could also limit our ability to utilize profits of one foreign business to finance operations
of a different foreign business.
Under current exchange control regulations, SARB approval would be required for any acquisition of our company which
would involve payment to our South African shareholders of any consideration other than South African rand. This restriction
could limit our management in its ability to consider strategic options and thus, our shareholders may not be able to realize the
premium over the current trading price of our shares.
Most of South Africa’s major industries are unionized, and the majority of employees belong to
trade unions. We face the risk of disruption from labor disputes and new South African labor laws.
Trade unions have had a significant impact on the collective bargaining process as well as on social and political reform in
South Africa in general. Although only approximately 1% percent of our South African workforce is unionized and we have not
experienced any labor disruptions in recent years, such labor disruptions may occur in the future. In addition, developments in
South African labor laws may increase our costs or alter our relationship with our employees and trade unions, which may have
an adverse effect on us, our financial condition and our operations.
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Operating in South Africa and other emerging markets subjects us to greater risks than those we
would face if we operated in more developed markets.
Emerging markets such as South Africa, as well as some of the other markets into which we have recently begun to
expand, including African countries outside South Africa, South America, South and Southeast Asia and Central and Eastern
Europe, are subject to greater risks than more developed markets.
While we focus our business primarily on emerging markets because that is where we perceive to be the greatest
opportunities to market our products and services successfully, the political, economic and market conditions in many of these
markets present risks that could make it more difficult to operate our business successfully.
Some of these risks include:
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political and economic instability, including higher rates of inflation and currency fluctuations;
high levels of corruption, including bribery of public officials;
loss due to civil strife, acts of war or terrorism, guerrilla activities and insurrection;
a lack of well-developed legal systems which could make it difficult for us to enforce our intellectual property
and contractual rights;
logistical, utilities (including electricity and water supply) and communications challenges;
potential adverse changes in laws and regulatory practices, including import and export license requirements
and restrictions, tariffs, legal structures and tax laws;
difficulties in staffing and managing operations and ensuring the safety of our employees;
restrictions on the right to convert or repatriate currency or export assets;
greater risk of uncollectible accounts and longer collection cycles;
indigenization and empowerment programs;
exposure to liability under the U.K. Bribery Act; and
exposure to liability under U.S. securities and foreign trade laws, including the Foreign Corrupt Practices Act,
or FCPA, and regulations established by the U.S. Department of Treasury’s Office of Foreign Assets Control,
or OFAC.
Many of these countries and regions are in various stages of developing institutions and political, legal and regulatory
systems that are characteristic of democracies. However, institutions in these countries and regions may not yet be as firmly
established as they are in democracies in the developed world. Many of these countries and regions are also in the process of
transitioning to a market economy and, as a result, are experiencing changes in their economies and their government policies
that can affect our investments in these countries and regions. Moreover, the procedural safeguards of the new legal and
regulatory regimes in these countries and regions are still being developed and, therefore, existing laws and regulations may be
applied inconsistently. In some circumstances, it may not be possible to obtain the legal remedies provided under those laws and
regulations in a timely manner.
As the political, economic and legal environments remain subject to continuous development, investors in these countries
and regions face uncertainty as to the security of their investments. Any unexpected changes in the political or economic
conditions in these or neighboring countries or others in the region may have a material adverse effect on the international
investments that we have made or may make in the future, which may in turn have a material adverse effect on our business,
operating results, cash flows and financial condition.
Our KSNET operations may be adversely affected by tension in the Korean peninsula.
Our KSNET operations contributed approximately 25% and 13% of our revenue and operating income, respectively, for
our 2017 fiscal year. There has been recent tension on the Korean peninsula and a concern about potential acts of military
aggression or cyber-attacks. Because KSNET is a transaction processor, its operations are dependent on continuing high levels
of consumer activity and the availability of data communication infrastructure. Acts of military aggression in the Korean
peninsula, other hostile acts or economic weakness that reduces spending by South Korean consumers is likely to materially and
adversely impact our KSNET operations as well as our business, operating results, cash flows and financial condition. If this
were to occur, we might be unable to comply with the debt covenants contained in our Korean debt facility, which could result
in default and acceleration of our indebtedness. Furthermore, we might not be able to obtain waivers of default or to refinance
the debt with another lender and, as a result, our business and financial condition would suffer.
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Risks Relating to Government Regulation
The South African National Credit Regulator has applied to cancel the registration of our
subsidiary, Moneyline Financial Services (Pty) Ltd, as a credit provider. If the registration is cancelled,
we will not be able to provide UEPS-based loans to our customers, which would harm our business.
Moneyline provides microloans to our UEPS/EMV cardholders. Moneyline is a registered credit provider under the South
African National Credit Act, or NCA, and is required to comply with the NCA in the operation of its lending business. In
September 2014, the South African National Credit Regulator, or NCR, applied to the National Consumer Tribunal to cancel
Moneyline’s registration, based on an investigation concluded by the NCR.
The NCR has alleged, among other things, that Moneyline contravened the NCA by including child support grants and
foster child grants in the affordability assessments performed by Moneyline prior to granting credit to these borrowers, and that
the procedures followed and documentation maintained by Moneyline are not in accordance with the NCA. We believe that
Moneyline has conducted its business in compliance with NCA and we are opposing the NCR’s application. However, if the
NCR’s application is successful, Moneyline would be prohibited from operating its microlending business, which could have a
material adverse effect on our results of operations and cash flows.
We are required to comply with certain U.S. laws and regulations, including economic and trade
sanctions, which could adversely impact our future growth.
We are subject to U.S. and other trade controls, economic sanctions and similar laws and regulations, including those in
the jurisdictions where we operate. Our failure to comply with these laws and regulations could subject us to civil, criminal and
administrative penalties and harm our reputation.
Doing business on a worldwide basis requires us to comply with the laws and regulations of various foreign jurisdictions.
These laws and regulations place restrictions on our operations, trade practices, partners and investment decisions. In particular,
our operations are subject to U.S. and foreign trade control laws and regulations, including various export controls and
economic sanctions programs, such as those administered by OFAC, as well as European sanctions. We monitor compliance in
accordance with the 10 principles as set out in the United Nations Global Compact Principles, the Organisation for Economic
Co-operation and Development recommendations relating to corruption, and the International Labor Organization Protocol in
terms of certain of the items to be monitored. As a result of doing business in foreign countries and with foreign partners, we are
exposed to a heightened risk of violating trade control laws as well as sanctions regulations.
Economic sanctions programs restrict our business dealings with certain sanctioned countries, persons and entities. In
addition, because we act through dealers and distributors, we face the risk that our dealers, distributors and customers might
further distribute our products to a sanctioned person or entity, or an ultimate end-user in a sanctioned country, which might
subject us to an investigation concerning compliance with OFAC or other sanctions regulations.
Violations of trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of
export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses,
as well as criminal fines and imprisonment. We have developed policies and procedures as part of a company-wide compliance
program that is designed to assist our compliance with applicable U.S. and international trade control laws and regulations,
including trade controls and sanctions programs administered by OFAC, and provide regular training to our employees to
comply with these laws and regulations. However, there can be no assurance that all of our employees, consultants, partners,
agents or other associated persons will not take actions in violation of our policies and these laws and regulations, or that our
policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may
engage, or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our local, strategic
or joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws.
Such a violation, even if our policies prohibit it, could materially and adversely affect our reputation, business, results of
operations and financial condition. Our continued international expansion, including in developing countries, and our
development of new partnerships and joint venture relationships worldwide, could increase the risk of OFAC violations in the
future.
We are required to comply with anti-corruption laws and regulations, including the FCPA and U.K.
Bribery Act, in the jurisdictions in which we operate our business, which could adversely impact our
future growth.
The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining
business, or securing any improper business advantage. It also requires us to keep books and records that accurately and fairly
reflect our transactions. As part of our business, we may deal with state-owned business enterprises, the employees of which are
considered foreign officials for purposes of the FCPA.
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In addition, we have to comply with the U.K. Bribery Act, or the U.K. Bribery Act, which includes provisions that extend
beyond bribery of foreign public officials and also apply to transactions with individuals not employed by a government. The
provisions of the U.K. Bribery Act are also more onerous than the FCPA in a number of other respects, including jurisdiction,
non-exemption of facilitation payments and penalties. Some of the international locations in which we operate, lack a developed
legal system and have higher than normal levels of corruption.
Any failure by us to adopt appropriate compliance procedures and ensure that our employees, agents and business partners
comply with the FCPA could subject us to substantial penalties. In addition, the requirement that we comply with the FCPA
could put us at a competitive disadvantage with companies that are not required to comply with the FCPA or could otherwise
harm our business. For example, in many emerging markets, there may be significant levels of official corruption, and thus,
bribery of public officials may be a commonly accepted cost of doing business. Our refusal to engage in illegal behavior, such
as paying bribes, may result in us not being able to obtain business that we might otherwise have been able to secure or possibly
even result in unlawful, selective or arbitrary action being taken against us by foreign officials.
Our current and potential competitors may use U.S. laws and regulations, including the FCPA, to disrupt our business
operations and harm our reputation in the territories in which we operate or in which we intend to expand into. For instance, as
we have previously reported, in November 2012, the U.S. Department of Justice commenced an investigation into whether we
violated the FCPA and other U.S. federal criminal laws by engaging in a scheme to make corrupt payments to officials of the
South Africa government in connection with securing our 2012 SASSA contract and whether we violated federal securities laws
in connection with statements made by us in our SEC filings regarding this contract. The investigations commenced as a result
of reports made to the relevant U.S. authorities by a losing bidder to the 2012 SASSA contract. While these investigations have
all been concluded with no adverse findings against us, during the course of the investigations, management’s time was diverted
from other matters relating to our business and we suffered harm to our business reputation. Furthermore, in fiscal 2013, the
FSB suspended Smart Life’s insurance license. Our management has to spend a disproportionate amount of time explaining the
circumstances surrounding, and the result of the investigations, when engaging new business partners, shareholders or
regulators.
Violations of anti-corruption laws and regulations are punishable by civil penalties, including fines, as well as criminal
fines and imprisonment. We have developed policies and procedures as part of a company-wide compliance program that is
designed to assist our compliance with applicable U.S. and international anti-corruption laws and regulations, and provide
regular training to our employees to comply with these laws and regulations. However, there can be no assurance that all of our
employees, consultants, partners, agents or other associated persons will not take actions in violation of our policies and these
laws and regulations, or that our policies and procedures will effectively prevent us from violating these regulations in every
transaction in which we may engage, or provide a defense to any alleged violation. In particular, we may be held liable for the
actions that our local, strategic or joint venture partners take inside or outside of the United States, even though our partners
may not be subject to these laws. Such a violation, even if our policies prohibit it, could materially and adversely affect our
reputation, business, results of operations and financial condition.
Since less developed countries present some of the best opportunities for us to expand our business internationally,
restrictions against entering into transactions with those foreign countries, as well as with certain entities and individuals in
those countries, can adversely affect our ability to grow our business.
Changes in current South African government regulations relating to social welfare grants could
adversely affect our revenues and cash flows.
We derive a substantial portion of our current business from the distribution of social welfare grants in South Africa and
the provision of financial services to social grant recipients. Because social welfare eligibility and grant amounts are regulated
by the South African government, any changes to or reinterpretations of the government regulations relating to social welfare
may result in the non-renewal or reduction of grants for certain individuals, or a determination that currently eligible social
welfare grant recipient cardholders are no longer eligible. If any of these changes were to occur, the number of grants we
distribute could decrease which could result in a reduction of our revenue and cash flows.
We do not have a South African banking license and, therefore, we provide our social welfare grant
distribution and EasyPay Everywhere solution through an arrangement with a third-party bank, which
limits our control over this business and the economic benefit we derive from it. If this arrangement
were to terminate, we would not be able to operate our social welfare grant distribution and EasyPay
Everywhere business without alternate means of access to a banking license.
The South African retail banking market is highly regulated. Under current law and regulations, our South African social
welfare grant distribution and EasyPay Everywhere business activities requires us to be registered as a bank in South Africa or
to have access to an existing banking license.
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We are not currently so registered, but we have an agreement with Grindrod Bank that enables us to implement our social
welfare grant distribution and EasyPay Everywhere solution in compliance with the relevant laws and regulations. If the
agreement were to be terminated, we would not be able to operate these services unless we were able to obtain access to a
banking license through alternate means. We are also dependent on Grindrod Bank to defend us against attacks from the other
South African banks who may regard the rapid market acceptance of our UEPS/EMV product with biometric verification as
disruptive to their funds transfer or other businesses and may seek governmental or other regulatory intervention. Furthermore,
we have to comply with the strict anti-money laundering and customer identification regulations of the SARB when we open
new bank accounts for our customers and when they transact. Failure to effectively implement and monitor these regulations
may result in significant fines or prosecution of Grindrod Bank and ourselves.
In addition, the South African Financial Advisory and Intermediary Services Act, 2002, requires persons who act as
intermediaries between financial product suppliers and consumers in South Africa to register as financial service providers.
Smart Life was granted an Authorized Financial Service Provider, or FSP, license on June 9, 2015, and Moneyline Financial
Services (Pty) Ltd and Net1 Mobile Solutions (Pty) Ltd were each granted FSP licenses on July 11, 2017. If our FSP licenses
are cancelled, we may be stopped from continuing our financial services businesses in South Africa.
Our payment processing businesses are subject to substantial governmental regulation and may be
adversely affected by liability under, or any future inability to comply with, existing or future
regulations or requirements.
Our payment processing activities are subject to extensive regulation. Compliance with the requirements under these
various regulatory regimes may cause us to incur significant additional costs and failure to comply with such requirements could
result in the shutdown of the non-complying facility, the imposition of liens, fines and/or civil or criminal liability.
We may be subject to regulations regarding privacy, data use and/or security which could adversely
affect our business.
We are subject to regulations in a number of the countries in which we operate relating to the collection, use, retention,
security and transfer of personally identifiable information about the people who use our products and services, in particular,
“Know Your Customer”, personal financial and health information. New laws in this area have been passed by several
jurisdictions, and other jurisdictions are considering imposing additional restrictions. The interpretation and application of user
data protection laws are in a state of flux. These laws may be interpreted and applied inconsistently from country to country and
our current data protection policies and practices may not be consistent with those interpretations and applications. Complying
with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a
manner adverse to our business.
Any failure, or perceived failure, by us to comply with any regulatory requirements or international privacy or consumer
protection-related laws and regulations could result in proceedings or actions against us by governmental entities or others,
subject us to significant penalties and negative publicity and adversely affect us. In addition, as noted above, we are subject to
the possibility of security breaches, which themselves may result in a violation of these laws.
Risks Relating to our Common Stock
Our stock price has been and may continue to be volatile.
Our stock price has experienced recent significant volatility. During the 2017 fiscal year, our stock price ranged from a low
of $8.37 to a high of $13.53. We expect that the trading price of our common stock may continue to be volatile as a result of a
number of factors, including, but not limited to the following:
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any adverse developments in litigation or regulatory actions in which we are involved;
fluctuations in currency exchange rates, particularly the U.S. dollar/ZAR exchange rate;
announcement of additional BEE transactions, especially one involving the issuance or potential issuance of equity
securities or dilution or sale of our existing business in South Africa;
quarterly variations in our operating results, especially if our operating results fall below the expectations of
securities analysts and investors;
announcements of acquisitions, disposals or impairments of intangible assets;
the timing of or delays in the commencement, implementation or completion of investments or major projects;
large purchases or sales of our common stock;
general conditions in the markets in which we operate; and
economic and financial conditions.
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The put right we have agreed to grant to the IFC Investors on the occurrence of certain triggering
events may have adverse impacts on us.
In May 2016, we issued an aggregate of 9,984,311 shares of our common stock to the IFC Investors. We granted to the
IFC Investors certain rights, including the right to require us to repurchase any shares we have sold to the IFC Investors upon
the occurrence of specified triggering events, which we refer to as a “put right.” Events triggering the put right relate to (1) us
being the subject of a governmental complaint alleging, a court judgment finding or an indictment alleging that we (a) engaged
in specified corrupt, fraudulent, coercive, collusive or obstructive practices; (b) entered into transactions with targets of
economic sanctions; or (c) failed to operate our business in compliance with anti-money laundering or anti-terrorism laws; or (2)
we reject a bona fide offer to acquire all of our outstanding shares at a time when we have in place or implement a shareholder
rights plan, or adopt a shareholder rights plan triggered by a beneficial ownership threshold of less than twenty percent. The put
price per share will be the higher of the price per share paid to us by the IFC Investors and the volume-weighted average price
per share prevailing for the 60 trading days preceding the triggering event, except that with respect a put right triggered by
rejection of a bona fide offer, the put price per share will be the highest price offered by the offeror. If a put triggering event
occurs, it could adversely impact our liquidity and capital resources. In addition, the existence of the put right could also affect
whether or on what terms a third party might in the future offer to purchase our company. Our response to any such offer could
also be complicated, delayed or otherwise influenced by the existence of the put right.
A majority of our common stock is beneficially owned by a small number of shareholders.
The interests of these shareholders may conflict with those of our other shareholders.
There is a concentration of ownership of our outstanding common stock because approximately 47% of our outstanding
common stock is owned by three shareholders. Based on their most recent SEC filings disclosing ownership of our shares, IFC
Investors, Allan Gray Proprietary Limited, and International Value Advisers, LLC, or IVA, beneficially owned approximately
18%, 16% and 13% of our outstanding common stock, respectively.
The interests of the IFC Investors, Allan Gray and IVA, may be different from or conflict with the interests of our other
shareholders. As a result of the ownership by the IFC Investors, Allan Gray and IVA, they will be able, if they act together, to
significantly influence our management and affairs and all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or
preventing a change of control of our company, thus depriving shareholders of a premium for their shares, or facilitating a
change of control that other shareholders may oppose.
We may seek to raise additional financing by issuing new securities with terms or rights superior to
those of our shares of common stock, which could adversely affect the market price of our shares of
common stock.
We may require additional financing to fund future operations, including expansion in current and new markets,
programming development and acquisition, capital costs and the costs of any necessary implementation of technological
innovations or alternative technologies, or to fund acquisitions. Because of the exposure to market risks associated with
economies in emerging markets, we may not be able to obtain financing on favorable terms or at all.
If we raise additional funds by issuing equity securities, the percentage ownership of our current shareholders will be
reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common
stock, which could adversely affect the market price and voting power of shares of common stock. If we raise additional funds
by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of
shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant
interest expense for us.
We may have difficulty raising necessary capital to fund operations or acquisitions as a result of
market price volatility for our shares of common stock.
In recent years, the securities markets in the United States have experienced a high level of price and volume volatility,
and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related
to the operations, performance, underlying asset values or prospects of such companies. For these reasons, our shares of
common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no
control. If our business development plans are successful, we may require additional financing to continue to develop and
exploit existing and new technologies, to expand into new markets and to make acquisitions, all of which may be dependent
upon our ability to obtain financing through debt and equity or other means.
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Issuances of significant amounts of stock in the future could potentially dilute your equity
ownership and adversely affect the price of our common stock.
We believe that it is necessary to maintain a sufficient number of available authorized shares of our common stock in order
to provide us with the flexibility to issue shares for business purposes that may arise from time to time. For example, we could
sell additional shares to raise capital to fund our operations or to acquire other businesses, issue shares in a BEE transaction,
issue additional shares under our stock incentive plan or declare a stock dividend. Our board may authorize the issuance of
additional shares of common stock without notice to, or further action by, our shareholders, unless shareholder approval is
required by law or the rules of the NASDAQ Stock Market. The issuance of additional shares could dilute the equity ownership
of our current shareholders. In addition, additional shares that we issue would likely be freely tradable which could adversely
affect the trading price of our common stock.
Failure to maintain effective internal control over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act, especially over companies that we may acquire, could have a material
adverse effect on our business and stock price.
Under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes, we are required to furnish a management certification
and auditor attestation regarding the effectiveness of our internal control over financial reporting. We are required to report,
among other things, control deficiencies that constitute a “material weakness” or changes in internal control that materially
affect, or are reasonably likely to materially affect, internal control over financial reporting. A “material weakness” is a
deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely
basis.
The requirement to evaluate and report on our internal controls also applies to companies that we acquire. Some of these
companies may not be required to comply with Sarbanes prior to the time we acquire them. The integration of these acquired
companies into our internal control over financial reporting could require significant time and resources from our management
and other personnel and may increase our compliance costs. If we fail to successfully integrate the operations of these acquired
companies into our internal control over financial reporting, our internal control over financial reporting may not be effective.
While we continue to dedicate resources and management time to ensuring that we have effective controls over financial
reporting, failure to achieve and maintain an effective internal control environment could have a material adverse effect on the
market’s perception of our business and our stock price.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or
bringing original actions based upon U.S. laws, including the federal securities laws or other foreign
laws, against us or certain of our directors and officers and experts.
While Net1 is incorporated in the state of Florida, United States, the company is headquartered in Johannesburg, South
Africa and substantially all of the company’s assets are located outside the United States. In addition, the majority of Net1’s
directors and all its officers reside outside of the United States and the majority of our experts, including our independent
registered public accountants, are based in South Africa.
As a result, even though you could effect service of legal process upon Net1, as a Florida corporation, in the United States,
you may not be able to collect any judgment obtained against Net1 in the United States, including any judgment based on the
civil liability provisions of the U.S. federal securities laws, because substantially all of our assets are located outside the United
States. Moreover, it may not be possible for you to effect service of legal process upon the majority of our directors and officers
or upon our experts within the United States or elsewhere outside South Africa and any judgment obtained against any of our
foreign directors, officers and experts in the United States, including one based on the civil liability provisions of the U.S.
federal securities laws, may not be collectible in the United States and may not be enforced by a South African court.
South Africa is not a party to any treaties regarding the enforcement of foreign commercial judgments, as opposed to
foreign arbitral awards. Accordingly, a foreign judgment is not directly enforceable in South Africa, but constitutes a cause of
action which may be enforced by South African courts provided that:
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the court which pronounced the judgment had international jurisdiction and competence to entertain the case according
to the principles recognized by South African law with reference to the jurisdiction of foreign courts;
the judgment is final and conclusive (that is, it cannot be altered by the court which pronounced it);
the judgment has not lapsed;
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the recognition and enforcement of the judgment by South African courts would not be contrary to public policy in
South Africa, including observance of the rules of natural justice which require that no award is enforceable unless the
defendant was duly served with documents initiating proceedings, that he was given a fair opportunity to be heard and
that he enjoyed the right to be legally represented in a free and fair trial before an impartial tribunal;
the judgment was not obtained by improper or fraudulent means;
the judgment does not involve the enforcement of a penal or foreign revenue law or any award of multiple or punitive
damages; and
the enforcement of the judgment is not otherwise precluded by the provisions of the Protection of Business Act 99 of
1978 (as amended), of the Republic of South Africa.
It has been the policy of South African courts to award compensation for the loss or damage actually sustained by the
person to whom the compensation is awarded. South African courts have awarded compensation to shareholders who have
suffered damages as a result of a diminution in the value of their shares based on various actions by the corporation and its
management. Although the award of punitive damages is generally unknown to the South African legal system, that does not
mean that such awards are necessarily contrary to public policy.
Whether a judgment was contrary to public policy depends on the facts of each case. Exorbitant, unconscionable, or
excessive awards will generally be contrary to public policy. South African courts cannot enter into the merits of a foreign
judgment and cannot act as a court of appeal or review over the foreign court. Further, if a foreign judgment is enforced by a
South African court, it will be payable in South African currency. Also, under South Africa’s exchange control laws, the
approval of SARB is required before a defendant resident in South Africa may pay money to a non-resident plaintiff in
satisfaction of a foreign judgment enforced by a court in South Africa.
It is doubtful whether an original action based on United States federal securities laws may be brought before South
African courts. A plaintiff who is not resident in South Africa may be required to provide security for costs in the event of
proceedings being initiated in South Africa. Furthermore, the Rules of the High Court of South Africa require that documents
executed outside South Africa must be authenticated for the purpose of use in South African courts.
In reaching the foregoing conclusions, we consulted with our South African legal counsel, Cliffe Dekker Hofmeyr Inc.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease our corporate headquarters facility which consists of approximately 93,000 square feet in Johannesburg, South
Africa. We also lease properties throughout South Africa, including a 12,088 square foot manufacturing facility in Lazer Park,
149 financial services branches and 78 depot facilities. We also lease additional office space in Johannesburg, Cape Town and
Durban, South Africa; Guildford and London, United Kingdom; Seoul, South Korea; Munich, Germany; Hong Kong and
Zhuhai, China; Mumbai, India; Black River, Mauritius and Frederick, Maryland. These leases expire at various dates through
2020. We own land and buildings in Ahnsung, Kyung-gi, South Korea, that is used for the storage of business documents. We
believe that we have adequate facilities for our current business operations.
ITEM 3. LEGAL PROCEEDINGS
Constitutional Court order regarding extension of contract with SASSA for 12 months
On March 17, 2017, the Constitutional Court delivered its order regarding the continued payment of social grants upon the
expiration of the contract between our subsidiary, CPS, and SASSA on March 31, 2017. The Constitutional Court ordered that
SASSA and CPS are under a constitutional obligation to ensure payment of social welfare grants from April 1, 2017 and
ordered CPS and SASSA to ensure payment of grants, for a period of 12 months, under the expiring contract’s terms and
conditions, augmented by certain additional terms and conditions. These included amendments to (i) adequately safeguard
personal data obtained during the payment process and ensure that it remains private and may not be used for any purpose other
than the payment of grants, and (ii) preclude anyone from inviting beneficiaries to “opt-in” to the sharing of confidential
information for the marketing of goods and services. The Constitutional Court also ordered that CPS may request National
Treasury to investigate and make a recommendation regarding the price charged by CPS in the extension contract and stated
that National Treasury must file a report with the Constitutional Court stating its findings in this regard.
The Constitutional Court also included a public accountability provision in its March 2017 order that impact CPS directly.
These provisions are similar to those included in its April 2014 order, and require that CPS provide the Constitutional Court
with an audited statement of expenses incurred, income received and net profit earned under the 12 month extension contract
ending March 31, 2018. SASSA is also required to obtain an independent audit of the audited information provided by CPS.
Furthermore, the Constitutional Court has instructed SASSA to send this audited information to National Treasury for its
approval prior to submission to the Constitutional Court.
The Constitutional Court included additional public accountability provisions that impact the Minister of Social
Development and SASSA. These provisions require the Minister and SASSA to file reports on affidavit with the Constitutional
Court every three months, commencing on June 19, 2017, setting out how they plan to ensure the payment of social grants after
the end of the 12-month contract extension period, what steps they have taken in that regard, what further steps they will take,
and when they will take each future step, so as to ensure that the payment of all social grants is made when they fall due after
the expiry of the 12-month period. The reports filed by the Minister and SASSA must include, but is not limited to, the
applicable time-frames for the various deliverables which form part of the plan, whether the time-frames have been complied
with, and if not, why that is the case and what will be done to remedy the situation. The Minister and SASSA are also required
to immediately report to the Constitutional Court and explain the reason for and consequences of any material changes to the
circumstances included in the reports previously submitted to the Constitutional Court.
The Constitutional Court also ordered SASSA to ensure that any new payment method (i) adequately safeguards personal
data obtained during the payment process and ensures that it remains private and may not be used for any purpose other than the
payment of grants; and (ii) precludes a contracting party from inviting beneficiaries to “opt-in” to the sharing of confidential
information for the marketing of goods and services.
The Constitutional Court order also invited parties involved in the Constitutional Court proceedings to provide the name
and consent of independent legal practitioners and technical experts, together with the Auditor-General, to oversee the
implementation of the payment of social welfare grants during the period to March 31, 2018, as well as oversee SASSA’s
conduct to appoint a new service provider from April 1, 2018, or to perform the grant distribution service in-house. The
Constitutional Court appointed a panel of ten such experts on June 6, 2017.
32
Litigation Regarding Legality of Debit Orders under Social Assistance Act Regulations
On June 3, 2016, we filed for a declaratory order with the High Court of the Republic of South Africa Gauteng Division,
Pretoria, or Pretoria High Court, to provide certainty to us, as well as other industry stakeholders, on the interpretation of the
Social Assistance Act and recent Regulations promulgated in terms thereof, or the Regulations. The Regulations limit direct
deductions from social grants paid to beneficiaries. We interpret the meaning of the word “deductions” to be specific to the
practice of deducting amounts, historically limited to life insurance premiums from grants, before the grants are paid to social
welfare beneficiaries’ bank accounts, and are of the opinion that the legislature did not intend to curtail the right of beneficiaries
to transact freely after the money is deposited into their bank accounts.
We brought the application for a declaratory order because SASSA seeks to lend a broader interpretation to the meaning of
the term “deductions” to incorporate any debit orders, EFT debits, purchase transactions, or fund transfers that are effected after
the transfer of social grants to beneficiaries’ bank accounts. If SASSA’s interpretation were to prevail, debit transactions could
no longer be used as a method for beneficiaries to make payments for financial services such as insurance premiums, loan re-
payments, electricity and other purchases, money transfers or any other electronic payments. We believe that forcing
beneficiaries to pay for these products or services in cash would be a major setback to the national objective of financial
inclusiveness, introduce financial and security risks for beneficiaries and result in significant price increases for these products
and services.
We further believe that SASSA’s interpretation of the Social Assistance Act and the Regulations is erroneous for a number
of reasons including, but not limited to, our belief that such an interpretation violates beneficiaries’ constitutional rights by
limiting their fundamental right to enter into contracts and that such interpretation impermissibly encroaches on the jurisdiction
and powers of the SARB and the Payments Association of South Africa, which regulate the national payment system. SASSA's
interpretation effectively prohibits the social welfare recipient community from enjoying the benefits of a convenient, low-cost,
reliable and ubiquitous payment system that enables the recipients to procure financial services at highly competitive rates.
We were joined in our application by several other industry participants, and the SARB also filed a responding affidavit.
On June 15, 2016, SASSA brought criminal charges against us and Grindrod Bank for contravening the Social Assistance
Act, alleging that we and Grindrod Bank failed to act in accordance with SASSA’s instructions by processing debit orders
against social welfare beneficiaries’ bank accounts after the Regulations came into effect.
On June 28, 2016, the Pretoria High Court scheduled a hearing on our application for a declaratory order for October 17
and 18, 2016. In its order, the Pretoria High Court prohibited SASSA from making any representations to the South African
Police Services and the National Prosecuting Authority regarding the criminal charges brought against us and Grindrod Bank
pending the determination of the dispute, including the determination of any appeals. In addition, the order prevented SASSA
from issuing further demands to us and Grindrod Bank to stop the processing of debit transactions against SASSA bank
accounts pending the determination of the dispute, including the determination of any appeals.
On August 8, 2016, we were informed that the NPA had reached a “no prosecution” decision on the criminal charges filed
by SASSA.
The matter was heard on October 17 and 18, 2016 and on May 9, 2017, the Pretoria High Court issued the declaratory
order sought by us that the Social Assistance Act and Regulations do not restrict social grant recipients in the operation of their
banks accounts. The order clarifies that recipients may continue to initiate debit order instructions with any service provider,
including our subsidiaries, against their bank accounts for the payment of goods and services. SASSA, its Chief Executive
Officer and the Minister of Social Development were ordered to pay the costs of the application. The Pretoria High Court also
refused the Black Sash Trust’s, or Black Sash, application to intervene in the matter. In support of its application, the Black
Sash made several allegations of “illegal deductions” which we denied in our answering affidavits.
On May 17, 2017, the NPA reaffirmed its “no prosecution decision” reached in August 2016 on the criminal charges
brought by SASSA against us and Grindrod Bank. In addition, the NPA notified us that no further action will be taken and that
we can consider the case closed.
On June 20, 2017, the Pretoria High Court refused the applicants, including the Minister of Social Development, SASSA
and Black Sash, application for leave to appeal the Pretoria High Court’s May 9, 2017, declaratory order. SASSA, its Chief
Executive Officer and the Minister of Social Development were ordered to pay the costs of the application for the leave to
appeal.
On July 19, 2017, each of SASSA and the Black Sash served applications petitioning the South African Supreme Court of
Appeal, or the Supreme Court, to grant them leave to appeal to either the Supreme Court or to a full bench of the Pretoria High
Court.
We cannot predict whether the Supreme Court will grant SASSA and/or the Black Sash leave to appeal this matter.
33
Challenge to Payment by SASSA of Additional Implementation Costs
In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced a legal proceeding in
the High Court of South Africa seeking an order by the Court to review and set aside the decision of SASSA’s Chief Executive
Officer to approve the payment to us of ZAR 317 million (approximately ZAR 277 million, excluding VAT) and directing us to
repay the aforesaid amount. Corruption Watch claims that there was no lawful basis for the decision to make the payment to us,
and that the decision was unreasonable and irrational and did not comply with South African legislation. We are named as a
respondent in this legal proceeding.
As we previously disclosed, in June 2014, we received approximately ZAR 277 million, excluding VAT, from SASSA,
related to the recovery of additional implementation costs we incurred during the beneficiary re-registration process in fiscal
2012 and 2013. After the award of the tender, SASSA requested that we biometrically register all social grant beneficiaries
(including child grant beneficiaries) and collect additional information for each child grant recipient. We agreed to SASSA’s
request, and as a result we performed approximately 11 million additional registrations beyond those that we tendered to register
for the quoted service fee. Accordingly, we claimed a cost recovery from SASSA, supported by a factual findings certificate
from an independent auditing firm. SASSA agreed to pay us the ZAR 277 million as full settlement of the additional costs we
incurred.
Corruption Watch applied for a hearing date and it has been set down for hearing during the week commencing November
6, 2017.
We believe that Corruption Watch’s claim is without merit, and we are defending it vigorously. However, we cannot
predict how the Court will rule on the matter.
NCR application for the cancelation of Moneyline’s registration as a credit provider
In September 2014, the NCR applied to the South African National Consumer Tribunal, or Tribunal, to cancel the
registration of our subsidiary, Moneyline, for breach of the NCA based on an investigation concluded by it. Pursuant to the
investigation, the NCA also issued two Compliance Notices – one to CPS and one to Moneyline. The Compliance Notice issued
to Moneyline accused it of “having access into the Grindrod Bank Accounts of social grant beneficiaries which enables them
(sic) to see the spending patterns of beneficiaries and deposit loan amounts into such accounts.” The Compliance Notice issued
to CPS accused it of providing “information about social grant beneficiaries” to Moneyline in breach of section 68(1) of the
NCA. The Compliance Notices demanded that both CPS and Moneyline take the appropriate steps to address the alleged non-
compliance with the NCA and to report in writing to the NCR, along with an independent audit report, that they were no longer
non-compliant as alleged by the Compliance Notices.
We objected to the Compliance Notices and the Tribunal set both Compliance Notices aside.
Regarding the NCR’s application to cancel the registration of Moneyline, we raised a number of procedural points in
defense, which, if we are successful, will be dispositive of the application. Argument on these points was heard on November
27, 2015, before three tribunal members. Two ruled against us and one upheld our points. We are appealing the majority ruling
to the High Court. A hearing date has been allocated and the appeal will be heard on December 6, 2017. If we are successful, it
will dispose of the application. If we do not prevail, then the NCR’s application will be set down before the Consumer Tribunal
for argument on the main issues raised by the NCR, as dealt with above. We cannot predict the outcome of this litigation.
There are no other material pending legal proceedings, other than ordinary routine litigation incidental to our business, to
which we are a party or of which any of our property is the subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
34
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market information
Our common stock is listed on The Nasdaq Global Select Market, or Nasdaq, in the United States under the symbol
“UEPS” and on the JSE in South Africa under the symbol “NT1.” The Nasdaq is our principal market for the trading of our
common stock.
The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by
Nasdaq.
Period
Quarter ended September 30, 2015 ...........
Quarter ended December 31, 2015 ............
Quarter ended March 31, 2016 ...................
Quarter ended June 30, 2016 ......................
Quarter ended September 30, 2016 ...........
Quarter ended December 31, 2016 ............
Quarter ended March 31, 2017 ...................
Quarter ended June 30, 2017 ......................
High
$21.48
$18.37
$13.56
$12.35
$11.30
$12.26
$13.53
$12.23
Low
$16.10
$12.98
$8.44
$8.72
$8.37
$8.57
$11.33
$9.19
Our transfer agent in the United States is Computershare Shareowner Services LLC, 480 Washington Blvd, Jersey City,
New Jersey, 07310. According to the records of our transfer agent, as of August 16, 2017, there were 15 shareholders of record
of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders,
whose shares are held of record by banks, brokers, and other financial institutions. Our transfer agent in South Africa is Link
Market Services South Africa (Pty) Ltd, 13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein, 2001, South Africa.
Dividends
We have not paid any dividends on our shares of common stock during our last two fiscal years and presently intend to
retain future earnings to finance the expansion of the business. We do not anticipate paying any cash dividends in the
foreseeable future. The future dividend policy will depend on our earnings, capital requirements, expansion plans, financial
condition and other relevant factors.
Issuer purchases of equity securities
On February 3, 2016, our board of directors approved the replenishment of our existing share repurchase authorization to
repurchase up to an aggregate of $100 million of common stock. The authorization has no expiration date. On June 29, 2016, we
adopted a Rule 10b5-1 plan for the purpose of repurchasing approximately $50 million of our common stock. The plan was
established in connection with the $100 million share repurchase authorization. The plan expired at the end of August 2016.
On May 24, 2017, in connection with the retirement of our co-founder, former chief executive officer and former member
of our board of directors, Mr. S.C.P. Belamant, we repurchased from him a total of 1,269,751 shares of our common stock,
which included the repurchase of shares issued upon the exercise of his 252,286 stock options.
The table below presents our common stock purchased during fiscal 2017 per quarter:
Period
First .........................................................
Second .....................................................
Third ........................................................
Fourth ......................................................
Total fiscal 2017 .................................
Total number
of shares
purchased
3,137,609
-
-
1,269,751
4,407,360
Average price
paid per
share
(US dollars)
10.07
-
-
10.80
10.28
35
Share performance graph
The chart below compares the five-year cumulative return, assuming the reinvestment of dividends, where applicable, on
our common stock with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph assumes $100 was invested
on June 30, 2012, in each of our common stock, the companies in the S&P 500 Index, and the companies in the NASDAQ
Industrial Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
(AMONG NET 1, THE S&P 500 INDEX AND THE NASDAQ INDUSTRIAL INDEX)
250
200
s
r
a
l
l
o
D
150
100
50
-
2012
NASDAQ Industrial Index
S&P 500 Index
Net1
2013
2014
2015
Fiscal year ended June 30,
2016
2017
36
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data should be read together with Item 7—“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Item 8—“Financial Statements and
Supplementary Data.” The following selected historical financial data as of June 30, 2017 and 2016, and for the three years
ended June 30, 2017 have been derived from our consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. The selected historical consolidated financial data presented below as of June 30, 2015, 2014 and 2013 and for the
years ended June 30, 2014 and 2013, have been derived from our consolidated financial statements, which are not included
herein. The selected historical financial data as of each date and for each period presented have been prepared in accordance
with U.S. GAAP. These historical results are not necessarily indicative of results to be expected in any future period.
Consolidated Statements of Operations Data
(in thousands, except per share data)
Revenue ...........................................................................................
Cost of goods sold, IT processing, servicing and support ...
Selling, general and administrative(2) ......................................
Equity instruments granted pursuant to BEE
transactions (3) ............................................................................... -
Depreciation and amortization ...................................................
Operating income ..........................................................................
Interest income ...............................................................................
Interest expense ..............................................................................
Income before income taxes .......................................................
Income tax expense .......................................................................
Net income attributable to Net1 .................................................
Income from continuing operations per share:
2017
$610,066
292,383
179,262
41,378
97,043
20,897
3,484
114,456
42,472
72,954
Year Ended June 30
2015
$625,979
297,856
158,919
2016
$590,749
290,101
145,886
2014(1)
$581,656
260,232
168,072
-
40,394
114,368
15,292
3,423
126,237
42,080
82,454
-
40,685
128,519
16,355
4,456
140,418
44,136
94,735
11,268
40,286
101,798
14,817
7,473
109,142
39,379
70,111
2013(1)
$452,147
196,834
191,552
-
40,599
23,162
12,083
7,966
27,279
14,656
12,977
Basic .............................................................................................
Diluted ..........................................................................................
$0.28
$0.28
(1) Includes revenue and implementation costs related to our SASSA contract from April 2012. In addition, 2014 includes
recovery of $26.6 million of implementation costs from SASSA.
(2) Includes a separation payment of $8.0 million paid to our former chief executive officer in 2017.
(3) Includes a non-cash charge of approximately $11.3 million in 2014 related to common stock issued in a BEE transaction.
$1.51
$1.50
$1.34
$1.33
$2.03
$2.02
$1.72
$1.71
Additional Operating Data:
(in thousands, except percentages)
Cash flows provided by operating activities .......................
Cash flows used in investing activities .................................
Cash flows provided by (used in) financing activities ......
2017(1)
$97,161
$114,071
$40,469
Year ended June 30,
2015(1)
$135,258
$80,783
$16,784
2016(1)
$116,552
$5,756
$13,645
2014(1)
$37,145
2013(1)
$55,917
$9,237 $457,875
$(25,781) $399,657
Operating income margin(2) .....................................................
(1) Cash flows used in investing activities include movements in settlement assets and cash flows provided by (used in)
financing activities include movement in settlement liabilities.
(2) Fiscal 2017 operating income margin was 18% before the separation payment of $8.0 million paid to our former chief
executive officer.
19%
21%
16%
18%
5%
37
2014
$58,672
259,591
186,576
68,514
2013
$53,665
169,059
175,806
77,257
1,363,375 1,302,662
76,859
66,632
$339,969
81,823
62,388
$441,748
Consolidated Balance Sheet Data:
(in thousands)
Cash and cash equivalents ..................................................
Total current assets before settlement assets ..................
Goodwill .................................................................................
Intangible assets ....................................................................
Total assets .............................................................................
Total current liabilities before settlement obligations .
Total long-term debt ............................................................
Total equity ............................................................................
2017
$258,457
465,735
188,833
38,764
1,450,756
80,859
7,501
$708,007
2016
$223,644
386,998
179,478
48,556
1,263,500
65,486
43,134
$603,220
As of June 30,
2015
$117,583
301,874
166,437
47,124
1,316,956
82,198
50,762
$478,785
- Remainder of this page left blank -
38
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Item 6—“Selected Financial Data” and Item 8—
“Financial Statements and Supplementary Data.” In addition to historical consolidated financial information, the following
discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See Item 1A—
“Risk Factors” and “Forward Looking Statements.”
Overview
We are a leading provider of payment solutions, transaction processing services and financial technology across multiple
industries and in a number of emerging and developed economies.
We have developed and market a comprehensive transaction processing solution that encompasses our smart card-based
alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction
channels. Our market-leading system can enable the billions of people globally who generally have limited or no access to a
bank account to enter affordably into electronic transactions with each other, government agencies, employers, merchants and
other financial service providers. Our UEPS, and UEPS/EMV derivative discussed below, uses biometrically secure smart cards
that operate in real-time but offline, unlike traditional payment systems offered by major banking institutions that require
immediate access through a communications network to a centralized computer. This offline capability means that users of our
system can conduct transactions at any time with other card holders in even the most remote areas so long as a smart card
reader, which is often portable and battery powered, is available. Our off-line systems also offer the highest level of availability
and affordability by removing any elements that are costly and are prone to outages. Our latest version of the UEPS technology
has been certified by EMV, which facilitates our traditionally proprietary UEPS system to interoperate with the global EMV
standard and allows card holders to transact at any EMV-enabled point of sale terminal or ATM. The UEPS/EMV technology
has been deployed on an extensive scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our
social welfare grant customers. In addition to effecting purchases, cash-backs and any form of payment, our system can be used
for banking, healthcare management, international money transfers, voting and identification.
We also provide secure financial technology solutions and services, by offering transaction processing, financial and
clinical risk management solutions to various industries. We have extensive expertise in secure online transaction processing,
cryptography, mobile telephony, integrated circuit card (chip/smart card) technologies, and the design and provision of financial
and value-added services to our cardholder base.
Our technology is widely used in South Africa today, where we distribute pension and welfare payments, using our
UEPS/EMV technology, to over ten million recipient cardholders across the entire country, process debit and credit card
payment transactions on behalf of a wide range of retailers through our EasyPay system, process value-added services such as
bill payments and prepaid airtime and electricity for the major bill issuers and local councils in South Africa, and provide
mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of third-party and
associated payroll payments in South Africa through our FIHRST service. We provide financial inclusion services such as
microloans, insurance, mobile transacting and prepaid utilities to our cardholder base.
In addition, through KSNET, we are one of the top three value-added network, or VAN, processors in South Korea, and
we offer card processing, payment gateway and banking value-added services in that country. We also offer issuing and
acquiring capabilities through Transact24 in Hong Kong. Our Masterpayment subsidiary in Germany provides value added
payment services to online retailers across Europe. Our XeoHealth service provides funders and providers of healthcare in
United States with an on-line real-time management system for healthcare transactions.
Our Net1 Solutions business unit is responsible for the worldwide technical development and commercialization of our
array of web and mobile applications and payment technologies, such as MVC, Chip and GSM licensing and VTU, and has
deployed solutions in many countries, including South Africa, Namibia, Nigeria, Malawi, Cameroon, the Philippines, India and
Colombia.
Sources of Revenue
We generate our revenues by charging transaction fees to government agencies, merchants, financial service providers,
utility providers, bill issuers, employers, healthcare providers and cardholders; by providing loans and insurance products and
by selling hardware, licensing software and providing related technology services.
39
We have structured our business and our business development efforts around four related but separate approaches to
deploying our technology. In our most basic approach, we act as a supplier, selling our equipment, software, and related
technology to a customer. The revenue and costs associated with this approach are reflected in our Financial inclusion and
applied technologies segment.
We have found that we have greater revenue and profit opportunities, however, by acting as a service provider instead of a
supplier. In this approach we own and operate the UEPS ourselves, charging one-time and on-going fees for the use of the
system either on a fixed or ad valorem basis. This is the case in South Africa, where we distribute welfare grants on behalf of
the South African government on a fixed fee basis, but charge a fee on an ad valorem basis for goods and services purchased
using our smart card. The revenue and costs associated with this approach are reflected in our South African transaction
processing and Financial inclusion and applied technologies segments.
Because our smart cards are designed to enable the delivery of more advanced services and products, we are also willing to
supply those services and products directly where the business case is compelling. For instance, we provide short-term loans to
our smart card holders. This is an example of the third approach that we have taken. Here we can act as the principal in
operating a business that can be better delivered through our UEPS. We can also act as an agent, for instance, in the provision of
insurance policies. In both cases, the revenue and costs associated with this approach are reflected in our Financial inclusion and
applied technologies segment.
In South Africa, we also generate fees from debit and credit card transaction processing, the provision of value-added
services such as bill payments, mobile top-up and prepaid utility sales, and from providing a payroll transaction management
service. The revenue and costs associated with these services are reflected in our South African transaction processing and
Financial inclusion and applied technologies segments.
Through KSNET, we earn most of our revenue from payment processing services we provide to approximately 237,000
merchants and to card issuers in South Korea through our value-added-network. Through Masterpayment and Transact24 we
generate fee revenue through the provision of payment service provider and card issuing and acquiring services in primarily
Germany, China and the U.S. Furthermore, in the U.S., we earn transaction fees from our customers utilizing our XeoRules on-
line real-time management system for healthcare transactions. We also generate fees from our customers who utilize our VCPay
technology to generate a unique, one-time use prepaid virtual card number to securely purchase goods and services or perform
bill payments in any card-not-present environment. The revenue and costs at of all of these businesses are reflected in our
International transaction processing segment.
Finally, we have business partnerships or joint ventures to introduce our financial technology solutions to markets such as
Namibia, One Credit in Nigeria, and MobiKwik in India. In these situations, we take an equity position in the business while
also acting as a supplier of technology. In evaluating these types of opportunities, we seek to maintain a highly disciplined
approach, carefully selecting partners, participating closely in the development of the business plan and remaining actively
engaged in the management of the new business. In most instances, the joint venture or partnership has a license to use our
proprietary technologies in the specific territory, including the back-end system. We also own 26% of Finbond Group Limited,
or Finbond, a South African public company that has a mutual banking license in South Africa and owns certain state lenders in
the U.S. We account for our equity investments using the equity method.
We believe that this flexible approach enables us to drive adoption of our solution while capturing the value created by the
implementation of our technology.
Developments during Fiscal 2017
SASSA contract extended to March 31, 2018
Our contract signed in February 2012 with SASSA was scheduled to expire on March 31, 2017. At a Parliamentary
briefing session on February 1, 2017, SASSA informed the meeting that it would not be ready to assume the payment function
on April 1, 2017. SASSA expressed its intention to approach the Constitutional Court to obtain permission to extend our
contract. On February 9, 2017, we received a letter from SASSA that essentially was an invitation to meet to discuss an interim
arrangement to continue with the payment of social welfare grants after March 31, 2017, for a limited period. The parties agreed
to meet in the first week of March 2017.
On February 28, 2017, a South African non-profit organization initiated a court process for the Constitutional Court of
South Africa to hear a matter that was described as in the public interest and in the interest of all grant beneficiaries. The
applicant sought reinstatement of the oversight role of the Constitutional Court for the payment of social grants to ensure
compliance by SASSA with its constitutional obligations to provide social assistance in a lawful manner that is in line with
constitutional rights and values. In early March 2017, other entities joined these proceedings. We did not oppose the
applications made.
40
In early March 2017, we met with SASSA to discuss the interim arrangement referred to above. The parties agreed on
draft terms following these discussions. These draft terms were subject to approval by National Treasury or the Constitutional
Court.
The Constitutional Court heard the matter referred to above on March 15, 2017, and issued its order on March 17, 2017.
The impact of the Constitutional Court’s order on us is summarized under “Item 3—Legal Proceedings.” The order effectively
extends the expiring contract and the suspension of the declaration of invalidity to March 31, 2018, under the expiring contract’s
terms and conditions, augmented by certain additional terms and conditions as described under “Item 3—Legal Proceedings.”
On March 31, 2017, we signed an addendum to the expiring contract with SASSA which extends the contract to March 31,
2018, under the expiring contracts terms and conditions and includes the specific terms as ordered by the Constitutional Court.
The Constitutional Court also ordered the Minister and SASSA to file reports with the Constitutional Court every three
months, commencing on June 19, 2017, setting out how they plan to ensure the payment of social grants after the end of the 12-
month contract extension period, what steps they have taken in that regard, what further steps they will take, and when they will
take each future step, so as to ensure that the payment of all social grants is made when they fall due after the expiry of the 12-
month period. The reports filed by the Minister and SASSA must include, but is not limited to, the applicable time-frames for
the various deliverables which form part of the plan, whether the time-frames have been complied with, and if not, why that is
the case and what will be done to remedy the situation. The Minister and SASSA are also required to immediately report to the
Constitutional Court and explain the reason for and consequences of any material changes to the circumstances included in the
reports previously submitted to the Constitutional Court.
The Constitutional Court order also invited parties involved in the Constitutional Court proceedings to provide the name
and consent of independent legal practitioners and technical experts, together with the Auditor-General, to oversee the
implementation of the payment of social welfare grants during the period to March 31, 2018, as well as oversee SASSA’s
conduct to appoint a new service provider from April 1, 2018, or to perform the grant distribution service in-house. The
Constitutional Court appointed a panel of ten such nominated experts on June 6, 2017. It is our understanding that the expert
panel is obtaining information from a number of sources. Accordingly, we have received a request for information from the
expert panel and have provided a comprehensive response.
Progress of financial inclusion initiatives in South Africa
In June 2015, we began the rollout of EPE, our business-to-consumer, or B2C, offering in South Africa. At July 31, 2017,
we had more than 2.0 million active EPE accounts, compared to 1.95 million at April 28, 2017. EPE is a fully transactional, low
cost account created to serve the needs of South Africa’s unbanked and under-banked population, most of whom are social grant
recipients. The EPE account offers customers a comprehensive suite of financial and various financial inclusion services, such
as prepaid products, in an economical, convenient and secure solution. EPE provides account holders with a UEPS-EMV debit
MasterCard, mobile and internet banking services, ATM and POS services, as well as loans, insurance and other financial
products and value-added services. However, SASSA and a non—profit organization continue to challenge the ability of
beneficiaries to freely transact with the grants that they receive as described under “Item 3—Legal Proceedings.”
In order for us to address the sizeable opportunity for EPE and related financial inclusion services in South Africa, in fiscal
2016, we started to expand our brick-and-mortar financial services branch infrastructure, which supplements our nationwide
distribution, with a UEPS/EMV-enabled ATM network, and hired a dedicated sales force. At July 31, 2017, we had 149
branches (July 31, 2016: 140), 980 ATMs (July 31, 2016: 904), and 1,822 (July 31, 2016: 2,200) dedicated employees. We
reduced our employee headcount throughout fiscal 2017 as a result of the slowdown of the branch expansion during the year
and the stabilization and improvement in the efficiency of the branch operations. However, the reduction in employee headcount
during the fiscal year did not result in a lower overall employment charge in 2017 relative to 2016 because, on average, we had
more employees during fiscal 2017 compared with fiscal 2016 in addition to higher rates per employee due to annual salary
increases.
During the 13 months since July 1, 2016 we sold approximately 250,000 new policies related to our simple, low-cost life
insurance products, in addition to the free basic life insurance policy provided with every EPE account opened.
We experienced higher year-over-year growth in the demand for our loans, which are among the most affordable available
to our customers. Tougher economic conditions in South Africa, aggravated by rising food prices as a result of widespread
drought conditions and a weakening currency, has had an impact on the number of clients who qualify for our loan products.
41
The graph below presents the growth of the number of EPE cards and Smart Life policies:
EPE cards
Number of EPE card and Smart Life policies
2,100,000
1,800,000
1,500,000
1,200,000
900,000
600,000
300,000
-
Smart Life
Policies
400,000
360,000
320,000
280,000
240,000
200,000
160,000
120,000
80,000
40,000
-
5
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Cumulative EPE cards
Cumulative Smart Life policies
Separation agreement with former chief executive officer
In May 2017, we entered into a Separation and Release of Claims Agreement, or Separation Agreement, with one of co-
founders, chief executive officer and director, Mr. Serge C.P. Belamant. The Separation Agreement provided for certain
payments to Mr. S.C.P. Belamant, including an aggregate $8.0 million severance and cooperative resignation payment and the
repurchase for 1,269,751 shares of our common stock (including the repurchase of 252,286 shares underlying Mr. S.C.P.
Belamant’s in-the-money stock options) for an aggregate repurchase of $13.7 million. We also entered into a Consulting
Agreement with Mr. S.C.P. Belamant, under which he would provide consulting services to us for a period of up to two years
following his departure. On July 31, 2017, we provided Mr. S.C.P. Belamant a written termination notice. We will not be
making any termination payments to Mr. S.C.P. Belamant beyond the 90-day notice period.
Strategic investments
Investments in Cell C Proprietary Limited and DNI-4PL Contracts Proprietary Limited
On August 2, 2017, we purchased 15% of Cell C, for an aggregate purchase price of ZAR 2.0 billion ($153.3 million
translated at exchange rates applicable as of June 30, 2017) in cash. Cell C is one of the three major licensed mobile operators in
South Africa with over 15 million active subscribers. We funded the transaction through a combination of cash and credit
facilities described in Note 14 to our consolidated financial statements.
On July 27, 2017, we purchased a 45% interest in DNI for ZAR 945 million ($72.4 million translated at exchange rates
applicable as of June 30, 2017) in cash. DNI is the leading distributor of mobile subscriber starter packs for Cell C, while also
distributing prepaid airtime through its extensive network of field operatives and agents. We have agreed to pay to DNI an
additional amount of up to ZAR 360 million, in cash, subject to its achievement of an agreed profit before tax, as defined in the
agreements, target between July 1, 2017 and June 30, 2019. All amounts were translated at exchange rates applicable as of June
30, 2017. We have a two-year option to purchase an additional 10% interest in DNI.
The investments in Cell C and DNI are consistent with our approach of leveraging our significant and established
infrastructures, and pursuing strategic acquisition opportunities or partnerships to gain access to new markets or complementary
products. We identified the need to offer customers a truly bespoke, affordable and comprehensive package that will go beyond
basic telephony. An integrated mobile-based digital product will therefore likely differentiate the offerings of all the relevant
stakeholders in this transaction including Net1. The Cell C and DNI investments allow us to address the needs of the broader
South African population by owning the value chain including the network, payment, product, distribution and hardware.
42
MobiKwik
Pursuant to a subscription agreement with One MobiKwik Systems Private Limited, or MobiKwik, in India, we agreed to
make an equity investment of up to $40.0 million in MobiKwik over a 24 month period. MobiKwik is India's largest
independent mobile payments network, with over 55 million users and 1.5 million merchants. We made an initial $15.0 million
investment in August 2016 and a further $10.6 million investment in June 2017. As of June 30, 2017, we owned approximately
13.5% of MobiKwik. In August 2017, MobiKwik raised additional funding through the issuance of additional shares to a new
shareholder at a 90% premium to our investments and our percentage ownership was diluted to 12.0%.
In addition, through a technology agreement, our Virtual Card technology will be integrated across all MobiKwik wallets
in order to provide ubiquity across all merchants in India. As part of our continued strategic relationship a number of our other
products, including our digital banking platform, are expected to be deployed by MobiKwik over the next year.
Bank Frick
On January 12, 2017, we entered into a share purchase agreement with the Kuno Frick Family Foundation, or Frick
Foundation, to acquire a 30% interest in Bank Frick & Co AG, a fully licensed bank based in Balzers, Liechtenstein, from the
Frick Foundation for approximately CHF 39.8 million ($41.5 million translated at exchange rates applicable as of June 30,
2017). The completion of the investment is subject to approval from the Financial Market Authority Liechtenstein. Following
the successful completion of this investment, we will have a two-year option to acquire an additional 35% interest in Bank
Frick.
Bank Frick provides a complete suite of banking services, with one of its key strategic pillars being the provision of
payment services and funding of financial technology opportunities. Bank Frick holds acquiring licenses from both Visa and
MasterCard and operates a branch in London. Together with Bank Frick, we have jointly identified several funding
opportunities, including for our working capital finance, card issuing and acquiring and transaction processing activities. The
pending investment in Bank Frick has the potential to provide us with a stable, long term and strategic relationship with a fully
licensed bank. Together with Bank Frick, we have agreed that approximately $30 million of the Bank Frick’s free equity will be
utilized as seed capital for a fund dedicated to our future activities.
Finbond
On October 7, 2016, we provided a loan of ZAR 139.2 million ($10.0 million, translated at the foreign exchange rates
applicable on the date of the loan) to Finbond in order for Finbond to partially finance its expansion strategy in the United
States. Interest on the loan is payable quarterly in arrears and is based on the London Interbank Offered Rate, or LIBOR, in
effect from time to time plus a margin of 12.00% . The LIBOR rate was 1.21% on June 30, 2017. The loan was initially
repayable in full at the earlier of Finbond concluding a rights offer or February 28, 2017, but the agreement was subsequently
amended to extend the date to August 31, 2017. If Finbond does not settle the amount outstanding on August 31, 2017, we may
elect to convert our loan to Finbond shares at an agreed conversion price or to continue to earn interest until such time as the
loan is settled in full. We expect the parties to agree to extend the expiration date of the agreement to a period not exceeding 12
months from August 31, 2017. We provided an irrevocable undertaking to participate in the rights offering and convert the ZAR
139.2 million loan to Finbond shares as part of this process.
Mastertrading - working capital financing and supply chain solutions
During fiscal 2017, we commenced with the expansion of our working capital financing and supply chain solutions, an
alternate trade finance offering, under the Mastertrading brand in a number of European countries and the U.S. Through this
offering, we support the liquidity and working capital position of our customers as we act as an “interim trader”. Customer
identified goods are bought and paid for by us and re-sold to our customers with delivery scheduled for an agreed future date.
Our customers pay us an agreed fixed trade margin based on the number of days between the date that we pay for the goods and
the date that they pay us for the goods. Generally, customers pay us the trade margin at the end of the transaction, however,
depending on the terms of the particular agreement, the trade margin may also be due on a monthly basis. We believe that our
customers benefit from this offering through improved supplier relations, better terms (e.g. discounts) and improved liquidity
situation since the goods are bought back from the interim trade just in time before the sale to the end customer.
In Europe, we provide our solution to a number of clients in the manufacturing, property development and wholesale
sectors. The interim trades in Europe have a duration ranging from two weeks to nine months and, as of June 30, 2017, we
expect approximately $17.0 million (€14.9 million) to be repaid on a revolving base.
In the U.S., we provide our offering to customers in the petroleum industry, and in certain instances we provide the
working capital financing directly to our customer. Trades in the U.S. have a duration ranging from between 12 to 24 weeks and
as of June 30, 2017, we expect approximately $12.2 million to be repaid on a revolving base through November 2017.
43
We have been informed that one of our U.S. customer’s clients breached their contractual obligations on a particular
transaction which resulted in a cash loss to our customer of approximately $3.7 million. As a result, our customer has not repaid
the full amount due to us and still owes us $3.8 million, including interest, related to this specific transaction. Our customer has
commenced recovery procedures, including formal legal proceedings, against its client. Notwithstanding these actions pursued
by our customer, we have created an allowance for credit losses of $3.8 million for the full amount due to us as we cannot
predict whether the legal proceedings initiated by our customer to recover the amounts due from its client will be successful.
We have utilized a facility from Bank Frick to fund the growth of the majority of the European working capital receivables
and utilized existing cash reserves to grow our U.S. working capital book.
Changes in Executive Leadership and Board of Directors
In April 2017, our board of directors determined to split our chairman and chief executive officer roles in recognition of
the growing practice of U.S. public companies, as well as the customary practice of South African public companies, for the
chairman to be an independent director. Mr. C.S. Seabrooke was appointed as chairman of our board in April 2017.
In June 2017, Mr. Alfred T. Mockett joined our board as an independent non-employee director. Mr. Mockett also serves
on our nominating and corporate governance, audit and remuneration committees. The IFC Investors has advised us that it
regards Mr. Mockett as the independent director nominated by the IFC Investors to our board of directors by virtue of the policy
agreement we signed with the IFC Investors.
In June 2017, Mr. Herman G. Kotzé became our chief executive officer, replacing Mr. S.C.P. Belamant, who retired as
chief executive officer. Mr. Kotzé has been our chief financial officer, secretary and treasurer since 2004, and will retain these
positions until a suitable candidate is identified and engaged to perform these functions.
Closure of DOJ investigation related to 2012 SASSA contract
In July 2017, we were advised that the U.S. Department of Justice had closed its investigation concerning possible
violations of the FCPA. The investigation commenced in November 2012, following the award of the SASSA national contract
to us in January 2012.
The closing of the DOJ investigation follows the United States Securities and Exchange Commission closing their
investigation in June 2015, the dismissal of a shareholder class action law suit by the U.S. Southern District in September 2015,
and the South African Police Service’s Directorate for Priority Crime Investigation, the Hawks, closing their investigation in
November 2015.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to
make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the
determination of estimates requires management’s judgment based on a variety of assumptions and other determinants such as
historical experience, current and expected market conditions and certain scientific evaluation techniques. Management believes
that the following accounting policies are critical due to the degree of estimation required and the impact of these policies on the
understanding of the results of our operations and financial condition.
Business Combinations and the Recoverability of Goodwill
A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations.
The purchase price of an acquired business is allocated to the tangible and intangible assets acquired and liabilities assumed
based upon their estimated fair value at the date of purchase. The difference between the purchase price and the fair value of the
net assets acquired is recorded as goodwill. In determining the fair value of assets acquired and liabilities assumed in a business
combination, we use various recognized valuation methods, including present value modeling. Further, we make assumptions
using certain valuation techniques, including discount rates and timing of future cash flows.
We review the carrying value of goodwill annually or more frequently if circumstances indicate impairment may have
occurred. In performing this review, we are required to estimate the fair value of goodwill that is implied from a valuation of the
reporting unit to which the goodwill has been allocated after deducting the fair values of all the identifiable assets and liabilities
that form part of the reporting unit.
44
The determination of the fair value of a reporting unit requires us to make significant judgments and estimates. In
determining the fair value of reporting units, we consider the earnings before interest, taxation, depreciation and amortization, or
EBITDA, and the EBITDA multiples applicable to peer and industry comparables of the reporting units. We base our estimates
on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. In addition, we make judgments
and assumptions in allocating assets and liabilities to each of our reporting units. The results of our impairment tests during
fiscal 2017 indicated that the fair value of our reporting units exceeded their carrying values and therefore our reporting units
were not at risk of potential impairment.
Intangible Assets Acquired Through Acquisitions
The fair values of the identifiable intangible assets acquired through acquisitions were determined by management using
the purchase method of accounting. We completed acquisitions during fiscal 2017 and 2016 where we identified and recognized
intangible assets. We have used the relief from royalty method, the multi-period excess earnings method, the income approach
and the cost approach to value acquisition-related intangible assets. In so doing, we made assumptions regarding expected future
revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates, exchange rates,
cash tax charges and useful lives.
The valuations were based on information available at the time of the acquisition and the expectations and assumptions
that have been deemed reasonable by us. No assurance can be given, however, that the underlying assumptions or events
associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from
forecasts of future cash flows. To the extent actual cash flows vary, revisions to the useful life or impairment of intangible assets
may be necessary.
Deferred Taxation
We estimate our tax liability through the calculations done for the determination of our current tax liability, together with
assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities which are disclosed on our balance sheet. Management then has to assess
the likelihood that deferred tax assets are more likely than not to be realized in future periods. In the event it is determined that
the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an adjustment to the deferred
tax asset valuation allowance would be recorded.
This adjustment would increase income in the period such determination was made. Likewise, should it be determined that
all or part of the net deferred tax asset would not be realized in the future, an adjustment to increase the deferred tax asset
valuation allowance would be charged to income in the period such determination is made. In assessing the need for a valuation
allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing
prudent and practicable tax planning strategies are considered. During fiscal 2017 and 2016, respectively, we recorded a net
increase of $0.1 million and $16.3 million to our valuation allowance, and in fiscal 2015, we recorded a net decrease of $2.6
million to our valuation allowance.
Stock-based Compensation
Management is required to make estimates and assumptions related to our valuation and recording of stock-based
compensation charges under current accounting standards. These standards require all share-based compensation to employees
to be recognized in the statement of operations based on their respective grant date fair values over the requisite service periods
and also requires an estimation of forfeitures when calculating compensation expense.
We utilize the Cox Ross Rubinstein binomial model to measure the fair value of stock options granted to employees and
directors and recognize compensation cost on a straight line basis. Option-pricing models require estimates of a number of key
valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. Our
management has estimated forfeitures based on historic employee behavior under similar compensation plans. The fair value of
stock options is affected by the assumptions selected. Net stock-based compensation expense from continuing operations was
$2.0 million, $3.6 million and $3.2 million for fiscal 2017, 2016 and 2015, respectively.
Accounts Receivable and Allowance for Doubtful Accounts Receivable
We maintain an allowance for doubtful accounts receivable related to our Financial inclusion and applied technologies and
International transaction-based activities segments with respect to sales or rental of hardware, support and maintenance services
provided; or sale of licenses to customers; or the provision of transaction processing services to our customers; or our working
capital financing and supply chain solutions provided.
45
Our policy is to regularly review the aging of outstanding amounts due from customers and adjust the provision based on
management’s estimate of the recoverability of the amounts outstanding.
Management considers factors including period outstanding, creditworthiness of the customers, past payment history and
the results of discussions by our credit department with the customer. We consider this policy to be appropriate taking into
account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. Additional
provisions may be required should the ability of our customers to make payments when due deteriorate in the future. A
significant amount of judgment is required to assess the ultimate recoverability of these receivables, including on-going
evaluation of the creditworthiness of each customer.
Microlending
We maintain an allowance for doubtful finance loans receivable related to our Financial inclusion and applied technologies
segment with respect to microlending loans provided to our customers. Our policy is to regularly review the ageing of
outstanding amounts due from borrowers and adjust the provision based on management’s estimate of the recoverability of
finance loans receivable. We write off microlending loans and related service fees if a borrower is in arrears with repayments
for more than three months or dies.
Management considers factors including the period of the microlending loan outstanding, creditworthiness of the
customers and the past payment history and trends of its established microlending book. We consider this policy to be
appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer
payment patterns. Additional allowances may be required should the ability of our customers to make payments when due
deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these finance loan
receivables, including on-going evaluation of the creditworthiness of each customer.
Recent Accounting Pronouncements
Recent accounting pronouncements adopted
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements,
including the expected dates of adoption and effects on financial condition, results of operations and cash flows.
Recent accounting pronouncements not yet adopted as of June 30, 2017
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements not yet
adopted as of June 30, 2017, including the expected dates of adoption and effects on 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
ZAR : $ average exchange rate ............
Highest ZAR : $ rate during period ......
Lowest ZAR : $ rate during period ......
Rate at end of period ............................
Year ended June 30,
2016
14.5062
16.8231
12.1965
14.7838
2017
13.6147
14.8114
12.4379
13.0535
2015
11.4494
12.5779
10.5128
12.2854
KRW : $ average exchange rate ...........
Highest KRW : $ rate during period ....
Lowest KRW : $ rate during period .....
Rate at end of period ............................
1,141
1,210
1,092
1,144
1,173
1,245
1,122
1,153
1,078
1,139
1,009
1,128
46
ZAR: US $ Exchange Rates
First quarter
Second quarter
Third quarter
Fourth quarter
:
$
S
U
R
A
Z
17.00
16.50
16.00
15.50
15.00
14.50
14.00
13.50
13.00
12.50
12.00
11.50
11.00
10.50
10.00
9.50
9.00
J
u
n
-
3
0
J
u
l
-
3
1
A
u
g
-
3
1
S
e
p
-
3
0
O
c
t
-
3
1
N
o
v
-
3
0
D
e
c
-
3
1
J
a
n
-
3
1
F
e
b
-
2
9
M
a
r
-
3
1
A
p
r
-
3
0
M
a
y
-
3
1
J
u
n
-
3
0
F2017 ZAR
F2016 ZAR
F2015 ZAR
KRW: US $ Exchange Rates
First quarter
Second quarter
Third quarter
Fourth quarter
:
$
S
U
W
R
K
1,250
1,200
1,150
1,100
1,050
1,000
950
J
u
n
-
3
0
J
u
l
-
3
1
A
u
g
-
3
1
S
e
p
-
3
0
O
c
t
-
3
1
N
o
v
-
3
0
D
e
c
-
3
1
J
a
n
-
3
1
F
e
b
-
2
8
M
a
r
-
3
1
A
p
r
-
3
0
M
a
y
-
3
1
J
u
n
-
3
0
F2017 KRW
F2016 KRW
F2015 KRW
47
Translation Exchange Rates
We are required to translate our results of operations from ZAR to U.S. dollars on a monthly basis. Thus, the average rates
used to translate this data for the years ended June 30, 2017, 2016 and 2015, vary slightly from the averages shown in the table
above. The translation rates we use in presenting our results of operations are the rates shown in the following table:
Table 2
Income and expense items: $1 = ZAR ..........
Income and expense items: $1 = KRW .........
Year ended
June 30,
2016
14.3842
1,172
2017
13.6182
1,146
2015
11.4275
1,073
Balance sheet items: $1 = ZAR .....................
Balance sheet items: $1 = KRW ...................
13.0535
1,144
14.7838
1,153
12.2854
1,128
Results of Operations
The discussion of our consolidated overall results of operations is based on amounts as reflected in our audited
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 intercompany eliminations. A reconciliation between total operating segment revenue and revenue
presented in our consolidated financial statements is included in Note 23 to those statements.
Fiscal 2017 includes Masterpayment Financial Services Limited, or Malta FS, from November 1, 2016 and Pros Software
from October 1, 2016. Fiscal 2016 includes the results of Transact24 from the January 1, 2016 and Masterpayment from April 1,
2016. Refer also to Note 3 to the consolidated financial statements.
Fiscal 2017 Compared to Fiscal 2016
The following factors had an influence on our results of operations during fiscal 2017 as compared with the same period in
the prior year:
• Favorable impact from the weakening of the U.S. dollar against ZAR: The U.S. dollar depreciated by 5% against the
ZAR during fiscal 2017, which positively impacted our reported results;
• Separation costs related to former chief executive officer: We paid our former chief executive officer $8 million in
cash related to his separation from our company in fiscal 2017. In addition, the vesting of 200,000 shares of restricted
stock granted to him in August 2016 was accelerated which resulted in an additional stock-based compensation charge
of approximately $1.6 million during fiscal 2017;
• Growth in lending and insurance businesses: We continued to achieve volume growth and operating efficiencies in
our lending and insurance businesses during fiscal 2017, which has resulted in an improved contribution to our
financial inclusion revenue and operating income;
• Ongoing contributions from EasyPay Everywhere: EPE revenue and operating income growth was driven primarily
by ongoing EPE adoption as we further expanded our customer base utilizing our ATM infrastructure;
• Masterpayment expansion costs and $3.8 million allowance for credit losses: Masterpayment has incurred additional
employment costs as it grows its staff complement to execute its expansion plan into new markets. We have provided
an allowance for credit losses of $3.8 million related to an amount due from one customer;
• Regulatory changes in South Korea governing fees on card transactions: Regulations governing the fees that may be
charged on card transactions have adversely impacted our revenues and operating income in South Korea, partially
offset by transaction volume growth;
• Lower prepaid sales resulting from improved security features to our Manje products: The introduction of our new
biometric-linking feature was implemented in the first quarter of fiscal 2017 and adversely impacted the number of
transacting users purchasing prepaid products through our mobile channel;
• Higher transaction-related costs in fiscal 2017: We incurred $3.3 million in transaction-related costs due to various
acquisition and investment initiatives pursued during fiscal 2017; and
48
• Higher tax impact of dividends from South African subsidiary in fiscal 2016 compared with 2017: Our income tax
expense for fiscal 2016 includes approximately $6.2 million related to the tax impact, including withholding taxes,
resulting from distributions from our South African subsidiary. There were fewer distributions from our South African
subsidiary during fiscal 2017, and our tax expense includes approximately $1.5 million related to the tax impact,
including withholding taxes, resulting from these distributions.
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:
Table 3
Revenue ......................................................................................................
Cost of goods sold, IT processing, servicing and support ..........................
Selling, general and administration ............................................................
Depreciation and amortization ...................................................................
Operating income .......................................................................................
Interest income ...........................................................................................
Interest expense ..........................................................................................
Income before income tax expense ............................................................
Income tax expense ....................................................................................
Net income before earnings from equity-accounted investments ...............
Earnings from equity-accounted investments ............................................
Net income .................................................................................................
Less net income attributable to non-controlling interest ............................
Net income attributable to us .....................................................................
Table 4
Revenue ......................................................................................................
Cost of goods sold, IT processing, servicing and support ..........................
Selling, general and administration ............................................................
Depreciation and amortization ...................................................................
Operating income .......................................................................................
Interest income ...........................................................................................
Interest expense ..........................................................................................
Income before income tax expense ............................................................
Income tax expense ....................................................................................
Net income before earnings from equity-accounted investments ...............
Earnings from equity-accounted investments ............................................
Net income .................................................................................................
Less net income attributable to non-controlling interest ............................
Net income attributable to us .....................................................................
In United States Dollars
(U.S. GAAP)
Year ended June 30,
2017
$ ’000
610,066
292,383
179,262
41,378
97,043
20,897
3,484
114,456
42,472
71,984
2,664
74,648
1,694
72,954
2016
$ ’000
590,749
290,101
145,886
40,394
114,368
15,292
3,423
126,237
42,080
84,157
639
84,796
2,342
82,454
%
change
3%
1%
23%
2%
(15%)
37%
2%
(9%)
1%
(14%)
317%
(12%)
(28%)
(12%)
In South African Rand
(U.S. GAAP)
Year ended June 30,
2017
ZAR
’000
8,308,001
3,981,730
2,441,226
563,493
1,321,552
284,580
47,446
1,558,686
578,392
980,294
36,279
1,016,573
23,069
993,504
2016
ZAR
’000
8,497,452
4,172,870
2,098,453
581,036
1,645,093
219,963
49,237
1,815,819
605,287
1,210,532
9,192
1,219,724
33,688
1,186,036
%
change
(2%)
(5%)
16%
(3%)
(20%)
29%
(4%)
(14%)
(4%)
(19%)
295%
(17%)
(32%)
(16%)
In ZAR, the decrease in revenue was primarily due to lower prepaid airtime sales, fewer ad hoc terminal sales, and a lower
contribution from KSNET due to regulatory changes in South Korea, which was partially offset by more fees generated from
our EPE and ATM offerings, improved lending and insurance activities, the inclusion of Masterpayment’s businesses, and an
increase in the number of SASSA UEPS/EMV beneficiaries paid.
49
In ZAR, the decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer prepaid
airtime and ad hoc terminal sales, which was partially offset by higher expenses incurred due to increased usage of the South
African National Payment System by beneficiaries, expenses incurred to operate our EPE and ATM offerings, and the inclusion
of Masterpayment’s businesses.
In ZAR, our selling, general and administration expense increased primarily due to a higher employee costs resulting from
our EPE roll-out in fiscal 2016, the impact of October 2016 annual salary increases for our South African and UK-based
employees, an $8.0 million separation payment to our former chief executive officer, an allowance for credit losses related to a
specific customer of $3.8 million, as well as increases in goods and services purchased from third parties. Our fiscal 2016
selling, general and administration expense includes a $1.9 million gain on re-measurement of the previously held interest
related to the T24 acquisition and a gain of ZAR 30 million ($2.2 million) resulting from the change in accounting for Finbond
due to the appointment of our representative to Finbond’s board of directors.
Our operating income margin for fiscal 2017 and 2016 was 16% and 19%, respectively, and our fiscal 2017 margin was
18% excluding the $8.0 million separation payment to our former chief executive officer. We discuss the components of
operating income margin under “—Results of operations by operating segment.” The decrease is primarily attributable to the
separation payment to our former chief executive officer and higher cost of goods sold, IT processing, servicing and support
referred to above, and partially offset by a decrease in depreciation expenses.
In ZAR, depreciation and amortization decreased primarily due to lower overall amortization of intangible assets that are
fully amortized and tangible assets that are fully depreciated. These decreases were partially offset by an increase in acquisition-
related intangible asset amortization resulting from recent transactions, including Masterpayment and Pros Software.
In ZAR, interest on surplus cash increased to $20.9 million (ZAR 284.6 million) from $15.3 million (ZAR 220.0 million),
due primarily to the interest received from our loan to Finbond and higher average daily ZAR cash balances and ZAR interest
rates, partially offset by the lower interest earned on the U.S. dollar cash reserves that we converted from ZAR through
distributions from our South African subsidiary.
In ZAR, interest expense decreased to $3.5 million (ZAR 47.4 million) from $3.4 million (ZAR 49.2 million), due to a
lower average long-term debt balance on our South Korean debt and a lower interest rate, offset by a $1.2 million (ZAR 16.0
million) guarantee fee that was expensed related to the financing for the Blue Label Telecoms Limited investment that was
ultimately not pursued.
Fiscal 2017 tax expense was $42.5 million (ZAR 578.4 million) compared to $42.1 million (ZAR 605.3 million) in fiscal
2016. Our effective tax rate for the fiscal 2017, was 37.1% and was higher than the South African statutory rate as a result of
non-deductible expenses (including consulting and legal fees) and the tax impact attributable to distributions from our South
African subsidiary. Our effective tax rate for the fiscal 2016, was 33.3% and was higher than the South African statutory rate as
a result of non-deductible expenses (including consulting and legal fees) and the tax impact, including withholding taxes, of
approximately $6.2 million attributable to distributions from our South African subsidiary.
Earnings from equity-accounted investments for fiscal 2017 have increased primarily due to the inclusion of our portion of
Finbond’s net income. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first
half and its annual results during our fourth quarter.
50
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
Operating Segment
Revenue:
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Intersegment eliminations ............................
Consolidated revenue .................................
Operating income (loss):
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Corporate/Eliminations ......................................
Consolidated operating income .................
Table 6
Operating Segment
2017
$ ’000
249,144
176,729
235,901
661,774
(51,708)
610,066
59,309
13,705
57,785
130,799
(33,756)
97,043
2017
ZAR
’000
Revenue:
South African transaction processing ....................... 3,392,893
International transaction processing ......................... 2,406,731
Financial inclusion and applied technologies ........... 3,212,547
Subtotal: Operating segments ............................ 9,012,171
(704,170)
Intersegment eliminations ............................
Consolidated revenue ................................. 8,308,001
Operating income (loss):
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
807,682
186,637
786,928
Subtotal: Operating segments ............................ 1,781,247
(459,696)
Corporate/Eliminations ......................................
Consolidated operating income ................. 1,321,551
South African transaction processing
In United States Dollars (U.S. GAAP)
Year ended June 30,
2016
$ ’000
% of
total
% of
total
41%
29%
39%
109%
(9%)
100%
61%
14%
60%
135%
(35%)
100%
212,574
169,807
249,403
631,784
(41,035)
590,749
51,386
23,389
54,999
129,774
(15,406)
114,368
36%
29%
42%
107%
(7%)
100%
45%
20%
48%
113%
(13%)
100%
In South African Rand (U.S. GAAP)
Year ended June 30,
2016
ZAR
’000
% of
total
% of
total
41%
29%
39%
109%
(9%)
100%
61%
14%
60%
135%
(35%)
100%
3,057,707
2,442,538
3,587,463
9,087,708
(590,256)
8,497,452
739,147
336,432
791,117
1,866,696
(221,603)
1,645,093
36%
29%
42%
107%
(7%)
100%
45%
20%
48%
113%
(13%)
100%
%
change
17%
4%
(5%)
5%
26%
3%
15%
(41%)
5%
1%
119%
(15%)
%
change
11%
(1%)
(10%)
(1%)
19%
(2%)
9%
(45%)
(1%)
(5%)
107%
(20%)
In ZAR, the increase in revenue and operating income from our South African transaction processing segment was
primarily due to higher EPE transaction revenue as a result of increased usage of our ATMs, increased inter-segment transaction
processing activities, and a modest increase in the number of social welfare grants distributed.
Operating income margin in our South African transaction processing segment for each of fiscal 2017 and 2016 was 24%.
Our fiscal 2017 margin includes higher EPE revenue as a result of increased ATM transactions, an increase in inter-segment
transaction processing activities, an increase in the number of beneficiaries paid in fiscal 2017 and a modest increase in the
margin of transaction fees generated from cardholders using the South African National Payment System, which was partially
offset by annual salary increases granted to our South African employees.
International transaction-based activities
In calendar 2016, South Korean regulators introduced specific regulations governing the fees that may be charged on card
transactions, as is the case in most other developed economies. These regulations have a direct impact on card issuers in South
Korea and, consistent with global practices, card issuers have renegotiated their fees with South Korean VAN companies,
including KSNET, which has had an adverse impact on KSNET’s financial performance.
51
Revenue from our International transaction processing segment increased during fiscal 2017, primarily due to the inclusion
of T24 and Masterpayment; however, this growth was partially offset by a lower contribution from KSNET due to the regulatory
changes. Operating income from our International transaction processing segment during fiscal 2017 was lower due to a
decrease in revenue at KSNET; losses incurred by Masterpayment as it grows its staff complement to execute its expansion plan
into new markets and an allowance for credit losses related to a specific customer of $3.8 million; and ongoing ZAZOO start-up
costs in the UK and India, which was partially offset by a positive contribution by T24. Operating income and margin for fiscal
2017 was also positively impacted by a refund of approximately $0.8 million that had been paid several years ago in connection
with industry-wide litigation that has now been finalized.
Operating income margin in our International transaction processing segment for fiscal 2017 and 2016, was 8% and 14%,
respectively.
Financial inclusion and applied technologies
In ZAR, revenue and operating income from our Financial inclusion and applied technologies segment decreased primarily
due to the introduction of our new biometric linking feature for prepaid airtime and other value added services, which adversely
impacted sales, as well as fewer ad hoc terminal sales, partially offset by increased volumes in our lending and insurance
businesses, an increase in inter-segment revenues and higher card sales.
Operating income margin from our Financial inclusion and applied technologies segment was 24% and 22%, during fiscal
2017 and 2016, respectively, and has increased primarily due to improved revenues from our lending and insurance businesses
and an increase in inter-segment revenues and fewer low margin prepaid product sales, offset by fewer ad hoc terminal sales and
annual salary increases granted to our South African employees.
Corporate/ Eliminations
Our corporate expenses generally include acquisition-related intangible asset amortization; expenses incurred related to
acquisitions and investments pursued; expenditure related to compliance with Sarbanes; 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.
During fiscal 2017, our corporate expenses have increased primarily due to the separation payment made to our former
chief executive officer, higher transaction-related expenditures and amortization costs and modest increases in U.S. dollar
denominated goods and services purchased from third parties and directors’ fees. These increases were partially offset by lower
stock-based compensation charges; lower provision for incentives, including no cash incentive award for fiscal 2017 for the
chief executive officer and chief financial officer; and the impact of the stronger U.S. dollar on goods and services procured in
other currencies, primarily the ZAR. Our fiscal 2016 corporate expenses include the fair value gain on re-measurement of the
previously held interest related to the T24 acquisition and the gain resulting from the change in accounting for Finbond.
Fiscal 2016 Compared to Fiscal 2015
The following factors had an influence on our results of operations during 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 26% against the ZAR and 9% against the KRW during fiscal 2016, which negatively impacted
our reported results;
• Continued growth in airtime revenue and transaction fees: We continued to grow our financial inclusion services
offerings during fiscal 2016, which has resulted in higher revenues and operating income, primarily from more sales of
low-margin prepaid airtime and an increase in transaction fees;
• Launch of EPE and Smart Life: During fiscal 2016 we launched our EPE and Smart Life offerings and expanded our
ATM network, which contributed to an increase in revenue in ZAR, as well as an associated increase in establishment
costs for our branch network;
•
Increased contribution by KSNET: Our results were positively impacted by growth in our Korean operations; and
• Tax impact of dividends from South African subsidiary: Our income tax expense includes approximately $6.2 million
related to the tax impact, including withholding taxes, resulting from distributions from our South African subsidiary
which helped reduce the impact of a weakened ZAR on our reported cash balances. The conversion of a significant
portion of our ZAR cash reserves to USD negatively impacted our interest income due to the material difference
between ZAR and USD deposit rates.
52
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:
Table 7
Revenue ......................................................................................................
Cost of goods sold, IT processing, servicing and support ..........................
Selling, general and administration ............................................................
Depreciation and amortization ...................................................................
Operating income .......................................................................................
Interest income ...........................................................................................
Interest expense ..........................................................................................
Income before income tax expense ............................................................
Income tax expense ....................................................................................
Net income before earnings from equity-accounted investments ...............
Earnings from equity-accounted investments ............................................
Net income .................................................................................................
Less net income attributable to non-controlling interest ............................
Net income attributable to us .....................................................................
Table 8
Revenue ......................................................................................................
Cost of goods sold, IT processing, servicing and support ..........................
Selling, general and administration ............................................................
Depreciation and amortization ...................................................................
Operating income .......................................................................................
Interest income ...........................................................................................
Interest expense ..........................................................................................
Income before income tax expense ............................................................
Income tax expense ....................................................................................
Net income before earnings from equity-accounted investments ...............
Earnings from equity-accounted investments ............................................
Net income .................................................................................................
Less net income attributable to non-controlling interest ............................
Net income attributable to us .....................................................................
In United States Dollars
(U.S. GAAP)
Year ended June 30,
2016
$ ’000
590,749
290,101
145,886
40,394
114,368
15,292
3,423
126,237
42,080
84,157
639
84,796
2,342
82,454
2015
$ ’000
625,979
297,856
158,919
40,685
128,519
16,355
4,456
140,418
44,136
96,282
452
96,734
1,999
94,735
%
change
(6%)
(3%)
(8%)
(1%)
(11%)
(6%)
(23%)
(10%)
(5%)
(13%)
41%
(12%)
17%
(13%)
In South African Rand
(U.S. GAAP)
Year ended June 30,
2016
ZAR
’000
8,497,452
4,172,870
2,098,453
581,036
1,645,093
219,963
49,237
1,815,819
605,287
1,210,532
9,192
1,219,724
33,688
1,186,036
2015
ZAR
’000
7,153,375
3,403,749
1,816,047
464,928
1,468,651
186,897
50,921
1,604,627
504,364
1,100,263
5,165
1,105,428
22,844
1,082,584
%
change
19%
23%
16%
25%
12%
18%
(3%)
13%
20%
10%
78%
10%
47%
10%
In ZAR, the increase in revenue 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, partially offset by lower UEPS-loans fees.
In ZAR, the increase in cost of goods sold, IT processing, servicing and support was primarily due to higher expenses
incurred from increased usage of the South African National Payment System by beneficiaries, expenses incurred to roll-out our
new EPE and ATM offerings and expanding our branch network, and more prepaid airtime sold.
In ZAR, our selling, general and administration expense increased due to a higher staff complement resulting from our
EPE roll-out, as well as increases in goods and services purchased from third parties, offset by a $1.9 million fair value gain
resulting from the acquisition of Transact24 and a gain of ZAR 30 million ($2.2 million) resulting from the change in
accounting for Finbond due to the appointment of our representative to Finbond’s board of directors.
53
Our operating income margin for fiscal 2016 and 2015 was 19% 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 increased primarily as a result of an increase in depreciation related to more
terminals used to provide transaction processing in Korea, the roll-out of EPE ATMs and an increase in acquisition-related
intangible asset amortization resulting from the Transact24 and Masterpayment transactions, all partially offset by lower overall
amortization of intangible assets that are now fully amortized.
In ZAR, interest on surplus cash increased to $15.3 million (ZAR 220.0 million) from $16.4 million (ZAR 186.9 million),
due primarily to higher average daily ZAR cash balances and ZAR interest rates, partially offset by the lower interest earned on
the USD cash reserves that we converted from ZAR through distributions from our South African subsidiary.
Interest expense decreased to $3.4 million (ZAR 49.2 million) from $4.5 million (ZAR 50.9 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 $42.1 million (ZAR 605.3 million) compared to $44.1 million (ZAR 504.4 million) in fiscal
2015. Our effective tax rate for the fiscal 2016, was 33.3% and was higher than the South African statutory rate as a result of
non-deductible expenses (including consulting and legal fees) and the tax impact, including withholding taxes, of approximately
$6.2 million attributable to distributions from our South African subsidiary. Our effective tax rate for fiscal 2015, was 31.4%
and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal).
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below
In United States Dollars (U.S. GAAP)
Year ended June 30,
2015
$ ’000
% of
total
% of
total
36%
29%
42%
107%
(7%)
100%
45%
20%
48%
113%
(13%)
100%
236,452
164,554
272,600
673,606
(47,627)
625,979
51,008
26,805
72,725
150,538
(22,019)
128,519
38%
26%
44%
108%
(8%)
100%
40%
21%
57%
118%
(18%)
100%
%
change
(10%)
3%
(9%)
(6%)
(14%)
(6%)
1%
(13%)
(24%)
(14%)
(30%)
(11%)
Table 9
Operating Segment
Revenue:
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Intersegment eliminations ............................
Consolidated revenue .................................
Operating income (loss):
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Corporate/Eliminations ......................................
Consolidated operating income .................
2016
$ ’000
212,574
169,807
249,403
631,784
(41,035)
590,749
51,386
23,389
54,999
129,774
(15,406)
114,368
54
Table 10
Operating Segment
2016
ZAR
’000
Revenue:
South African transaction processing ....................... 3,057,707
International transaction processing ......................... 2,442,538
Financial inclusion and applied technologies ........... 3,587,463
Subtotal: Operating segments ............................ 9,087,708
(590,256)
Intersegment eliminations ............................
Consolidated revenue ................................. 8,497,452
Operating income (loss):
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
739,147
336,432
791,117
Subtotal: Operating segments ............................ 1,866,696
(221,603)
Corporate/Eliminations ......................................
Consolidated operating income ................. 1,645,093
South African transaction processing
In South African Rand (U.S. GAAP)
Year ended June 30,
2015
ZAR
’000
% of
total
% of
total
36%
29%
42%
107%
(7%)
100%
45%
20%
48%
113%
(13%)
100%
2,702,055
1,880,441
3,115,137
7,697,633
(544,258)
7,153,375
582,894
306,314
831,065
1,720,273
(251,622)
1,468,651
38%
26%
44%
108%
(8%)
100%
40%
21%
57%
118%
(18%)
100%
%
change
13%
30%
15%
18%
8%
19%
27%
10%
(5%)
9%
(12%)
12%
In ZAR, the increase in segment revenue and operating income was primarily due to higher EPE transaction revenue as a
result of increased usage of our ATMs, more low-margin transaction fees generated from card holders using the South African
National Payment System, increased inter-segment transaction processing activities, and a modest increase in the number of
social welfare grants distributed.
Operating income margin in our South African transaction processing segment for fiscal 2016 and 2015 was 24% and
22%, respectively, and has increased primarily due a modest increase in the margin on transaction fees generated from
cardholders using the South African National Payment System and to an increase in the number of beneficiaries paid in fiscal
2016.
International transaction-based activities
Revenue from our International transaction processing segment increased primarily due to higher transaction volume at
KSNET during fiscal 2016 and the inclusion of the contribution from Transact24 and Masterpayment. Operating income during
fiscal 2016 was lower due to an increase in depreciation expense and ongoing ZAZOO start-up costs in the United Kingdom and
India, but was partially offset by an increase in revenue contribution from KSNET and a positive contribution from Transact24,
Masterpayment and XeoHealth.
Operating income and operating income margin in our International transaction processing segment for fiscal 2015, were
positively impacted by a refund of approximately $1.7 million that had been paid several years ago in connection with industry-
wide litigation. Operating income margin for fiscal 2016 and 2015, was 14% and 16%, respectively.
Financial inclusion and applied technologies
In ZAR, revenue and operating income from our Financial inclusion and applied technologies segment 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, offset by lower lending service fees. Operating income for fiscal 2016, was adversely impacted by
establishment costs for Smart Life and expansion of our branch network.
Operating income margin from our Financial inclusion and applied technologies segment was 22% and 27%, during fiscal
2016 and 2015, respectively, and has decreased primarily due to the sale of more low-margin prepaid airtime and establishment
costs for Smart Life and expansion of our branch network.
Corporate/ Eliminations
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, lower amortization costs, lower executive cash incentive awards, the fair value
gain resulting from the acquisition of Transact24 and the gain resulting from the change in accounting for Finbond, partially
offset by modest increases in USD denominated goods and services purchased from third parties and directors’ fees.
55
Liquidity and Capital Resources
At June 30, 2017, our cash balances were $258.5 million, which comprised U.S. dollar-denominated balances of $60.0
million, ZAR-denominated balances of ZAR 1.8 billion ($141.5 million), KRW-denominated balances of KRW 55.0 billion
($48.1 million) and other currency deposits, primarily euro, of $8.9 million. The increase in our cash balances from June 30,
2016, was primarily due to the sale of 5 million shares of our common stock and expansion of most of our core businesses,
which was partially offset by the repurchase of shares of our common stock; unscheduled voluntary repayments of our Korean
debt; payment of taxes; the investment in MobiKwik, Malta FS and Pros Software; a loan to Finbond and capital expenditures.
We currently believe that our cash and credit facilities are sufficient to fund our future operations for at least the next four
quarters.
We generally invest the surplus cash held by our South African operations in overnight call accounts that we maintain at
South African banking institutions, and surplus cash held by our non-South African companies in U.S. dollar denominated
money market accounts. We have invested surplus cash in Korea in short-term investment accounts at Korean banking
institutions.
Historically, we have financed most of our operations, research and development, working capital, capital expenditures
and acquisitions through internally generated cash. When considering whether to borrow under our financing facilities, we
consider the cost of capital, cost of financing, opportunity cost of utilizing surplus cash and availability of tax efficient
structures to moderate financing costs. For instance, in July 2017, we obtained loan facilities from South African banks to fund
a portion of our investment in Cell C and a portion of our working capital requirements. Refer to Note 14 to our consolidated
financial statements for the year ended June 30, 2017, for additional information related to these loan facilities.
We have a short-term South African credit facility with Nedbank of ZAR 400 million ($30.6 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 comprise an overdraft facility of up to ZAR 50 million and
indirect and derivative facilities of up to ZAR 150 million, which include letters of guarantee, letters of credit and forward
exchange contracts. On December 9, 2016, Nedbank agreed to temporarily increase the overdraft facility by the secondary
amount of ZAR 200 million to ZAR 250 million.
As of June 30, 2017, we had used none of the overdraft and ZAR 130.5 million ($10.0 million, translated at exchange rates
applicable as of June 30, 2017) of the indirect and derivative facilities to obtain foreign exchange contracts and to support
guarantees issued by Nedbank to various third parties on our behalf. Refer to Note 12 to the consolidated financial statements
for more information about the terms of this facility.
We obtained EUR 40.0 million ($45.7 million) and CHF 20 million ($20.9 million) revolving overdraft facilities from
Bank Frick. As of June 30, 2017, we had utilized approximately CHF 15.9 million ($16.6 million) of the CHF 20 million facility
and had not utilized any of the EUR 40 million facility. As of June 30, 2017, the interest rate on each of these facilities was
5.00%. We have assigned all claims against amounts due from Masterpayment customers, which have been financed from the
CHF 20 million facility, plus all secondary rights and preferential rights as collateral for this facility to Bank Frick. Our
Masterpayment subsidiary was required to open a primary business account with Bank Frick, and this account has been pledged
to Bank Frick as collateral for the EUR 40 million facility. The initial term of the EUR 40 million facility ends on December 31,
2019, but it will automatically be extended for one year if it is not terminated with 12 months written notice. The CHF 20
million facility does not have a fixed term; however, it may be terminated by either party with six months written notice at the
end of a calendar month.
As of June 30, 2017, we had outstanding long-term debt of KRW 18.6 billion (approximately $16.2 million translated at
exchange rates applicable as of June 30, 2017) 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 (1.41% as of June 30, 2017) plus a margin of 3.10% for one of
the term loan facilities and the revolver and a margin of 2.90% for the other term loan facility. We made a scheduled repayment
of KRW 10 billion ($8.8 million) on April 29, 2017. Scheduled remaining repayments of the term loans and loan under the
revolving credit facility are as follows: April 2018 (KRW 10 billion) and October 2018 (KRW 8.6 billion plus all outstanding
loans under our revolving credit facility).
On July 29, 2016, we prepaid KRW 20 billion ($17.8 million) of the Facility A loan and KRW 10 billion ($8.9 million) of
our Facility C revolving credit facility; both prepayments were translated at exchange rates applicable as of the payment date.
Refer to Note 14 to the consolidated financial statements for more information about the terms of this facility.
56
We have a unique cash flow cycle due to the funding mechanism under our SASSA contact and our pre-funding of certain
merchants. We generally receive the grant funds 48 hours prior to the provision of the service in a trust account and any interest
we earn on these amounts is for the benefit of SASSA. We are required to initiate payments before the start of the pay cycle
month in order to have cash, merchant and interbank funds available when the payment cycle commences and this process
requires that we have access to the grant funds to be paid. These funds are recorded as settlement assets and liabilities.
Historically, we opened the pay cycle at certain participating merchants a few days before the payment of grants at pay sites,
however, currently we do not commence the payment cycle at participating merchants before the start of the pay cycle month.
We use our funds to pre-fund certain merchants for grants paid through our merchant acquiring system on our behalf a day
or two before the pay cycle opens. We typically reimburse merchants that are not pre-funded within 48 hours after they
distribute the grants to the social welfare recipient cardholders.
In addition, as a transaction processor, we receive cash from:
• customers on whose behalf we processes off-payroll payments that we will disburse to customer employees, payroll-
related payees and other payees designated by the customer; and
• credit card companies (as well as other types of payment services) which have business relationships with merchants
selling goods and services via the internet in South Korea and through Transact24 that are our customers and on whose behalf
we process the transactions between various parties and settle the funds from the credit card companies to our merchant
customers.
These funds do not represent cash that is available to us and we present these funds, and the associated liability, outside of
our current assets and liabilities on our consolidated balance sheet. Movements in these cash balances are presented in investing
activities and movements in the obligations are presented in financing activities in our consolidated statement of cash flows.
Cash flows from operating activities
In ZAR, cash flows from operating activities for fiscal 2017 decreased to $97.2 million (ZAR 1.3 billion) from $116.6
million (ZAR 1.7 billion) for fiscal 2016. Excluding the impact of interest received, interest paid under our Korean debt and
taxes presented in the table below, the decrease relates primarily to the growth of Masterpayment’s working capital finance
offering and the separation payment made to our former chief executive officer, offset by an increase in cash from operating
activities resulted from improved trading activity during fiscal 2017. During fiscal 2017, we paid interest of $1.5 million under
our South Korean debt facility.
In ZAR, cash flows from operating activities for fiscal 2016 increased to $116.6 million (ZAR 1.7 billion) from $135.3
million (ZAR 1.5 billion) for fiscal 2015. Excluding the impact of interest received, interest paid under our Korean debt and
taxes presented in the table below, the increase in cash from operating activities resulted from improved trading activity during
fiscal 2016. During fiscal 2016, we paid interest of $3.3 million under our South Korean debt facility.
During fiscal 2017, we made a first provisional tax payment of $18.2 million (ZAR 252.0 million) and a second
provisional tax payment of $17.2 million (ZAR 221.7 million) related to our 2017 tax year in South Africa. We paid dividend
withholding taxes of $1.5 million (ZAR 21.3 million). We also paid taxes totaling $8.1 million in other tax jurisdictions,
primarily South Korea.
During fiscal 2016, we made a first provisional tax payment of $16.0 million (ZAR 239.9 million) and a second
provisional tax payment of $13.7 million (ZAR 207.3 million) related to our 2016 tax year in South Africa. We paid dividend
withholding taxes of $4.2 million (ZAR 60.0 million). We also paid taxes totaling $5.0 million in other tax jurisdictions,
primarily South Korea.
57
Taxes paid during fiscal 2017, 2016 and 2015 were as follows:
Table 11
First provisional payments ......................
Second provisional payments ..................
Taxation paid related to prior years .........
Taxation refunds received .......................
Dividend withholding taxation ................
Total South African ..........................
Foreign, primarily South Korea ........
Total tax paid ..........................
2017
$
‘000
18,192
17,197
1,624
(1,414)
1,471
37,070
8,095
45,165
2016
$
‘000
15,956
13,733
3,436
(176)
4,183
37,132
4,991
42,123
Year ended June 30,
2015
$
‘000
2017
ZAR
‘000
18,910
16,234
2,408
(468)
737
37,821
7,638
45,459
251,968
221,734
22,365
(19,481)
21,300
497,886
109,800
607,686
2016
ZAR
‘000
239,939
207,329
46,840
(2,402)
60,000
551,706
74,844
626,550
2015
ZAR
‘000
217,241
199,779
26,395
(5,396)
8,702
446,721
86,857
533,578
We expect to pay additional second provisional payments in South Africa of approximately $1.9 million (ZAR 25.2 million
translated at exchange rates applicable as of June 30, 2017) related to our 2017 tax year in the first quarter of fiscal 2018.
Cash flows from investing activities
Cash used in investing activities for fiscal 2017 includes capital expenditure of $11.2 million (ZAR 152.5 million),
primarily for the acquisition of payment processing terminals in Korea. Our Korean capital expenditures have declined due to
regulatory changes in South Korea, which now prohibit the provision of payment equipment to the majority of merchants.
Cash used in investing activities for fiscal 2016 includes capital expenditure of $35.8 million (ZAR 514.9 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 fiscal 2015 includes capital expenditure of $36.4 million (ZAR 416.4 million),
primarily for the acquisition of payment processing terminals in Korea and the rollout of ATMs in South Africa.
During fiscal 2017, we paid approximately $25.8 million for an approximate 13.5% interest in MobiKwik; provided a $10.0
million loan to Finbond; provided a $2.0 million loan to KZ One and paid approximately $2.9 million and $1.7 million,
respectively, net of cash received, to acquire 100% of each of Malta FS and Pros Software’s ordinary shares.
During fiscal 2016, we paid approximately $14.8 million and $1.7 million, respectively, net of cash received, to acquire
60% of Masterpayment and approximately 56% of Transact24’s ordinary shares. We also exercised our rights under the
Finbond rights offer and paid approximately $8.9 million (ZAR 136.1 million) to acquire an additional 40,733,723 shares of
common stock of Finbond.
During fiscal 2015, we paid $13.2 million for non-controlling interests in businesses based in Nigeria and Hong Kong.
Cash flows from financing activities
During fiscal 2017, we sold 5 million shares of our common stock for $45.0 million and received approximately $2.9
million from the exercise of stock options. We also paid approximately $45.3 million to repurchase 4,407,360 shares of our
common stock and also paid $0.5 million, on July 1, 2016, related to settlement of amounts outstanding related to the
repurchases at the end of June 2016. We also made a $28.5 million unscheduled repayment of our Korean debt, made a
scheduled $7.4 million Korean debt repayment, utilized approximately $0.8 million of our Korean borrowings to pay quarterly
interest due and utilized approximately $16.2 million of our CHF facilities. In addition, we paid a guarantee fee of $1.1 million
related to the guarantee issued by RMB and paid a dividend of approximately $2.1 million to certain of our non-controlling
interests.
During fiscal 2016, we received approximately $107.7 million from the issue of 9,984,311 shares of our common stock
and approximately $3.8 million from the exercise of stock options. We made scheduled Korean long-term debt repayments of
approximately $8.7 million, and utilized approximately $2.1 million of our Korean borrowings to pay quarterly interest due. We
also acquired 2,426,704 shares of our common stock and paid approximately $26.6 million during fiscal 2016 and the remaining
$0.5 million on July 1, 2016, related to these repurchases and, in June 2016, paid approximately $11.2 million for all of the
shares of Masterpayment that we did not already own.
58
During fiscal 2015, we made a scheduled Korean debt repayment of $14.1 million, repurchased BVI’s remaining
1,837,432 shares of Net1 common stock for approximately $9.2 million, received $1.4 million from BVI for 12.5% of CPS’
issued and outstanding ordinary shares and paid a dividend of $1.0 million to certain of our non-controlling interests. We also
utilized approximately $3.8 million of our Korean borrowings to pay quarterly interest due and received approximately
$2.0 million from the exercise of stock options.
Contractual Obligations
The following table sets forth our contractual obligations as of June 30, 2017:
Table 13
Payments due by Period, as of June 30, 2017 (in $ ’000s)
Less
than 1
year
1-3
years
3-5
years
More
than 5
years
Total
153,216
72,395
41,512
17,140
16,579
7,794
2,278
84
2,795
313,793
-
-
-
7,613
Acquisition of Cell C (A) .....................
Acquisition of DNI (B) ........................
Acquisition of Bank Frick (C) ..............
Long-term debt obligations (D) ............
Short-term credit facilities ....................
Operating lease obligations ..................
Purchase obligations .............................
Capital commitments ...........................
Other long-term obligations (E)(F) ......
Total ...............................................
(A) – In August 2017, we acquired 15% of the issued share capital of Cell C for ZAR 2 billion utilizing a combination of
our existing cash reserves and a lending facility obtained in July 2017, refer also Item 7—Management Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.
153,216
72,395
41,512
9,527
16,579
5,276
2,278
84
-
300,867
1,977
-
-
-
9,590
-
-
-
2,795
2,795
541
-
-
-
541
-
-
-
-
-
-
-
-
(B) – In July 2017, we acquired 45% of the issued share capital of DNI for ZAR 945 million utilizing our existing cash
reserves.
(C) – We have agreed to purchase 30% of Bank Frick for an aggregate purchase price of approximately CHF 39.8 million,
refer also Note 10 to our consolidated financial statements.
(D) – Includes $16.2 million of long-term debt and interest payable at the rate applicable on June 30, 2017, under our
Korean debt facility.
(E) – Includes policyholder liabilities of 2.2 million related to our insurance business.
(F) – We have excluded a $66.6 million guarantee to Bank Frick to secure the short-term facilities provides to
Masterpayment and cross-guarantees in the aggregate amount of $10.0 million issued as of June 30, 2017, to Nedbank
to secure guarantees it has issued to third parties on our behalf as the amounts that will be settled in cash are not
known and the timing of any payments is uncertain. We have also excluded contractual commitments to invest
approximately $15 million in MobiKwik, subject to the achievement of certain contractual conditions.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
Capital expenditures for the years ended June 30, 2017, 2016 and 2015 were as follows:
Table 12
Operating Segment
2017
$
’000
2016
$
’000
Year ended June 30,
2015
$
’000
2017
ZAR
’000
2016
ZAR
’000
2015
ZAR
’000
South African transaction processing ..................
International transaction processing .....................
Financial inclusion and applied technologies .......
2,473
7,745
977
Consolidated total........................................ 11,195
5,101
28,029
2,667
35,797
7,008
28,205
1,223
36,436
33,669
105,446
13,302
152,417
73,374
403,174
38,363
514,911
80,084
322,312
13,976
416,372
Our capital expenditures for fiscal 2017, 2016 and 2015, are discussed under “—Liquidity and Capital Resources—Cash
flows from investing activities.”
59
All of our capital expenditures for the past three fiscal years were funded through internally-generated funds. We had
outstanding capital commitments as of June 30, 2017, of $0.1 million related mainly to computer equipment required to
maintain and expand operations. We expect to fund these expenditures through internally-generated funds. In addition to these
capital expenditures, we expect that capital spending for fiscal 2018 will also relate to expanding our operations in South Korea
and South Africa.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We seek to reduce our exposure to currencies other than the South African rand, or ZAR, through a policy of matching, to
the extent possible, assets and liabilities denominated in those currencies. In addition, we use financial instruments to
economically hedge our exposure to exchange rate and interest rate fluctuations arising from our operations. We are also
exposed to equity price and liquidity risks as well as credit risks.
Currency Exchange Risk
We are subject to currency exchange risk because we purchase inventories that we are required to settle in other
currencies, primarily the euro and U.S. dollar. We have used forward contracts to limit our 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. As of
June 30, 2017 and 2016, our outstanding foreign exchange contracts were as follows:
As of June 30, 2017
None.
As of June 30, 2016
Notional amount
EUR 573,765.00
EUR 554,494.50
EUR 465,711.00
EUR 393,675.00
EUR 302,368.50
Strike price
ZAR 15.9587
ZAR 16.0643
ZAR 16.1798
ZAR 16.2911
ZAR 16.4085
Translation Risk
Fair market
value price
ZAR 16.3393
ZAR 16.4564
ZAR 16.582
ZAR 16.7017
ZAR 16.8301
Maturity
July 20, 2016
August 19, 2016
September 20, 2016
October 20, 2016
November 21, 2016
Translation risk relates to the risk that our results of operations will vary significantly as the U.S. dollar is our reporting
currency, but we earn most of our revenues and incur most of our expenses in ZAR. The U.S. dollar to ZAR exchange rate has
fluctuated significantly over the past three years. As exchange rates are outside our control, there can be no assurance that future
fluctuations will not adversely affect our results of operations and financial condition.
Interest Rate Risk
As a result of our normal borrowing and leasing activities, our operating results are exposed to fluctuations in interest
rates, which we manage primarily through our regular financing activities. In addition, outstanding indebtedness under our long-
term South Korean debt facilities bear interest at the South Korean CD rate plus 3.10%. As interest rates, and specifically the
South Korean CD rate, are outside our control, there can be no assurance that future increases in interest rates, specifically the
South Korean CD rate, will not adversely affect our results of operations and financial condition. As of June 30, 2017, the South
Korean CD rate was 1.41%.
60
The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as
of June 30, 2017, as a result of a change in the South Korean CD rate. The effects of a hypothetical 1% (i.e. 100 basis points)
increase and a 1% decrease in the South Korean CD rate as of June 30, 2017, is shown. The selected 1% hypothetical change
does not reflect what could be considered the best or worst case scenarios.
Table 14
Interest on debt facility
As of June 30, 2017
Annual
expected
interest
charge
($ ’000)
732
Hypothetical
change in
South
Korean CD
rate
1%
(1%)
Estimated
annual
expected
interest charge
after change in
South Korean
CD rate
($ ’000)
895
570
We generally maintain limited investment in cash equivalents and have occasionally invested in marketable securities. The
interest earned on our bank balances and short term cash investments is dependent on the prevailing interest rates in the
jurisdictions where our cash reserves are invested.
Credit Risk
Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties. We maintain
credit risk policies with regard to our counterparties to minimize overall credit risk. These policies include an evaluation of a
potential counterparty’s financial condition, credit rating, and other credit criteria and risk mitigation tools as our management
deems appropriate.
With respect to credit risk on financial instruments, we maintain a policy of entering into such transactions only with South
African and European financial institutions that have a credit rating of BB+ or better, as determined by credit rating agencies
such as Standard & Poor’s, Moody’s and Fitch Ratings.
Microlending credit risk
We are exposed to credit risk in our microlending activities, which provides unsecured short-term loans to qualifying
customers. We manage this risk by performing an affordability test for each prospective customer and assign 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 we would incur as a result of the volatility in the exchange-traded price of
equity securities that we hold and the risk that we may not be able to liquidate these securities. We have invested in
approximately 26% of the issued share capital of Finbond which are exchange-traded equity securities and from April 1, 2016,
accounted for using the equity method. The fair value of these securities as of June 30, 2017, represented approximately 1% of
our total assets, including these securities. We expect to hold these securities for an extended period of time and we are 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.
The market price of these securities may fluctuate for a variety of reasons, consequently, the amount we 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 we would incur as a result of the lack of liquidity on the exchange on which
these securities are listed. We 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. We monitor these investments for impairment and make
appropriate reductions in carrying value when an impairment is deemed to be other-than-temporary.
61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with the report of our independent registered public accounting firm,
appear on pages F-1 through F-61 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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 chief
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-
15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were effective as of June 30, 2017.
Internal Control over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer
and chief financial officer, or persons performing similar functions, and effected by our board of directors, management, and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. GAAP.
Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U.S. GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of our
officers and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
Inherent Limitations in Internal Control over Financial Reporting
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into
the process safeguards to reduce, though not eliminate, this risk.
Management’s Report on Internal Control Over Financial Reporting
Management, including our chief executive officer and chief financial officer, is responsible for establishing and
maintaining adequate internal control over our financial reporting. Management conducted an evaluation of the effectiveness of
internal control over financial reporting based on the Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of June 30, 2017. Deloitte & Touche (South Africa), our independent
registered public accounting firm, has issued an audit report on our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended
June 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Net 1 UEPS Technologies, Inc.
Johannesburg, South Africa
We have audited the internal control over financial reporting of Net 1 UEPS Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June
30, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended June 30, 2017 of the Company and our report dated August 24,
2017, expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche
Registered Auditors
Johannesburg, South Africa
August 24, 2017
National Executive: *LL Bam Chief Executive Officer *TMM Jordan Deputy Chief Executive Officer
*MJ Jarvis Chief Operating Officer *AF Mackie Audit & Assurance *N Sing Risk Advisory *NB Kader Tax TP Pillay
Consulting S Gwala BPS *K Black Clients & Industries *JK Mazzocco Talent & Transformation MG Dicks Risk Independence
& Legal *TJ Brown Chairman of the Board
A full list of partners and directors is available on request
*Partner and Registered Auditor
63
ITEM 9B. OTHER INFORMATION
None.
- Remainder of this page left blank -
64
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our executive officers is set out in Part I, Item 1 under the caption “Executive Officers and Significant
Employees of the Registrant.” The other information required by this Item is incorporated by reference to the sections of our
definitive proxy statement for our 2017 annual meeting of shareholders entitled “Board of Directors and Corporate Governance”
and “Additional Information.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2017 annual meeting of shareholders entitled “Executive Compensation,” “Board of Directors and Corporate Governance—
Compensation of Directors” and “—Remuneration Committee Interlocks and Insider Participation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2017 annual meeting of shareholders entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2017 annual meeting of shareholders entitled “Certain Relationships and Related Transactions” and “Board of Directors and
Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2017 annual meeting of shareholders entitled “Audit and Non-Audit Fees.”
65
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
a) The following documents are filed as part of this report
1. Financial Statements
The following financial statements are included on pages F-1 through F-61.
Report of the Independent Registered Public Accounting Firm – Deloitte & Touche (South Africa)
Consolidated balance sheets as of June 30, 2017 and 2016
Consolidated statements of operations for the years ended June 30, 2017, 2016 and 2015
Consolidated statements of comprehensive income for the years ended June 30, 2017, 2016 and 2015
Consolidated statements of changes in equity for the years ended June 30, 2017, 2016 and 2015
Consolidated statements of cash flows for the years ended June 30, 2017, 2016 and 2015
Notes to the consolidated financial statements
2. Financial Statement Schedules
F-2
F-3
F-4
F-5
F-6
F-9
F-10
Financial statement schedules have been omitted since they are either not required, not applicable, or the information is
otherwise included.
(b) Exhibits
Description of Exhibit
Incorporated by Reference Herein
Included
Herewith Form Exhibit
Filing Date
Amended and Restated Articles of Incorporation
8-K
3.1
December 1, 2008
Exhibit
No.
3.1
3.2
4.1
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Amended and Restated By-Laws of Net 1 UEPS
Technologies, Inc.
Form of common stock certificate
Form of Restricted Stock Agreement
Form of Stock Option Agreement
Form of Restricted Stock Agreement (non-
employee directors)
Form of Indemnification Agreement
Form of non-employee director agreement
X
Amended and Restated 2015 Stock Incentive Plan
of Net 1 UEPS Technologies, Inc.
Service Agreement between KSNET, Inc. and Phil-
Hyun Oh dated June 30, 2014
Service Agreement between Net1 Applied
Technologies Korea and Phil-Hyun Oh dated June
30, 2014
Separation and Release of Claims Agreement, dated
May 24, 2017, by and between the Company and
Serge C.P. Belamant
10.10
Distribution Agreement, dated July 1, 2002,
10.11
between Net 1 UEPS Technologies, Inc. and Net 1
Investment Holdings (Pty) Limited
Patent and Technology Agreement, dated June 19,
2000, by and between Net 1 Holdings S.a.r.1. and
Net 1 UEPS Technologies, Inc.
10.12
Technology License Agreement between Net 1
Investment Holdings (Proprietary) Limited and Visa
International Service Association
66
8-K
S-1
10-K
10-K
3.2
4.1
10.13
10.14
November 5, 2009
June 20, 2005
August 23, 2012
August 23, 2012
10-K
10.15
August 23, 2012
10-K
10.32
August 25, 2016
14A
A
September 25, 2015
8-K
10.1
July 2, 2014
8-K
8-K
10.2
10.59
July 2, 2014
May 31, 2017
S-4
10.1
February 3, 2004
S-4
10.2
February 3, 2004
S-1
10.12
May 26, 2005
10.13
10.14
Product License Agreement between Net 1
Holdings S.a.r.1. and Net 1 Operations S.a.r.1.
Non Exclusive UEPS License Agreement between
Net 1 Investment Holdings (Proprietary) Limited
and SIA Netcards
10.15
Assignment of Copyright and License of Patents
and Trade Marks between MetroLink (Proprietary)
Limited and Net 1 Products (Proprietary) Limited
10.16
Agreement between Nedcor Bank Limited and Net
S-4/A
10.8
April 21, 2004
S-4/A
10.10
April 21, 2004
S-1
10.18
May 26, 2005
1 Products (Proprietary) Limited
S-1/A
10.16
July 19, 2005
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Patent and Technology Agreement by and among
Net 1 Investment Holdings (Proprietary) Limited,
Net 1 Applied Technology Holding Limited and
Nedcor Bank Limited
Patent and Technology Agreement by and among
Net 1 Holdings S.a.r.1., Net 1 Applied Technology
Holdings Limited and Nedcor Bank Limited
Agreement by and among Nedbank Limited, Net 1
UEPS Technologies, Inc., and Net 1 Applied
Technologies South Africa Limited
Contract for the Payment of Social Grants dated
February 3, 2012 between CPS and SASSA
Service Level Agreement dated February 3, 2012
between CPS and SASSA
Addendum dated March 31, 2017, to the Contract
and related Service Level Agreement for the
Payment of Social Grants dated February 3, 2012
between South African Social Security Agency and
Cash Paymaster Services (Pty) Ltd.
Agreement of Lease, Memorandum of an agreement
entered into by and between Buzz Trading 199
(Pty) Ltd and Net 1 Applied Technologies South
Africa (Pty) Ltd dated May 7, 2013
Addendum to the Lease Agreement made and
entered into by and between Buzz Trading 199
(Pty) Ltd and Net 1 Applied Technologies South
Africa (Pty) Ltd dated November 18, 2016
KRW 85,000,000,000 Senior Facilities Agreement
dated October 28, 2013, between Net 1 Applied
Technologies Korea, as borrower, Hana Bank, as
agent and security agent, financial institutions listed
therein as original lenders and Hana Daetoo
Securities Co., Ltd., as mandated lead arranger.
Relationship Agreement dated December 10, 2013
between Net 1 UEPS Technologies, Inc., Net 1
Applied Technologies South Africa (Proprietary)
Limited, Business Venture Investments No 1567
(Proprietary) Limited (RF) and Mosomo Investment
Holdings (Proprietary) Limited.
Relationship Agreement dated December 10, 2013
between Net 1 UEPS Technologies, Inc., Net 1
Applied Technologies South Africa (Proprietary)
Limited, Born Free Investments 272 (Pty) Ltd and
Mazwi Yako.
67
S-1
10.19
May 26, 2005
S-1/A
10.19
July 19, 2005
S-1/A
10.20
July 19, 2005
8-K
99.1
February 6, 2012
8-K
99.2
February 6, 2012
8-K
10.59
March 31, 2017
10-Q
10.25
May 9, 2013
10-Q
10-60
May 4, 2017
8-K
10.24
October 31, 2013
8-K
10.25
December 10, 2013
8-K
10.26
December 10, 2013
10.28
Facility Letter between Nedbank Limited and Net1
Applied Technologies South Africa Limited and
certain of its subsidiaries dated as of December 13,
2013 and First Addendum thereto dated as of
December 18, 2013
10.29
Letter from Nedbank Limited to Net1 Applied
Technologies South Africa Proprietary Limited and
certain of its subsidiaries, dated December 7, 2016
10.30
Addendum dated January 31, 2014, to the
Relationship Agreement between Net 1 UEPS
Technologies, Inc., Net 1 Applied Technologies
South Africa (Proprietary) Limited, Business
Venture Investments No 1567 (Proprietary) Limited
(RF) and Mosomo Investment Holdings
(Proprietary) Limited.
10.31
Addendum dated January 31, 2014, to the
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
Relationship Agreement between Net 1 UEPS
Technologies, Inc., Net 1 Applied Technologies
South Africa (Proprietary) Limited, Born Free
Investments 272 (Pty) Ltd and Mazwi Yako.
Second Addendum dated March 14, 2014, to the
Relationship Agreement between Net 1 UEPS
Technologies, Inc., Net 1 Applied Technologies
South Africa (Proprietary) Limited, Business
Venture Investments No 1567 (Proprietary) Limited
(RF) and Mosomo Investment Holdings
(Proprietary) Limited.
Second Addendum dated March 14, 2014, to the
Relationship Agreement between Net 1 UEPS
Technologies, Inc., Net 1 Applied Technologies
South Africa (Proprietary) Limited, Born Free
Investments 272 (Pty) Ltd and Mazwi Yako.
Subscription and Sale of Shares Agreement dated
August 27, 2014, between Net 1 UEPS
Technologies, Inc., Net 1 Applied Technologies
South Africa (Proprietary) Limited, Business
Venture Investments No 1567 (Proprietary) Limited
(RF), Mosomo Investment Holdings (Proprietary)
Limited and Cash Paymaster Services (Proprietary)
Ltd
Subscription Agreement, dated April 11, 2016,
among the Company and the IFC Investors
Policy Agreement, dated April 11, 2016, among the
Company and the IFC Investors
Subscription Agreement, dated October 4, 2016,
between Net1 Applied Technologies South Africa
Proprietary Limited and Blue Label Telecoms
Limited
Stock Purchase Agreement, dated October 6, 2016,
between Net 1 UEPS Technologies, Inc. and N2
Partners Ltd.
Stock Purchase Agreement, dated October 6, 2016,
between Net 1 UEPS Technologies, Inc. and Draper
Gain Investments Ltd.
First Addendum to Subscription Agreement, dated
October 20, 2016, between Net1 Applied
Technologies South Africa (Pty) Ltd and Blue
Label Telecoms Limited
68
8-K
10.27
December 19, 2013
8-K
10.50
December 9, 2016
10-Q
10.28
February 6, 2014
10-Q
10.29
February 6, 2014
8-K
10.30
March 18, 2014
8-K
10.31
March 18, 2014
10-Q
10.29
November 6, 2014
8-K
10.31
April 12, 2016
8-K
10.32
April 12, 2016
8-K
10.33
October 6, 2016
8-K
10.34
October 6, 2016
8-K
10.35
October 6, 2016
8-K
10.36
October 25, 2016
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
Common Terms Agreement, dated October 20,
2016, among Net1 Applied Technologies South
Africa Proprietary Limited, Net 1 UEPS
Technologies, Inc. and FIRSTRAND Bank Limited
(acting through its Rand Merchant Bank Division)
Senior Facility A Agreement, dated October 20,
2016, between Net1 Applied Technologies South
Africa Proprietary Limited and FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division)
Senior Facility B Agreement, dated October 20,
2016. between Net1 Applied Technologies South
Africa Proprietary Limited and FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division)
Senior Facility C Agreement, dated October 20,
2016, between Net1 Applied Technologies South
Africa Proprietary Limited and FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division)
Subordination Agreement, dated October 20, 2016,
among Net1 Applied Technologies South Africa
Proprietary Limited, Net1 UEPS Technologies, Inc.,
the persons listed in Schedule 1 thereto, the persons
listed in Schedule 2 thereto, the persons listed in
Schedule 3 thereto and FIRSTRAND Bank Limited
(acting through its Rand Merchant Bank Division)
Security Cession & Pledge, dated October 20, 2016,
given by Net1 Applied Technologies South Africa
Proprietary Limited in favor of FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division), and each of the other secured creditors
set forth therein.
Amendment No. 1 to Stock Purchase Agreement,
dated November 3, 2016, between Net 1 UEPS
Technologies, Inc. and N2 Partners Ltd.
Amendment No. 1 to Stock Purchase Agreement,
dated November 3, 2016, between Net 1 UEPS
Technologies, Inc. and Draper Gain Investments
Ltd.
Amended and Restated Subscription Agreement,
dated November 16, 2016, between Net1 Applied
Technologies South Africa Proprietary Limited and
Blue Label Telecoms Limited
10.50
Amendment Letter from FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division) to Net1 Applied Technologies South
Africa Proprietary Limited, dated November 15,
2016
10.51
Bank Guarantee issued by FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division) in favor of Blue Label Telecoms Limited,
dated November 15, 2016
10.52
Amendment No. 2 to Stock Purchase Agreement,
dated November 16, 2016, between Net 1 UEPS
Technologies, Inc. and N2 Partners Ltd.
69
8-K
10.37
October 25, 2016
8-K
10.38
October 25, 2016
8-K
10.39
October 25, 2016
8-K
10.40
October 25, 2016
8-K
10.41
October 25, 2016
8-K
10.42
October 25, 2016
8-K
10.43
November 4, 2016
8-K
10.44
November 4, 2016
8-K
10.45
November 18, 2016
8-K
10.46
November 18, 2016
8-K
10.47
November 18, 2016
8-K
10.48
November 18, 2016
10.53
10.54
Amendment No. 2 to Stock Purchase Agreement,
dated November 16, 2016, between Net 1 UEPS
Technologies, Inc. and Draper Gain Investments
Ltd.
First Addendum to Amended and Restated
Subscription Agreement, dated February 28, 2017,
between Net1 Applied Technologies South Africa
Proprietary Limited and Blue Label Telecoms
Limited
10.55
Amendment Letter from FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division) to Net1 Applied Technologies South
Africa Proprietary Limited to Net1 Applied
Technologies South Africa Proprietary Limited,
dated February 28, 2017
Side Letter from FIRSTRAND Bank Limited
(acting through its Rand Merchant Bank Division)
to Net1 Applied Technologies South Africa
Proprietary Limited, dated February 28, 2017
10.56
10.57
Bank Guarantee issued by FIRSTRAND Bank
10.58
Limited (acting through its Rand Merchant Bank
Division) in favor of Blue Label Telecoms Limited,
dated February 28, 2017
First Amendment and Restatement Agreement,
dated March 15, 2017, by and among Net1 Applied
Technologies South Africa Proprietary Limited, Net
1 UEPS Technologies, Inc. and FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division)
10.59
Amended and Restated Common Terms
10.60
10.61
10.62
Agreement, dated October 20, 2016, as amended
and restated on March 15, 2017, by and among
Net1 Applied Technologies South Africa
Proprietary Limited, Net 1 UEPS Technologies, Inc.
and FIRSTRAND Bank Limited (acting through its
Rand Merchant Bank Division)
Senior Facility A Agreement dated October 20,
2016, as amended and restated on March 15, 2017,
by and between Net1 Applied Technologies South
Africa Proprietary Limited and FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division)
Senior Facility B Agreement dated October 20,
2016, as amended and restated on March 15, 2017,
by and between Net1 Applied Technologies South
Africa Proprietary Limited and FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division)
Senior Facility C Agreement dated October 20,
2016, as amended and restated on March 15, 2017,
by and between Net1 Applied Technologies South
Africa Proprietary Limited and FIRSTRAND Bank
Limited (acting through its Rand Merchant Bank
Division)
70
8-K
10.49
November 18, 2016
8-K
10.50
March 2, 2017
8-K
10.51
March 2, 2017
8-K
10.52
March 2, 2017
8-K
10.53
March 2, 2017
8-K
10.54
March 20, 2017
8-K
10.55
March 20, 2017
8-K
10.56
March 20, 2017
8-K
10.57
March 20, 2017
8-K
10.58
March 20, 2017
10.63
10.64
10.65
10.66
10.67
10.68
10.69
Equity Implementation Agreement, dated as of June
19, 2017, by and among 3C Telecommunications
Proprietary Limited, The Prepaid Company
Proprietary Limited, Net1 Applied Technologies
South Africa Proprietary Limited, the parties
identified on Schedule 1.1.52 thereto, Albanta
Trading 109 Proprietary Limited, Cedar Cellular
Investment 1 (RF) Proprietary Limited, Magnolia
Cellular Investment 2 (RF) Proprietary Limited,
Yellowwood Cellular Investment 3 (RF) Proprietary
Limited, and Cell C Proprietary Limited.
Subscription Agreement, dated as of June 19, 2017,
by and between Net1 Applied Technologies South
Africa Proprietary Limited and Cell C Proprietary
Limited.
Cell C Shareholders Agreement, dated as of June
19, 2017, by and between Albanta Trading 109
Proprietary Limited, the parties identified on
Schedule 1.1.55 thereto, The Prepaid Company
Proprietary Limited, Net1 Applied Technologies
South Africa Proprietary Limited, Cedar Cellular
Investment 1 (RF) Proprietary Limited, Magnolia
Cellular Investment 2 (RF) Proprietary Limited,
Yellowwood Cellular Investment 3 (RF) Proprietary
Limited, and Cell C Proprietary Limited
Additional Subscription Agreement dated June 23,
2017, among Net1 Applied Technologies South
Africa Proprietary Limited and AJD Holdings and
Richmark Holdings Proprietary Limited, in relation
to and including as a party DNI – 4PL Contracts
Proprietary Limited
Framework Agreement dated June 23, 2017, among
Net1 Applied Technologies South Africa
Proprietary Limited, Peter Kennedy Gain, AJD
Holdings, Richmark Holdings Proprietary Limited
and DNI – 4PL Contracts Proprietary Limited
Shareholders’ Agreement dated June 23, 2017
among Net1 Applied Technologies South Africa
Proprietary Limited, AJD Holdings and Richmark
Holdings Proprietary Limited, in relation to and
including as a party DNI – 4PL Contracts
Proprietary Limited
Subscription Agreement dated June 23, 2017 among
Net1 Applied Technologies South Africa
Proprietary Limited, AJD Holdings and Richmark
Holdings Proprietary Limited, in relation to and
including as a party DNI – 4PL Contracts
Proprietary Limited
10.70
Memorandum of Incorporation DNI – 4PL
Contracts Proprietary Limited
12
14
21
23
Statement of Ratio of Earnings to Fixed Charges
Amended and Restated Code of Ethics
Subsidiaries of Registrant
Consent of Independent Registered Public
Accounting Firm
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
71
X
X
X
X
X
X
X
X
X
8-K
10.67
June 26, 2017
8-K
10.68
June 26, 2017
8-K
10.69
June 26, 2017
10-K
14
August 28, 2014
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
32
Certification pursuant to 18 USC Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
X
X
X
X
X
X
X
X
* Indicates a management contract or compensatory plan or arrangement.
72
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Herman G. Kotzé
Herman G. Kotzé
Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and Director
Date: August 24, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
NAME
TITLE
DATE
/s/ Christopher S. Seabrooke
Christopher S. Seabrooke
Chairman of the Board and Director
August 24, 2017
/s/ Herman G. Kotzé
Herman G. Kotzé
/s/ Paul Edwards
Paul Edwards
/s/ Alfred T. Mockett
Alfred T. Mockett
/s/ Alasdair J. K. Pein
Alasdair J. K. Pein
Chief Executive Officer, Chief Financial Officer,
Treasurer, Secretary and Director (Principal Executive,
Financial and Accounting Officer)
August 24, 2017
Director
Director
Director
August 24, 2017
August 24, 2017
August 24, 2017
73
NET 1 UEPS TECHNOLOGIES, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
Report of the Independent Registered Public Accounting Firm – Deloitte & Touche (South Africa)
Consolidated balance sheets as of June 30, 2017 and 2016
Consolidated statements of operations for the years ended June 30, 2017, 2016 and 2015
Consolidated statements of comprehensive income for the years ended June 30, 2017, 2016 and 2015
Consolidated statements of changes in equity for the years ended June 30, 2017, 2016 and 2015
Consolidated statements of cash flows for the years ended June 30, 2017, 2016 and 2015
Notes to the consolidated financial statements
F-2
F-3
F-4
F-5
F-6
F-9
F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Net 1 UEPS Technologies, Inc.
Johannesburg, South Africa
We have audited the accompanying consolidated balance sheets of Net 1 UEPS Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income,
shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2017. These financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Net 1 UEPS
Technologies, Inc. and subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2017 in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated August 24, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche
Registered Auditors
Johannesburg, South Africa
August 24, 2017
National Executive: *LL Bam Chief Executive Officer *TMM Jordan Deputy Chief Executive Officer
*MJ Jarvis Chief Operating Officer *AF Mackie Audit & Assurance *N Sing Risk Advisory *NB Kader Tax TP Pillay
Consulting S Gwala BPS *K Black Clients & Industries *JK Mazzocco Talent & Transformation MG Dicks Risk Independence
& Legal *TJ Brown Chairman of the Board
A full list of partners and directors is available on request
*Partner and Registered Auditor
F-2
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
as of June 30, 2017 and 2016
ASSETS
2017
2016
(In thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents
Pre-funded social welfare grants receivable (Note 4)
Accounts receivable, net (Note 5)
Finance loans receivable, net (Note 5)
Inventory (Note 6)
Deferred income taxes (Note 20)
Total current assets before settlement assets
Settlement assets (Note 2)
Total current assets
PROPERTY, PLANT AND EQUIPMENT, net (Note 8)
EQUITY-ACCOUNTED INVESTMENTS (Note 10)
GOODWILL (Note 9)
INTANGIBLE ASSETS, net (Note 9)
OTHER LONG-TERM ASSETS (Note 10 and Note 11)
TOTAL ASSETS
CURRENT LIABILITIES
LIABILITIES
Short-term facilities (Note 12)
Accounts payable
Other payables (Note 13)
Current portion of long-term borrowings (Note 14)
Income taxes payable
Total current liabilities before settlement obligations
Settlement obligations (Note 2)
Total current liabilities
DEFERRED INCOME TAXES (Note 20)
LONG-TERM BORROWINGS (Note 14)
OTHER LONG-TERM LIABILITIES (Note 11)
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 24)
EQUITY
COMMON STOCK (Note 15)
Authorized: 200,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury - 2017: 56,369,737; 2016:
55,271,954
PREFERRED STOCK
Authorized shares: 50,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury: 2017: -; 2016: -
ADDITIONAL PAID-IN CAPITAL
TREASURY SHARES, AT COST: 2017: 24,891,292; 2016: 20,483,932 (Note 15)
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 16)
RETAINED EARNINGS
TOTAL NET1 EQUITY
REDEEMABLE COMMON STOCK (Note 15)
NON-CONTROLLING INTEREST
TOTAL EQUITY
$
$
258,457
2,322
111,429
80,177
8,020
5,330
465,735
640,455
1,106,190
39,411
27,862
188,833
38,764
49,696
1,450,756
40,570
16,579
15,136
34,799
8,738
5,607
80,859
640,455
721,314
11,139
7,501
2,795
742,749
223,644
1,580
107,805
37,009
10,004
6,956
386,998
536,725
923,723
54,977
25,645
179,478
48,556
31,121
1,263,500
-
14,097
37,479
8,675
5,235
65,486
536,725
602,211
12,559
43,134
2,376
660,280
80
74
-
273,733
(286,951)
(162,569)
773,276
597,569
107,672
2,766
708,007
-
223,978
(241,627)
(189,700)
700,322
493,047
107,672
2,501
603,220
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 1,450,756
$
1,263,500
See accompanying notes to consolidated financial statements.
F-3
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 2017, 2016 and 2015
2017
2016
(In thousands, except per share data)
2015
REVENUE (Note 17)
Services rendered
Loan-based fees received
Sale of goods
EXPENSE
Cost of goods sold, IT processing, servicing and support
Selling, general and administration
Depreciation and amortization
OPERATING INCOME
INTEREST INCOME
INTEREST EXPENSE
$
$ 610,066
533,279
53,894
22,893
590,749
514,847
47,117
28,785
$ 625,979
536,046
62,235
27,698
292,383
179,262
41,378
97,043
20,897
3,484
290,101
297,856
145,886
158,919
40,394
40,685
114,368
128,519
15,292
3,423
16,355
4,456
INCOME BEFORE INCOME TAXES
114,456
126,237
140,418
INCOME TAX EXPENSE (Note 20)
42,472
42,080
44,136
NET INCOME BEFORE EARNINGS FROM EQUITY-
ACCOUNTED INVESTMENTS
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
NET INCOME
71,984
2,664
74,648
84,157
96,282
639
452
84,796
96,734
LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING
INTEREST
1,694
2,342
1,999
NET INCOME ATTRIBUTABLE TO NET1
$
72,954
$
82,454
$
94,735
Net income per share, in United States dollars: (Note 21)
Basic earnings attributable to Net1 shareholders
Diluted earnings attributable to Net1 shareholders
1.34
1.33
1.72
1.71
2.03
2.02
See accompanying notes to consolidated financial statements.
F-4
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended June 30, 2017, 2016 and 2015
2017
2016
(In thousands)
2015
NET INCOME
$
74,648
$
84,796
$
96,734
OTHER COMPREHENSIVE INCOME (LOSS):
Movement in foreign currency translation reserve
Movement in foreign currency translation reserve related to
equity-accounted investments
Transfer of assets available for sale, net of tax, to comprehensive
income (Note 7)
Net unrealized income on asset available for sale, net of tax
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
30,466
(49,941)
(57,074)
(2,697)
-
-
27,769
-
-
(1,732)
692
(50,981)
-
422
(56,652)
COMPREHENSIVE INCOME
Less comprehensive income attributable to non-
controlling interest
102,417
33,815
40,082
(2,332)
(1,880)
(1,787)
COMPREHENSIVE INCOME ATTRIBUTABLE
TO NET1
$
100,085
$
31,935
$
38,295
See accompanying notes to consolidated financial statements.
F-5
NET 1 UEPS TECHNOLOGIES, INC.
Consolidated Statement of Changes in Equity for the year ended June 30, 2015 (dollar amounts in thousands)
Net 1 UEPS Technologies, Inc. Shareholders
Number
of
Shares
Amount
Number
of
Treasury
Shares
Treasury
Shares
Number of
shares, net of
treasury
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
other
comprehensive
(loss) income
Total
Net1
Equity
Redeemable
common
stock
Non-
controlling
Interest
Total
Balance – July 1, 2014
63,702,511
$63
(15,883,212)
$(200,681)
47,819,299
$202,401
$522,729
$(82,741)
$441,771
$-
$(23)
$441,748
Repurchase of common stock (Note 15)
(1,837,432)
(9,151)
(1,837,432)
Restricted stock granted (Note 18)
Exercise of stock option (Note 18)
213,237
773,633
1
(336,584)
(4,688)
213,237
437,049
6,732
3,195
483
1,085
404
47,412
94,735
(9,151)
-
2,045
3,195
483
1,489
-
-
94,735
(56,440)
(56,440)
(9,151)
-
2,045
3,195
483
(82)
1,407
(1,024)
(1,024)
1,999
96,734
(212)
(56,652)
Stock-based compensation charge (Note
18)
Income tax benefit from vested stock
awards
Transactions with non-controlling interest
(Note 15)
Dividends paid to non-controlling interest
Issue of shares pursuant to fiscal 2013
N1MS acquisition
47,412
Net income
Other comprehensive loss (Note 16)
Balance – June 30, 2015
64,736,793
$64
(18,057,228)
$(214,520)
46,679,565
$213,896
$617,868
$(139,181)
$478,127
$-
$658
$478,785
F-6
NET 1 UEPS TECHNOLOGIES, INC.
Consolidated Statement of Changes in Equity for the year ended June 30, 2016 (dollar amounts in thousands)
Net 1 UEPS Technologies, Inc. Shareholders
Number
of
Shares
Amount
Number
of
Treasury
Shares
Treasury
Shares
Number of
shares, net of
treasury
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
other
comprehensive
(loss) income
Total
Net1
Equity
Redeemable
common
stock
Non-
controlling
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
Issue of common stock that is
redeemable for cash or other assets
(Note 15)
Repurchase of common stock (Note
15)
Restricted stock granted (Note 18)
Exercise of stock option (Note 18)
Stock-based compensation charge
(Note 18)
Income tax benefit from vested stock
awards
Acquisition of non-controlling
interest (Note 3 and Note 15)
9,984,311
10
9,984,311
10
107,672
319,492
323,645
(2,426,704)
(27,107)
(2,426,704)
319,492
323,645
3,762
3,598
67
(1,308)
3,963
82,454
(27,107)
-
3,762
3,598
67
(1,308)
3,963
82,454
(50,519)
(50,519)
107,682
(27,107)
-
3,762
3,598
67
(37)
(1,345)
3,963
2,342
84,796
(462)
(50,981)
Transact24 acquisition (Note 3)
391,645
391,645
Net income
Other comprehensive loss (Note 16)
Balance – June 30, 2016
75,755,886
$74
(20,483,932)
$(241,627)
55,271,954
$223,978
$700,322
$(189,700)
$493,047
$107,672
$2,501
$603,220
F-7
NET 1 UEPS TECHNOLOGIES, INC.
Consolidated Statement of Changes in Equity for the year ended June 30, 2017 (dollar amounts in thousands)
Net 1 UEPS Technologies, Inc. Shareholders
Number
of
Shares
Amount
Number
of
Treasury
Shares
Treasury
Shares
Number of
shares, net of
treasury
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
other
comprehensive
(loss) income
Total
Net1
Equity
Redeemable
common
stock
Non-
controlling
Interest
Total
Balance – July 1, 2016
75,755,886
$74
(20,483,932)
$(241,627)
55,271,954
$223,978
$700,322
$(189,700)
$493,047
$107,672
$2,501
$603,220
Sale of common stock (Note 15)
5,000,000
Repurchase of common stock (Note
15)
Restricted stock granted (Note 18)
Exercise of stock option (Note 18)
389,587
321,026
5
1
5,000,000
44,995
(4,407,360)
(45,324)
(4,407,360)
389,587
321,026
2,878
3,905
Stock-based compensation charge
(Note 18)
Reversal of stock compensation
charge (Note 18)
Utilization of APIC pool related to
vested restricted stock
Dividends paid to non-controlling
interest
Stock based-compensation charge
related to equity-accounted
investment (Note 10)
Net income
Other comprehensive income
(Note 16)
(205,470)
(205,470)
(1,923)
(189)
89
72,954
45,000
(45,324)
-
2,879
3,905
(1,923)
(189)
-
89
72,954
45,000
(45,324)
-
2,879
3,905
(1,923)
(189)
(2,067)
(2,067)
89
1,694
74,648
27,131
27,131
638
27,769
Balance – June 30, 2017
81,261,029
$80
(24,891,292)
$(286,951)
56,369,737
$273,733
$773,276
$(162,569)
$597,569
$107,672
$2,766
$708,007
See accompanying notes to consolidated financial statements.
F-8
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2017, 2016 and 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Earnings from equity-accounted investments
Fair value adjustment
Interest payable
Facility fee amortized
Gain on release from accumulated other comprehensive income
(Note 7)
Gain on fair value of Transact24 (Note 3)
Profit on disposal of property, plant and equipment
Stock compensation charge, net of forfeitures (Note 18)
Dividends received from equity accounted investments
(Increase) Decrease in accounts and finance loans receivable, and
pre-funded grants receivable
Decrease (Increase) in inventory
Decrease in accounts payable and other payables
(Decrease) Increase in taxes payable
Decrease in deferred taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
Proceeds from disposal of property, plant and equipment
Investment in MobiKwik
Investment in equity and loans in equity-accounted investments
Acquisitions, net of cash acquired (Note 3)
Acquisition of available for sale securities
Proceeds from sale of business (Note 19)
Other investing activities, net
Net change in settlement assets (Note 2)
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of common stock (Note 15 and Note 18)
Acquisition of treasury stock (Note 15)
Repayment of long-term borrowings (Note 14)
Proceeds from bank overdraft (Note 12)
Dividends paid to non-controlling interest
Payment of guarantee fee (Note 14)
Long-term borrowings obtained (Note 14)
Acquisition of interests in non-controlling interests (Note 15)
Sale of equity to non-controlling interest (Note 15)
Net change in settlement obligations (Note 2)
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash – beginning of year
Cash, cash equivalents and restricted cash – end of year
See accompanying notes to consolidated financial statements.
$
F-9
2017
2016
(In thousands)
2015
$
74,648
$
84,796
$
96,734
41,378
(2,664)
(300)
20
1,326
-
-
(639)
1,982
1,187
(15,767)
3,025
(6,461)
(354)
(220)
97,161
(11,195)
1,592
(25,835)
(12,044)
(4,651)
-
-
-
(61,938)
(114,071)
47,879
(45,794)
(37,318)
16,176
(2,067)
(1,145)
800
-
-
61,938
40,469
11,254
34,813
223,644
258,457
(18,514)
$
40,394
(639)
519
1,829
138
(2,176)
(1,909)
(286)
3,598
-
(3,401)
1,001
(7,840)
763
(235)
116,552
(35,797)
1,349
-
-
(15,767)
(8,900)
-
(5)
53,364
(5,756)
111,444
(26,637)
(8,716)
-
-
-
2,107
(11,189)
-
(53,364)
13,645
(18,380)
106,061
117,583
223,644
$
40,685
(452)
248
1,283
208
-
-
(296)
3,195
-
1,399
(3,846)
(850)
606
(3,656)
135,258
(36,436)
857
-
(13,200)
-
-
1,895
(29)
(33,870)
(80,783)
2,045
(9,151)
(14,128)
-
(1,024)
-
3,765
-
1,407
33,870
16,784
(12,348)
58,911
58,672
117,583
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Net 1 UEPS Technologies, Inc. (“Net1” and collectively with its consolidated subsidiaries, the “Company”) was
incorporated in the State of Florida on May 8, 1997. The Company provides payment solutions and transaction processing
services across a wide range of industries and in various geographies. It has developed and markets a smart-card based alternative
payment system for the unbanked and underbanked populations of developing economies. Its universal electronic payment system
(“UEPS”) uses biometrically secure smart cards that operate in real-time but offline, which allows users to enter into transactions
at any time with other card holders in even the most remote areas. The Company also develops and provides secure transaction
technology solutions and services, and offers transaction processing, financial and on-line real-time healthcare management
solutions in the United States. The Company’s technology is widely used in South Africa today, where it distributes pension and
welfare payments to recipient cardholders in South Africa, provides financial services, processes debit and credit card payment
transactions on behalf of retailers through its EasyPay system, processes value-added services such as bill payments and prepaid
electricity for the major bill issuers and local councils in South Africa, processes third-party and associated payroll payments for
employees and provides mobile telephone top-up transactions for the major South African mobile carriers. Through KSNET, the
Company offers card processing, payment gateway (“PG”) and banking value-added network services (“VAN”) in South Korea.
The Company has expanded its card issuing and acquiring capabilities through the acquisition of Transact24 in Hong Kong. The
Company’s Masterpayment subsidiary in Germany provides value added payment services to online retailers across Europe.
Basis of presentation
The accompanying consolidated financial statements include subsidiaries over which Net1 exercises control and have been
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The financial statements of entities which are controlled by Net1, referred to as subsidiaries, are consolidated. Inter-company
accounts and transactions are eliminated upon consolidation.
The Company, if it is the primary beneficiary, consolidates entities which are considered to be variable interest entities
(“VIE”). The primary beneficiary is considered to be the entity that will absorb a majority of the entity's expected losses, receive a
majority of the entity's expected residual returns, or both. No entities were required to be consolidated in terms of these
requirements during the years ended June 30, 2017, 2016 and 2015.
Business combinations
The Company accounts for its business acquisitions under the acquisition method of accounting. The total value of the
consideration paid for acquisitions is allocated to the underlying net assets acquired, based on their respective estimated fair
values. The Company uses a number of valuation methods to determine the fair value of assets and liabilities acquired, including
discounted cash flows, external market values, valuations on recent transactions or a combination thereof, and believes that it uses
the most appropriate measure or a combination of measures to value each asset or liability. The Company recognizes
measurement-period adjustments in the reporting period in which the adjustment amounts are determined.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-10
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Translation of foreign currencies
The primary functional currency of the Company is the South African Rand (“ZAR”) and its reporting currency is the U.S.
dollar. The Company also has consolidated entities which have other currencies, primarily South Korean won (“KRW”), as their
functional currency. Assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Revenues and
expenses are translated at average rates for the period. Translation gains and losses are reported in accumulated other
comprehensive income in total equity.
Foreign exchange transactions are translated at the spot rate ruling at the date of the transaction. Monetary items are
translated at the closing spot rate at the balance sheet date. Transactional gains and losses are recognized in selling, general and
administration expense on the Company’s consolidated statement of operations for the period.
Cumulative translation adjustment are released into net income only if the sale or transfer results in the complete or
substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.
Allowance for doubtful accounts receivable
Allowance for doubtful finance loans receivable
The Company regularly reviews the ageing of outstanding amounts due from borrowers and adjusts the allowance based on
management’s estimate of the recoverability of the finance loans receivable. The Company writes off microlending finance loans
receivable and related service fees if a borrower is in arrears with repayments for more than three months or dies. The Company
writes off working capital finance receivable and related fees it is evident that reasonable recovery procedures, including where
deemed necessary, formal legal action, has failed.
Allowance for doubtful accounts receivable
A specific provision is established where it is considered likely that all or a portion of the amount due from customers
renting point of sale (“POS”) equipment, receiving support and maintenance or transaction services or purchasing licenses from
the Company will not be recovered. Non-recoverability is assessed based on a review by management of the ageing of
outstanding amounts, the location of the customer and the payment history in relation to those specific amounts.
Inventory
Inventory is valued at the lower of cost and market value. Cost is determined on a first-in, first-out basis and includes
transport and handling costs.
Equity-accounted investments
The Company uses the equity method to account for investments in companies when it has significant influence but not
control over the operations of the equity-accounted company. Under the equity method, the Company initially records the
investment at cost and then adjusts the carrying value of the investment to recognize the proportional share of the equity-
accounted company’s net income or loss. In addition, when an investment qualifies for the equity method (as a result of an
increase in the level of ownership interest or degree of influence), the cost of acquiring the additional interest in the investee is
added to the current basis of the Company’s previously held interest and the equity method would be applied subsequently from
the date on which the Company obtains the ability to exercise significant influence over the investee. Any unrealized holding
gains or losses in accumulated other comprehensive income related to an available for sale security that becomes eligible for the
equity method are recognized in earnings as of the date on which the investment qualifies for the equity method. The Company
does not recognize cumulative losses in excess of its investment or loans in an equity-accounted investment except if it has an
obligation to provide additional financial support. Dividends received from an equity-accounted investment reduce the carrying
value of the Company’s investment.
F-11
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Leasehold improvement costs
Costs incurred in the adaptation of leased properties to serve the requirements of the Company are capitalized and amortized
over the shorter of the estimated useful life of the asset and the remaining term of the lease.
Property, plant and equipment
Property, plant and equipment are shown at cost less accumulated depreciation. Property, plant and equipment are
depreciated on the straight-line basis at rates which are estimated to amortize the assets to their anticipated residual values over
their useful lives. Within the following asset classifications, the expected economic lives are approximately:
Computer equipment
Office equipment
Vehicles
Furniture and fittings
Buildings and structures
Plant and equipment
3 to 8 years
2 to 10 years
3 to 8 years
3 to 10 years
8 to 30 years
5 to 10 years
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds
and the carrying amount of the asset and is recognized in income.
Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise over the fair values of the identifiable assets
acquired and liabilities assumed. The Company tests for impairment of goodwill on an annual basis and at any other time if events
or circumstances change that would more likely than not reduce the fair value of the reporting unit goodwill below its carrying
amount.
Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the
business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel;
the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; and results of
testing for recoverability of a significant asset group within a reporting unit.
If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recorded in the statement of operations. Measurement of the fair value of a reporting unit is based on one or more of the following
fair value measures: the amount at which the unit as a whole could be bought or sold in a current transaction between willing
parties; present value techniques of estimated future cash flows; or valuation techniques based on multiples of earnings or
revenue, or a similar performance measure.
Intangible assets
Intangible assets are shown at cost less accumulated amortization. Intangible assets are amortized over the following useful
lives:
Customer relationships
Software and unpatented technology
FTS patent
Exclusive licenses
Trademarks
1 to 15 years
3 to 5 years
10 years
7 years
3 to 20 years
Intangible assets are periodically evaluated for recoverability, and those evaluations take into account events or
circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
F-12
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Policy reserves and liabilities
Reserves for policy benefits and claims payable
The Company determines its reserves for policy benefits under its life insurance products using a model which estimates
claims incurred that have not been reported at the balance sheet date. This model includes best estimate assumptions of
experience plus prescribed margins, as required in the markets in which these products are offered, namely South Africa. The best
estimate assumptions include those assumptions related to mortality, morbidity and claim reporting delays, and the main
assumptions used to calculate the reserve for policy benefits include (i) mortality and morbidity assumptions reflecting the
company’s most recent experience and (ii) claim reporting delays reflecting Company specific and industry experience. The
values of matured guaranteed endowments were increased by late payment interest (net of the asset management fee and
allowance for tax on investment income).
Deposits on investment contracts
For the Company’s interest-sensitive life contracts, liabilities approximate the policyholder’s account value.
Reinsurance contracts held
The Company enters into reinsurance contracts with reinsurers under which the Company is compensated for the entire
amount or a portion of losses arising on one or more of the insurance contracts it issues.
The expected benefits to which the Company is entitled under its reinsurance contracts held are recognized as reinsurance
assets. These assets consist of short-term balances due from reinsurers (classified within accounts receivable, net) as well as long-
term receivables (classified within other long-term assets) that are dependent on the expected claims and benefits arising under
the related reinsurance contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts
associated with the reinsured contracts and in accordance with the terms of each reinsurance contract.
Reinsurance assets are assessed for impairment at each balance sheet date. If there is reliable objective evidence that
amounts due may not be recoverable, the Company reduces the carrying amount of the reinsurance asset to its recoverable amount
and recognizes that impairment loss in its condensed consolidated statement of operations.
Reinsurance premiums are recognized when due for payment under each reinsurance contract.
Redeemable common stock
Common stock that is redeemable (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the
holder, or (3) upon the occurrence of an event that is not solely within the control of Company is presented outside of total Net1
equity (i.e. permanent equity). Redeemable common stock is initially recognized at issuance date fair value and the Company
does not adjust the issuance date fair value if redemption is not probable. The Company re-measures the redeemable common
stock to the maximum redemption amount at the balance sheet date once redemption is probable. Reduction in the carrying
amount of the redeemable common stock is only appropriate to the extent that the Company has previously recorded increases in
the carrying amount of the redeemable equity instrument as the redeemable common stock may be not be carried at an amount
that is less the initial amount reported outside of permanent equity.
Redeemable common stock is reclassified as permanent equity when presentation outside permanent equity is no longer
required (if, for example, a redemption feature lapses, or there is a modification of the terms of the instrument). The existing
carrying amount of the redeemable common stock is reclassified to permanent equity at the date of the event that caused the
reclassification and prior period consolidated financial statements are not adjusted.
F-13
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Sales taxes
Revenue and expenses are presented net of sales, use and value added taxes, as the case may be.
Revenue recognition
The Company recognizes revenue when:
•
there is persuasive evidence of an agreement or arrangement;
• delivery of products has occurred or services have been rendered;
•
• collectability is reasonably assured.
the seller’s price to the buyer is fixed or determinable; and
The Company’s principal revenue streams and their respective accounting treatments are discussed below:
Fees
Pension and welfare and South African participating merchants
The Company provides a welfare benefit distribution service to the South African Social Security Agency (“SASSA”). Fee
income received for these services is recognized in the statement of operations when distributions have been made to the recipient
cardholders.
Recipient cardholders are able to load their welfare grants at merchants enrolled in the Company’s participating merchant
system in certain provinces. There is no charge to the recipient cardholder to load the grant onto a smart card at the merchant
location, however, a fee is charged to the merchant for purchases made at the merchant using the smart card. A fee is also charged
to the merchant when the recipient cardholder makes a cash withdrawal. Fee income received for these services is recognized in
the statement of operations when the transaction occurs.
Fees related to management of card issuance programs and utilization of ATMs
The Company manages card issuance programs and owns ATMs in South Africa from which it generates fee revenue. Fee
revenue generated from card issuance programs includes interchange and other miscellaneous fees, which are recorded when
cardholder transact at either a POS or an ATM. Fee revenue generated from utilization of ATMs includes cash withdrawal,
balance enquiry, insufficient funds and other miscellaneous ATM fees which are recorded when an ATM user performs a
transaction at an ATM.
Card VAN, banking VAN and payment gateway
Card VAN services consist of services relating to authorization of credit card transactions including transmission of
transaction details (“authorization service”), and collection of receipts associated with the credit card transactions (“collection
service”). With its authorization service, the Company connects credit card companies with merchants online when a customer
uses his/her credit card via terminals installed at merchants’ sites and the Company’s central processing server for approval of
credit card transactions. Immediately after approval of credit card transactions, the Company transmits details of the transactions
to credit card companies online for processing payments. Collection service captures the transaction data and gathers receipts as
documented evidence and provides them to credit card companies upon request. The Company earns service fees based on the
number of transactions processed for credit card companies when services are rendered in accordance with the contracts entered
into between credit card companies and the Company. The Company bills for its service charges to credit card companies each
month. Each service could be provided either individually or collectively, based on terms of contracts.
F-14
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Fees (continued)
Card VAN, banking VAN and payment gateway (continued)
The Company charges commission fees to credit card companies for the authorization service provided based on the number
of approvals transferred. The right to receive a service fee is due once a credit card transaction has been approved and details of
the transaction are transmitted by the Company. Therefore, revenues from the authorization service are recognized when the
credit card transactions are authorized and details of the transactions are transmitted. The Company earns a collection service fee
once it has provided settled funds to the credit card companies. Therefore, revenue from the collection service is recognized when
the Company collects the receipts and provides them to the card companies.
For multiple-element arrangements, the Company has identified two deliverables. The first deliverable is the authorization
service, and the second deliverable is the collection service. The Company evaluates each deliverable in an arrangement to
determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has
standalone value and there are no customer-negotiated refunds or return rights for the delivered elements. If the arrangement
includes a customer-negotiated refund or return right relative to the delivered item and the delivery and performance of the
undelivered item is considered probable and substantially in the Company's control, the delivered element constitutes a separate
unit of accounting. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered
elements and the allocation of the arrangement consideration and revenue recognition is determined for the combined unit as a
single unit. Allocation of the consideration is determined at arrangement inception on the basis of each unit's relative selling price.
In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to
deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and
(iii) best estimate of the selling price (“ESP”).
VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the
Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they
were sold regularly on a stand-alone basis. Because the Company has neither VSOE nor TPE for the two deliverables, the
allocation of revenue has been based on the Company’s ESPs. Amounts allocated to the authorization and the collection service
are recognized at the time of service, provided the other conditions for revenue recognition have been met.
The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may
vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in
developing the ESPs include prices charged by the Company, historical pricing practices and controls, range of prices for various
customers and the nature of the services. Consideration is also given to market conditions such as competitor pricing strategies
and market perception.
Banking VAN is a division supporting a company’s fund management business (large payment transfers, collections, etc.)
by relaying financial transactions between client companies and financial institutions. Financial transactions between two or more
business enterprises, or between business enterprises and their customers, are conducted through the transaction-processing
network established between the Company and the banks. Revenue from the banking VAN service is recognized when the service
is rendered by the Company.
With its PG service, the Company provides the Internet-based settlement service between an on-line shopping mall and a
credit card company when a customer uses his/her credit card, debit card or on-line payment to pay for goods or services. The
Company receives fees for carrying out settlements for electronic transactions. Revenue from the PG service is recognized when
the service is rendered by the Company.
Microlending service fee
The Company provides short-term loans to customers in South Africa and charges and recognizes monthly service fee
revenue under the contractual terms of the loan. The monthly service fee amount is fixed upon initiation and does not change over
the term of the loan.
F-15
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Fees (continued)
Other fees and commissions
The Company provides an automated payment collection service to third parties, for which it charges monthly fees. These
fees are recognized in the statement of operations as the underlying services are performed. The Company provides medical-
related claims adjudication, reconciliation and settlement services (“medical-related claim service”) to customers, for which it
charges fees. These fees are recognized in the statement of operations as the underlying services are performed. The Company
sells prepaid electricity and recognizes a commission in its statement of operations once the prepaid electricity token has been
delivered to the customer.
Contract variations fees
The Company records additional revenue from variations to contracts for the provision of welfare benefits, if:
there is persuasive evidence of an agreement;
•
• collectability is reasonably assured; and
• all material terms and conditions of the agreement have been adhered to.
Hardware and prepaid airtime voucher sales
Revenue from hardware and airtime voucher sales is recognized when risk of loss has transferred to the customer and there
are no unfulfilled Company obligations that affect the customer’s final acceptance of the arrangement. Any cost of warranties and
remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized.
The Company buys terminals from manufacturers, and subsequently sells them through its agencies. Revenue is recognized
when significant risks and rewards of ownership of terminals have passed to the buyer, usually on delivery of the terminals to the
buyer.
To the extent that sales of hardware are made in an arrangement that includes software that is more than incidental, the
Company considers post-contract maintenance and technical support or other future obligations which could impact the timing
and amount of revenue recognized.
Software
Revenue from licensed software is recognized on a subscription basis over the period that the client is entitled to use the
license. Revenue from the sale of software is recognized if all revenue recognition criteria have been met. Post-contract
maintenance and technical support in respect of software is generally negotiated and sold as a separate service and is recognized
over the period such items are delivered.
Systems implementation projects
The Company undertakes smart card system implementation projects. The hardware and software installed in these projects
are in the form of customized systems, which ordinarily involve modification to meet the customer’s specifications. Software
delivered under such arrangements is available to the customer permanently, subject to the payment of annual license fees.
Revenue for such arrangements is recognized under the percentage of completion method, save for annual license fees, which are
recognized in the period to which they relate. Up-front and interim payments received are recorded as client deposits until
customer acceptance.
F-16
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Systems implementation projects (continued)
The Company’s customer arrangements may have multiple deliverables. Generally, the Company’s multiple element
arrangements fall within the scope of specific accounting standards that provide guidance regarding the separation of elements in
multiple-deliverable arrangements and the allocation of consideration among those elements. If not, the Company unbundles
multiple element arrangements into separate units of accounting when the delivered element(s) has stand-alone value and fair
value of the undelivered element(s) exists.
Terminal rental income
The Company leases terminals to merchants participating in its merchant acquiring system. Operating rental income is
recognized monthly on a straight-line basis in accordance with the lease agreement.
Other income
Revenue from service and maintenance activities is charged to customers on a time-and-materials basis and is recognized in
the statement of operations as services are delivered to customers.
Research and development expenditure
Research and development expenditure is charged to net income in the period in which it is incurred. During the years ended
June 30, 2017, 2016 and 2015, the Company incurred research and development expenditures of $2.0 million, $2.3 million and
$2.4 million, respectively.
Computer software development
Product development costs in respect of software intended for sale to licensees are expensed as incurred until technological
feasibility is attained. Technological feasibility is attained when the Company’s software has completed system testing and has
been determined to be viable for its intended use. The time between the attainment of technological feasibility and completion of
software development is generally short with immaterial amounts of development costs incurred during this period.
Costs in respect of the development of software for the Company’s internal use are expensed as incurred, except to the
extent that these costs are incurred during the application development stage. All other costs including those incurred in the
project development and post-implementation stages are expensed as incurred.
Income taxes
The Company provides for income taxes using the asset and liability method. This approach recognizes the amount of taxes
payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events
recognized in the financial statements and tax returns. Deferred income taxes are adjusted to reflect the effects of changes in tax
laws or enacted tax rates.
The Company measured its South African income taxes and deferred income taxes for the years ended June 30, 2017, 2016
and 2015, using the enacted statutory tax rate in South Africa of 28%.
As of June 30, 2017, the Company intends to permanently reinvest its non-U.S. undistributed earnings of $469.7 million in
those non-U.S. jurisdictions. Accordingly, the Company has not recognized a deferred tax liability related to future distributions
of these undistributed earnings. It is not practicable for the Company to estimate the amount of unrecognized deferred tax liability
because of the complexities of the calculations involved. The Company will be required to record a tax charge if it is no longer
able to permanently reinvest its undistributed earnings. This may result in an increase in the Company’s effective tax rate in future
periods.
F-17
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes (continued)
In establishing the appropriate deferred tax asset valuation allowances, the Company assesses the realizability of its deferred
tax assets, and based on all available evidence, both positive and negative, determines whether it is more likely than not that the
deferred tax assets or a portion thereof will be realized.
Reserves for uncertain tax positions are recognized in the financial statements for positions which are not considered more
likely than not of being sustained based on the technical merits of the position on audit by the tax authorities. For positions that
meet the more likely than not standard, the measurement of the tax benefit recognized in the financial statements is based upon
the largest amount of tax benefit that, in management’s judgement, is greater than 50% likely of being realized based on a
cumulative probability assessment of the possible outcomes.
The Company’s policy is to include interest related to unrecognized tax benefits in interest expense and penalties in selling,
general and administration in the consolidated statements of operations.
Stock-based compensation
Stock-based compensation represents the cost related to stock-based awards granted. The Company measures equity-based
stock-based compensation cost at the grant date, based on the estimated fair value of the award, and recognizes the cost as an
expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. In respect of awards with only
service conditions that have a graded vesting schedule, the Company recognizes compensation cost on a straight-line basis over
the requisite service period for the entire award. The forfeiture rate is estimated using historical trends of the number of awards
forfeited prior to vesting. The expense is recorded in the statement of operations and classified based on the recipients’ respective
functions.
The Company records deferred tax assets for awards that result in deductions on the Company’s income tax returns, based
on the amount of compensation cost recognized and the Company’s statutory tax rate in the jurisdiction in which it will receive a
deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction
reported on the Company’s income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred
tax asset) or in the statement of operations (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital
exists from previous awards).
Equity instruments issued to third parties
Equity instruments issued to third parties represents the cost related to equity instruments granted. The Company measures
this cost at the grant date, based on the estimated fair value of the award, and recognizes the cost as an expense on a straight-line
basis (net of estimated forfeitures) over the requisite service period. The forfeiture rate is estimated based on the Company’s
expectation of the number of awards that will be forfeited prior to vesting.
The Company records deferred tax assets for equity instrument awards that result in deductions on the Company’s income
tax returns, based on the amount of equity instrument cost recognized and the Company’s statutory tax rate in the jurisdiction in
which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the
actual tax deduction reported on the Company’s income tax return are recorded in the statement of operations.
Settlement assets and settlement obligations
Settlement assets comprise (1) cash received from the South African government that the Company holds pending
disbursement to recipient cardholders of social welfare grants and (2) cash received from customers on whose behalf the
Company processes payroll payments that the Company will disburse to customer employees, payroll-related payees and other
payees designated by the customer.
F-18
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Settlement assets and settlement obligations (continued)
Settlement obligations comprise (1) amounts that the Company is obligated to disburse to recipient cardholders of social
welfare grants, and (2) amounts that the Company is obligated to pay to customer employees, payroll-related payees and other
payees designated by the customer.
The balances at each reporting date may vary widely depending on the timing of the receipts and payments of these assets
and obligations.
Recent accounting pronouncements adopted
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. The adoption of this guidance did not have a material impact on the Company’s financial statements.
In September 2015, the FASB issued guidance regarding Business Combinations (Topic 805): Simplifying the Accounting
for Measurement-Period Adjustments. This guidance eliminates the requirement that an acquirer in a business combination
account for measurement-period adjustments retrospectively. Under this guidance, measurement-period adjustments are
recognized during the period in which they are determined. The guidance is effective for the Company beginning July 1, 2016.
The adoption of this guidance did not have a material impact on the Company’s financial statements.
In November 2016, the FASB issued guidance regarding Restricted Cash - a consensus of the FASB Emerging Issues Task
Force. This guidance amends current guidance to add or clarify the classification and presentation of restricted cash in the
statement of cash flows. The guidance is effective for the Company beginning July 1, 2018, however the Company has early
adopted the guidance, effective December 31, 2016. The adoption of this guidance did not have a material impact on the
Company’s financial statements.
Recent accounting pronouncements not yet adopted as of June 30, 2017
In May 2014, the FASB issued guidance regarding Revenue from Contracts with Customers. This guidance requires an
entity to recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the
consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The
guidance was to be effective for the Company beginning July 1, 2017, however in August 2015, the FASB issued guidance
regarding Revenue from Contracts with Customers, Deferral of the Effective Date. This guidance defers the required
implementation date specified in Revenue from Contracts with Customers to March 2017. Public companies may elect to adopt
the standard along the original timeline. The guidance is effective for the Company beginning July 1, 2018. The Company expects
that this guidance may have a material impact on its financial statements and is currently evaluating the impact of this guidance
on its financial statements on adoption.
In August 2014, the FASB issued guidance regarding Disclosure of Uncertainties about an Entity’s Ability to Continue as a
Going Concern. This guidance requires an entity to perform interim and annual assessments of its ability to continue as a going
concern within one year of the date that its financial statements are issued. An entity must provide certain disclosures if conditions
or events raise substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for the
Company beginning July 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on
its financial statements disclosure.
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.
F-19
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements not yet adopted as of June 30, 2017 (continued)
In November 2015, the FASB issued guidance regarding Balance Sheet Classification of Deferred Taxes. This guidance
requires that deferred tax liabilities and assets are to be classified as non-current in a classified statement of financial position. The
current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a
single amount is not affected by the amendments in this update. This guidance is effective for the Company beginning
July 1, 2017, with early adoption permitted on a prospective or retrospective basis. The Company is currently assessing the
impact of this guidance on its financial statements disclosures.
In January 2016, the FASB issued guidance regarding Recognition and Measurement of Financial Assets and Financial
Liabilities. The guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option
and the presentation and disclosure requirements for financial instruments. In addition, the guidance clarifies the valuation
allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.
This guidance is effective for the Company beginning July 1, 2018, and early adoption is not permitted, with certain exceptions.
The amendments are required to be applied by means of a cumulative-effect adjustment on the balance sheet as of the beginning
of the fiscal year of adoption. The Company is currently assessing the impact of this guidance on its financial statements
disclosure.
In February 2016, the FASB issued guidance regarding Leases. The guidance increases transparency and comparability
among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. The amendments to
current lease guidance include the recognition of assets and liabilities by lessees for those leases currently classified as operating
leases. The guidance also requires disclosures to meet the objective of enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases. This guidance is effective for the Company beginning July 1, 2019.
Early adoption is permitted. The Company expects that this guidance may have a material impact on its financial statements and
is currently evaluating the impact of this guidance on its financial statements on adoption.
In March 2016, the FASB issued guidance regarding Improvements to Employee Share-Based Payment Accounting. The
guidance simplifies several aspects of the accounting for employee share-based payment transactions for both public and
nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows. This guidance is effective for the Company beginning July 1, 2017. Early adoption is
permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In June 2016, the FASB issued guidance regarding Measurement of Credit Losses on Financial Instruments. The guidance
replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and
other receivables, loans, and other financial instruments, an entity is required to use a forward-looking expected loss model rather
than the incurred loss model for recognizing credit losses, which reflects losses that are probable. Credit losses relating to
available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the
amortized cost basis of the securities. This guidance is effective for the Company beginning July 1, 2020. Early adoption is
permitted beginning July 1, 2019. The Company is currently assessing the impact of this guidance on its financial statements
disclosure.
In June 2016, the FASB issued guidance regarding Classification of Certain Cash Receipts and Cash Payments. The
guidance is intended to reduce diversity in practice and explains how certain cash receipts and payments are presented and
classified in the statement of cash flows, including beneficial interests in securitization, which would impact the presentation of
the deferred purchase price from sales of receivables. This guidance is effective for the Company beginning July 1, 2018, and
must be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact of this guidance on
its financial statements disclosure.
F-20
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements not yet adopted as of June 30, 2017 (continued)
In January 2017, the FASB issued guidance regarding Clarifying the Definition of a Business. This guidance provides a
more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a
business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and
costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in
applying the guidance, reduce the costs of application, and make the definition of a business more operable. The guidance is
effective for the Company beginning July 1, 2018. Early adoption is permitted. The Company is currently assessing the impact of
this guidance on its financial statements disclosure.
In January 2017, the FASB issued guidance regarding Simplifying the Test for Goodwill Impairment. This guidance removes
the requirement for an entity to calculate the implied fair value of goodwill (as part of step 2 of the current goodwill impairment
test) in measuring a goodwill impairment loss. The guidance is effective for the Company beginning July 1, 2020. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is
currently assessing the impact of this guidance.
In May 2017, the FASB issued guidance regarding Compensation—Stock Compensation (Topic 718): Scope of Modification
Accounting. The guidance amends the scope of modification accounting for share-based payment arrangements and provides
guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required
to apply modification accounting under Accounting Standards Codification 718. Specifically, an entity would not apply
modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and
after the modification. The guidance is effective for the Company beginning July 1, 2018. Early adoption is permitted. The
Company is currently assessing the impact of this guidance on its financial statements disclosure.
3.
ACQUISITIONS
The cash paid, net of cash received related to the Company’s various acquisitions during the years ended June 30, 2017,
2016 and 2015 are summarized in the table below:
Masterpayment Financial Services Limited (formerly C4U-Malta Limited) (“Malta FS”)
Pros Software (Pty) Ltd (“Pros Software”) .........................................................................
Transact24 Limited (“Transact24”) ....................................................................................
Masterpayment AG (“Masterpayment”) .............................................................................
Total cash paid, net of cash received ................................................................................
2017
$2,940
1,711
-
-
$4,651
2016
$-
-
1,666
14,101
$15,767
2015
$-
-
-
-
$-
2017 acquisitions
Malta FS
In November 2016, the Company acquired a 100% interest in Malta FS, a licensed Malta Financial Services Authority-
supervised electronic money institution, for approximately $3.9 million (€3.6 million translated at the foreign exchange rates
applicable on the date of acquisition). Malta FS’ license has been passported across all member states of the European Union. The
Company intends to apply for a principal membership with the major card associations and to integrate a robust and reliable
issuing and acquiring processing platform in Malta FS to enable the issuance of electronic money instruments, such as electronic
money accounts, prepaid cards and virtual cards, after a transitional period of integration and technology adaption. The Company
plans to build and reinforce Malta FS such that it operates as the Company’s principal regulated electronic money institution with
the ability to cover all of the Company’s financial services activities and business in the European Union.
F-21
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS (continued)
2017 acquisitions (continued)
Pros Software
In October 2016, the Company acquired a 100% interest in Pros Software, a software development and consulting services
company based near Johannesburg, South Africa, for ZAR 25.0 million ($1.8 million, translated at the foreign exchange rates
applicable on the date of acquisition). Pros Software performs software development and consulting services for a number of
clients, including for the Company, and has a specialty practice in business intelligence.
The final purchase price allocation of the Malta FS and Pros Software acquisitions, translated at the foreign exchange rates
applicable on the date of acquisition, is provided in the table below:
Cash and cash equivalents .................................
Accounts receivable ...........................................
Property, plant and equipment, net ....................
Intangible assets (Note 9)...................................
Goodwill (Note 9) ..............................................
Accounts payables and other payables ...............
Income taxes payable .........................................
Deferred tax liabilities .......................................
Total purchase price ................................
Malta FS
$999
983
30
1,078
2,475
(1,570)
-
(56)
$3,939
Pros Software
$110
165
9
2,311
-
(58)
(69)
(647)
$1,821
Total
$1,109
1,148
39
3,389
2,475
(1,628)
(69)
(703)
$5,760
Pro forma results of operations have not been presented because the effect of the Malta FS and Pros Software acquisitions,
individually and in the aggregate, were not material to the Company. During the year ended June 30, 2017, the Company incurred
acquisition-related expenditure of $0.5 million related to the Malta FS and Pros Software acquisitions. Since the closing of the
Malta FS acquisition on November 1, 2016, it has contributed revenue and a net loss after acquired intangible asset amortization,
net of taxation, of $0.2 million and $0.7 million, respectively. Since the closing of the Pros Software acquisition on October 1,
2016, it has contributed revenue and a net loss after acquired intangible asset amortization, net of taxation, of $0.5 million and
$1.8 million, respectively.
2016 acquisitions
Transact24 Limited
On January 20, 2016, the Company acquired the remaining 56% of the issued and outstanding ordinary shares of Transact24
for $3.0 million in cash and through the issue of 391,645 shares of the Company’s common stock with an aggregate issue date fair
value of approximately $4.0 million. Transact24 is a specialist Hong Kong-based payment services company. The Company
acquired approximately 44% of Transact24 in May 2015.
The Company elected to settle part of the purchase price in shares in order to appropriately align the T24 management team
with the Company and its global strategy. The parties agreed that 50% of the Company’s shares issued in the transaction were
contractually restricted as to resale until after June 30, 2016, and the remaining 50% of the shares were restricted until after
June 30, 2017.
Masterpayment AG
In April 2016, the Company acquired a 60% interest in Masterpayment AG (“Masterpayment”), a specialist payment
services processor based in Munich, Germany for approximately $9.4 million and paid a contractually agreed EBITDA earn-out
of $5.4 million in June 2016, for a total purchase consideration of $14.8 million. Masterpayment provides payment and acquiring
services for all major European debit and credit cards; and invoicing for online retail, digital goods and content. Masterpayment
currently has a client portfolio of approximately 5,000 registered merchants.
F-22
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS (continued)
The final purchase price allocation of Transact24 and Masterpayment acquisitions, translated at the foreign exchange rates
applicable on the date of acquisition, is provided in the table below:
Cash and cash equivalents ............................................................................
Accounts receivable ......................................................................................
Property, plant and equipment, net ...............................................................
Deferred tax assets ........................................................................................
Intangible assets (Note 9)..............................................................................
Goodwill (Note 9) .........................................................................................
Accounts payables and other payables ..........................................................
Deferred tax liabilities ..................................................................................
Fair value of assets and liabilities on acquisition ....................................
Less: fair value of equity-accounted investment, comprising: ................
Less: gain on re-measurement of previously held interest .................
Less: carrying value at the acquisition date (Note 10) .......................
Less: fair value attributable to controlling interests on acquisition date .
Total purchase price ...........................................................................
Add: carrying value of non-controlling interests acquired ...........
Add: adjustment to Net1 equity (Note 15) ..................................
Cash paid for non-controlling interest (Note 15) ....................
Total consideration paid for Masterpayment ....................
$1,334
2,019
154
1,070
4,974
6,024
(1,898)
(1,243)
12,434
(5,471)
(1,908)
(3,563)
-
$6,963
Transact24 Masterpayment
$665
765
18
-
9,428
17,084
(1,114)
(2,236)
24,610
-
-
-
(9,844)
14,766
9,867
1,322
11,189
$25,955
Total
$1,999
2,784
172
1,070
14,402
23,108
(3,012)
(3,479)
37,044
(5,471)
(1,908)
(3,563)
(9,844)
$21,729
Pro forma results of operations have not been presented because the effect of the Transact24 and Masterpayment
acquisitions, individually and in the aggregate, were not material to the Company. During the year ended June 30, 2016, the
Company incurred acquisition-related expenditure of $0.2 million related to these acquisitions. Since the closing of the
Transact24 acquisition, it has contributed revenue and net income of $3.8 million and $0.03 million, respectively, for the year
ended June 30, 2016. Since the closing of the Masterpayment acquisition, it has contributed revenue and net loss, after acquired
intangible asset amortization, net of taxation, non-controlling interest, of $2.4 million and $0.04 million, respectively, for the year
ended June 30, 2016.
2015 acquisitions
None.
4.
PRE-FUNDED SOCIAL WELFARE GRANTS RECEIVABLE
Pre-funded social welfare grants receivable represents primarily amounts pre-funded by the Company to certain merchants
participating in the merchant acquiring system. The July 2017 payment service commenced on July 1, 2017, but the Company pre-
funded certain merchants participating in the merchant acquiring systems on the last day of June 2017. The July 2016 payment
service commenced on July 1, 2016, but the Company pre-funded certain merchants participating in the merchant acquiring
systems in the last two days of June 2016.
F-23
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
5.
ACCOUNTS RECEIVABLE, net and FINANCE LOANS RECEIVABLE, net
Accounts receivable, net
Accounts receivable, trade, net ................................................................................
Accounts receivable, trade, gross ..........................................................................
Allowance for doubtful accounts receivable, end of year .....................................
Beginning of year ............................................................................................
Acquired in acquisition....................................................................................
Reversed to statement of operations ................................................................
Charged to statement of operations .................................................................
Utilized ............................................................................................................
Foreign currency adjustment ...........................................................................
Current portion of payments to agents in South Korea amortized over the contract
period .......................................................................................................................
Payments to agents in South Korea amortized over the contract period .........
Less: Payments to agents in South Korea amortized over the contract period
included in other long-term assets (Note 10) ...................................................
Loans provided to Finbond Group Limited (“Finbond”) (Note 10) .........................
Other receivables .....................................................................................................
Total accounts receivable, net .........................................................................
2017
$53,818
55,073
1,255
1,669
10
(42)
672
(1,200)
146
22,562
39,852
17,290
11,920
23,129
$111,429
2016
$57,563
59,232
1,669
1,956
-
(68)
388
(361)
(246)
26,572
52,469
25,897
-
23,670
$107,805
Receivables from customers renting POS equipment from the Company are included in accounts receivable, trade, and are
stated net of an allowance for certain amounts that the Company’s management has identified may be unrecoverable. Accounts
receivable, trade, also includes amounts due from customers from the sale of hardware, software licenses and SIM cards and
provision of transaction processing services. During the year ended June 30, 2017 and 2016, the Company recorded bad debt
expense of $0.1 million and $1.2 million, respectively. The Company did not record bad debt expense during the years ended
June 30, 2015.
Finance loans receivable, net
The Company’s finance loans receivable, net, as of June 30, 2017 and 2016, is presented in the table below:
Microlending finance loans receivable, net .............................................................
Microlending finance loans receivable, gross .......................................................
Allowance for doubtful microlending finance loans receivable, end of year ........
Beginning of year ............................................................................................
Reversed to statement of operations ................................................................
Charged to statement of operations .................................................................
Utilized ............................................................................................................
Foreign currency adjustment ...........................................................................
Working capital finance receivable, net ...................................................................
Working capital finance receivable, gross ............................................................
Allowance for doubtful working capital finance receivable, end of year ..............
Beginning of year ............................................................................................
Charged to statement of operations .................................................................
Total finance loans receivable, net ..........................................................
2017
$50,994
54,711
3,717
4,494
(55)
-
(1,260)
538
29,183
32,935
3,752
-
3,752
$80,177
2016
$37,009
41,503
4,494
4,227
-
2,113
(1,105)
(741)
-
-
-
-
$37,009
F-24
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
5.
ACCOUNTS RECEIVABLE, net and FINANCE LOANS RECEIVABLE, net (continued)
Finance loans receivable, net (continued)
Finance loans receivable, net, comprising microlending finance loans receivable related to the Company’s microlending
operations in South Africa and its working capital finance receivable related to its working capital financing offering in Europe
and the United States. The Company did not expense any unrecoverable microlending finance loans receivable during the year
ended June 30, 2017, 2016 or 2015, respectively, because these loans were written off directly against the allowance for doubtful
microlending finance loans receivable. The Company has created an allowance for doubtful working capital finance receivables
related to a receivable due from a customer based in the United States that has been outstanding for more than four months.
6.
INVENTORY
The Company’s inventory as of June 30, 2017 and 2016, is presented in the table below:
Finished goods ..............................................................................
2017
$8,020
$8,020
2016
$10,004
$10,004
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of financial instruments
Initial recognition and measurement
Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost,
which includes transaction costs.
Risk management
The Company seeks to reduce its exposure to currencies other than the South African rand through a policy of matching, to
the extent possible, assets and liabilities denominated in those currencies. In addition, the Company uses financial instruments in
order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company
is also exposed to equity price and liquidity risks as well as credit risks.
Currency exchange risk
The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other
currencies, primarily the euro and U.S. dollar. The Company has used forward contracts in order to limit its exposure in these
transactions to fluctuations in exchange rates between the South African rand, on the one hand, and the U.S. dollar and the euro,
on the other hand.
Translation risk
Translation risk relates to the risk that the Company’s results of operations will vary significantly as the U.S. dollar is its
reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The U.S. dollar to ZAR exchange
rate has fluctuated significantly over the past three years. As exchange rates are outside the Company’s control, there can be no
assurance that future fluctuations will not adversely affect the Company’s results of operations and financial condition.
Interest rate risk
As a result of its normal borrowing and leasing activities, the Company’s operating results are exposed to fluctuations in
interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited
investment in cash equivalents and has occasionally invested in marketable securities.
F-25
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Fair value of financial instruments (continued)
Risk management (continued)
Working capital finance customer concentration risk
Working capital finance customer concentration risk relates to the risk of loss that the Company would incur as a result of its
initial concentration of customers as it grows its working capital financing receivables base in Europe and the U.S. During the
year ended June 30, 2017, the Company commenced marketing activities to develop and expand its capital financing receivables
base. The Company manages the risk through on-going marketing efforts to further expand its customer base as well as through
regular contact with its customer to assess their need for the Company’s product.
Credit risk
Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties. The
Company maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterparty’s financial condition, credit rating, and other credit criteria and risk mitigation tools as the
Company’s management deems appropriate.
With respect to credit risk on financial instruments, the Company maintains a policy of entering into such transactions only
with South African and European financial institutions that have a credit rating of BB+ or better, as determined by credit rating
agencies such as Standard & Poor’s, Moody’s and Fitch Ratings.
Microlending credit risk
The Company is exposed to credit risk in its microlending activities, which provides unsecured short-term loans to
qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer and
assigns a “creditworthiness score”, which takes into account a variety of factors such as other debts and total expenditures on
normal household and lifestyle expenses.
Equity price and liquidity risk
Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded
price of equity securities that it holds and the risk that it may not be able to liquidate these securities. The market price of these
securities may fluctuate for a variety of reasons, consequently, the amount the Company may obtain in a subsequent sale of these
securities may significantly differ from the reported market value.
Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on
which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an
extended period of time without influencing the exchange traded price, or at all.
Financial instruments
Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly
transaction between market participants at the measurement date and in the principal or most advantageous market for that asset
or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or
liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-
performance risk including the Company’s own credit risk.
Fair value measurements and inputs are categorized into a fair value hierarchy which prioritizes the inputs into three levels
based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is
reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in
its entirety.
F-26
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Financial instruments (continued)
These levels are:
• Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
• Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
• Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using model-based
techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following section describes the valuation methodologies the Company uses to measure financial assets and liabilities at
fair value.
Investments in common stock
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to
determine fair value. This pricing methodology would apply to Level 1 investments. If quoted prices in active markets for
identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and
liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would
be included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect
management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are
therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar
techniques. Investments valued using such techniques are included in Level 3 investments.
Derivative transactions - Foreign exchange contracts
As part of the Company’s risk management strategy, the Company enters into derivative transactions to mitigate exposures
to foreign currencies using foreign exchange contracts. These foreign exchange contracts are over-the-counter derivative
transactions. Substantially all of the Company’s derivative exposures are with counterparties that have long-term credit ratings of
BB+ or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair value
(Level 2). The Company has no derivatives that require fair value measurement under Level 1 or 3 of the fair value hierarchy.
The Company’s outstanding foreign exchange contracts are as follows:
As of June 30, 2017
None.
As of June 30, 2016
Notional amount
EUR 573,765.00
EUR 554,494.50
EUR 465,711.00
EUR 393,675.00
EUR 302,368.50
Strike price
ZAR 15.9587
ZAR 16.0643
ZAR 16.1798
ZAR 16.2911
ZAR 16.4085
Fair market
value price
ZAR 16.3393
ZAR 16.4564
ZAR 16.582
ZAR 16.7017
ZAR 16.8301
Maturity
July 20, 2016
August 19, 2016
September 20, 2016
October 20, 2016
November 21, 2016
F-27
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Financial instruments (continued)
The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2017, according
to the fair value hierarchy:
Quoted
Price in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$627
5,160
-
$5,787
$-
-
37
$37
$-
-
-
$-
Total
$627
5,160
37
$5,824
Assets
Related to insurance business: .......................
Cash and cash equivalents (included in other
long-term assets) ..........................................
Fixed maturity investments (included in
cash and cash equivalents) ...........................
Other ...............................................................
Total assets at fair value ...............................
The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2016, according
to the fair value hierarchy:
Quoted
Price in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Related to insurance business (included in
other long-term assets): ..................................
Cash and cash equivalents ............................
Foreign exchange contracts .............................
Other ...............................................................
Total assets at fair value ...............................
$533
-
-
$533
$-
62
37
$99
$-
-
-
$-
$533
62
37
$632
Changes in the Company’s investment in Finbond (Level 3 that are measured at fair value on a recurring basis) were
insignificant during the years ended June 30, 2016 and 2015, respectively. There have been no transfers in or out of Level 3
during the year ended June 30, 2017. During the year ended June 30, 2016, the Company determined that it was able to exert
significant influence on Finbond and transferred the carrying value as of April 1, 2016, to equity-accounted investments.
Trade, finance loans and other receivables
Trade, finance loans and other receivables originated by the Company are stated at cost less allowance for doubtful accounts
receivable. The fair value of trade, finance loans and other receivables approximate their carrying value due to their short-term
nature.
F-28
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Financial instruments (continued)
Trade and other payables
The fair values of trade and other payables approximates their carrying amounts, due to their short-term nature.
Assets and liabilities measured at fair value on a nonrecurring basis
The Company measures its assets at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily
impaired. The Company has no liabilities that are measured at fair value on a nonrecurring basis. The Company reviews the
carrying values of its assets when events and circumstances warrant and considers all available evidence in evaluating when
declines in fair value are other-than-temporary. The fair values of the Company’s assets are determined using the best information
available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment
charge is recorded when the cost of the assets exceeds its fair value and the excess is determined to be other-than-temporary.
The Company has not recorded any impairment charges during the reporting periods presented herein.
8.
PROPERTY, PLANT AND EQUIPMENT, net
Summarized below is the cost, accumulated depreciation and carrying amount of property, plant and equipment as of
June 30, 2017 and 2016:
2017
2016
Cost:
Land ............................................................................
Building and structures ...............................................
Computer equipment ...................................................
Furniture and office equipment ...................................
Motor vehicles.............................................................
Plant and equipment ....................................................
Accumulated depreciation:
Land ............................................................................
Building and structures ...............................................
Computer equipment ...................................................
Furniture and office equipment ...................................
Motor vehicles.............................................................
Plant and equipment ....................................................
Carrying amount:
Land ............................................................................
Building and structures ...............................................
Computer equipment ...................................................
Furniture and office equipment ...................................
Motor vehicles.............................................................
Plant and equipment ....................................................
$858
471
131,589
8,769
17,936
-
159,623
-
171
97,475
6,804
15,762
-
120,212
858
300
34,114
1,965
2,174
-
$39,411
$851
467
130,998
7,262
15,368
-
154,946
-
151
81,423
5,048
13,347
-
99,969
851
316
49,575
2,214
2,021
-
$54,977
F-29
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
GOODWILL AND INTANGIBLE ASSETS, net
Goodwill
Summarized below is the movement in the carrying value of goodwill for the years ended June 30, 2017, 2016 and 2015:
Balance as of July 1, 2014 ................................................................
Foreign currency adjustment(1) .......................................................
Balance as of June 30, 2015 ..............................................................
Acquisition of Transact24 (Note 3) ................................................
Acquisition of Masterpayment (Note 3) .........................................
Foreign currency adjustment(1) .......................................................
Balance as of June 30, 2016 ..............................................................
Acquisition of Malta FS (Note 3) ..................................................
Foreign currency adjustment(1) .......................................................
Balance as of June 30, 2017 ..............................................................
Gross
value
$186,576
(20,139)
166,437
6,024
17,084
(10,067)
179,478
2,475
6,880
$188,833
Accumulated
impairment
$-
-
-
-
-
-
-
-
-
$-
Carrying
value
$186,576
(20,139)
166,437
6,024
17,084
(10,067)
179,478
2,475
6,880
$188,833
(1) – the foreign currency adjustment represents the effects of the fluctuations between the South African rand, Euro and the
Korean won, and the U.S. dollar on the carrying value.
Goodwill associated with the acquisition of Transact24, Masterpayment and Malta FS represents the excess of cost over the
fair value of acquired net assets. The Transact24, Masterpayment and Masterpayment Financial Services goodwill is not
deductible for tax purposes. See Note 3 for the allocation of the purchase price to the fair value of acquired net assets. Transact24,
Masterpayment and Malta FS have all been allocated to the Company’s International transaction processing operating segment.
The Company assesses the carrying value of goodwill for impairment annually, or more frequently, whenever events occur
and circumstances change indicating potential impairment. The Company performs its annual impairment test as of June 30 of
each year. The results of the Company’s impairment tests during the year ended June 30, 2017 and 2016, indicated that the fair
value of the Company’s reporting units exceeded their carrying values and therefore the Company’s reporting units were not at
risk of potential impairment.
Goodwill has been allocated to the Company’s reportable segments as follows:
International
transaction
processing
Carrying
value
$166,437
6,024
17,084
(10,067)
179,478
2,475
6,880
$188,833
(1) – the foreign currency adjustment represents the effects of the fluctuations between the South African rand, Euro and the
Korean won, and the U.S. dollar on the carrying value.
Balance as of July 1, 2015 ..............................
Acquisition of Transact24 (Note 3) ..............
Acquisition of Masterpayment (Note 3) .......
Foreign currency adjustment(1) .....................
Balance as of June 30, 2016 ............................
Acquisition of Malta FS (Note 3) .................
Foreign currency adjustment(1) .....................
Balance as of June 30, 2017 ............................
$115,519
6,024
17,084
(2,442)
136,185
2,475
1,910
$140,570
Financial
inclusion and
applied
technologies
$26,339
-
-
(3,471)
22,868
-
2,264
$25,132
South
African
transaction
processing
$24,579
-
-
(4,154)
20,425
-
2,706
$23,131
F-30
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
GOODWILL AND INTANGIBLE ASSETS, net (continued)
Intangible assets, net
Summarized below is the fair value of intangible assets acquired, translated at the exchange rate applicable as of the relevant
acquisition dates, and the weighted-average amortization period:
Fair value as
of acquisition
date
Weighted-
Average
Amortization
period (in years)
Finite-lived intangible asset:
Transact24 customer relationships ...................................................
Masterpayment customer relationships ............................................
Transact24 software and unpatented technology .............................
Masterpayment software and unpatented technology ......................
Masterpayment trademarks ..............................................................
Customer relationships – Pros Software ..........................................
Customer relationships – Malta FS ..................................................
Software and unpatented technology ...............................................
$3,749
6,595
1,225
1,765
1,068
2,311
186
147
5
5
3
3
5
0.75
0.65
1.25
Infinite-lived intangible asset:
Financial institution license ..............................................................
$745
n/a
On acquisition, the Company recognized deferred tax liabilities of approximately $0.7 million and $3.5 million related to the
acquisition of intangible assets during the years ended June 30, 2017 and 2016, respectively.
The Company assesses the carrying value of intangible assets for impairment whenever events occur or circumstances
change indicating that the carrying amount of the intangible asset may not be recoverable. No intangible assets have been
impaired during the years ended June 30, 2017, 2016 and 2015, respectively.
Summarized below is the carrying value and accumulated amortization of intangible assets as of June 30, 2017 and 2016:
As of June 30, 2017
As of June 30, 2016
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
$99,209
$(65,595)
$33,614
$94,529
$(51,557)
$42,972
33,273
2,935
4,506
6,972
(31,112)
(2,935)
(4,506)
(4,759)
2,161
-
-
2,213
31,452
2,592
4,506
6,685
(28,791)
(2,592)
(4,506)
(3,762)
2,661
-
-
2,923
Finite-lived intangible assets:
Customer relationships (1) .....
Software and unpatented
technology (1) ........................
FTS patent ..............................
Exclusive licenses ..................
Trademarks ............................
Total finite-lived intangible
assets .................................
146,895
(108,907)
37,988
139,764
(91,208)
48,556
Infinite-lived intangible assets:
Financial institution license ....
Total infinite-lived intangible
assets .................................
776
Total intangible assets....... $147,671
776
-
776
-
-
-
-
$(108,907)
776
$38,764
-
$139,764
-
$(91,208)
-
$48,556
(1) Includes the customer relationships acquired as part of the Pros Software acquisition in October 2016, and the customer
relationships and software and unpatented technology acquired as part of the Malta FS acquisition in November 2016.
F-31
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
GOODWILL AND INTANGIBLE ASSETS, net (continued)
Intangible assets, net (continued)
Amortization expense charged for the years to June 30, 2017, 2016 and 2015 was $14.0 million, $11.2 million, and
$19.4 million, respectively.
Future estimated annual amortization expense for the next five fiscal years, assuming exchange rates prevailing on
June 30, 2017, is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a
result of acquisitions, changes in useful lives, exchange rate fluctuations and other relevant factors.
2018 .................................................................................
2019 .................................................................................
2020 .................................................................................
2021 .................................................................................
2022 .................................................................................
Thereafter .........................................................................
Total future estimated annual amortization expense ..
$12,318
10,800
10,097
4,383
77
$313
$37,988
10.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS
Equity-accounted investments
The Company’s ownership percentage in its equity-accounted investments as of June 30, 2017 and 2016, was as follows:
Finbond ................................................................................................
KZ One Limited (formerly One Credit Limited) (“KZ One”) .............
SmartSwitch Namibia (Pty) Ltd (“SmartSwitch Namibia) ..................
Walletdoc Proprietary Limited (“Walletdoc”) .....................................
2017
26%
25%
50%
20%
2016
26%
25%
50%
20%
The Company’s management does not believe that its equity-accounted investments, either individual or in aggregate, are
material in relation to its balance sheet or statement of operations presented and therefore summarized financial information as to
assets, liabilities and results of operations of its equity-accounted investments have not been provided.
The Company has provided a credit facility of up to $10 million in the form of convertible debt to KZ One, of which $2
million had been utilized as of June 30, 2016. The credit facility had not been utilized as of June 30, 2015.
As of June 30, 2017, the Company owned 197,522,435 shares in Finbond. Finbond is listed on the Johannesburg Stock
Exchange and its closing price on June 30, 2017, was R2.95 per share. The aggregate value of the Company’s holding in Finbond
on June 30, 2017, was R582.7 million ($44.6 million translated at exchange rates applicable as of June 30, 2017.) On July 13,
2017, the Company acquired an additional 3.6 million shares in Finbond for approximately ZAR 11.2 million ($0.9 million
translated at exchange rates applicable as of June 30, 2017.) On July 17, 2017, the Company received 4,361,532 shares as a
capitalization share issue in lieu of a dividend.
On October 7, 2016, the Company provided a loan of ZAR 139.2 million ($10.0 million, translated at the foreign exchange
rates applicable on the date of the loan) to Finbond in order for Finbond to partially finance its expansion strategy in the United
States. Interest on the loan is payable quarterly in arrears and is based on the London Interbank Offered Rate (“LIBOR”) in effect
from time to time plus a margin of 12.00%. The LIBOR rate was 1.121% on June 30, 2017. The loan was initially repayable in
full at the earlier of Finbond concluding a rights offer or February 28, 2017, but the agreement was subsequently amended to
extend this date to August 31, 2017. If Finbond does not settle the amount outstanding on August 31, 2017, the Company has the
election to convert its loan to Finbond shares at an agreed conversion price or to continue to earn interest until such time as the
loan is settled in full. The Company expects the parties to agree to extend the expiration date of the agreement to a period not
exceeding 12 months from August 31, 2017.
F-32
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
10.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Equity-accounted investments (continued)
Summarized below is the movement in equity-accounted investments during the years ended June 30, 2017 and 2016:
Finbond
KZ One
Other(1)
Total
Investment in equity:
Balance as of July 1, 2015 ...............................................
Acquisition of shares .................................................
Comprehensive income:
Equity accounted earnings ...................................
Other comprehensive income ...............................
Dividends received ....................................................
Transfer from assets available for sale ......................
Consolidation of Transact24 (Note 3) .......................
Foreign currency adjustment(2) ..................................
Balance as of June 30, 2016 ............................................
Stock-based compensation.........................................
Comprehensive income (loss):
Other comprehensive loss ....................................
Equity accounted earnings (loss) .........................
Share of net income ........................................
Dilution resulting from corporate transactions
Dividends received ....................................................
Foreign currency adjustment(2) ..................................
Balance as of June 30, 2017 ............................................
Investment in loans:
Balance as of July 1, 2015 ...............................................
Transfer from other receivables, net ..........................
Loans granted ............................................................
Foreign currency adjustment(2) ..................................
Balance as of June 30, 2016 ............................................
Loans granted ............................................................
Interest accrued ..........................................................
Foreign currency adjustment(2) ..................................
Included in accounts receivable, net (Note 5) ...........
Balance as of June 30, 2017 ..................................................
$-
-
-
-
-
-
16,250
-
54
16,304
89
816
(1,687)
2,503
2,709
(206)
(477)
2,229
$18,961
$-
1,011
-
4
1,015
10,044
107
754
(11,920)
$-
$10,036
-
17
17
-
-
-
-
(2,895)
7,158
-
(1,213)
(1,010)
(203)
(203)
-
-
-
$5,945
$-
-
-
-
-
2,000
-
-
$4,293
-
622
622
-
(143)
-
(3,563)
(182)
1,027
-
364
-
364
364
-
(710)
116
$797
$-
-
141
-
141
-
-
18
$2,000
$159
$14,329
-
639
639
-
(143)
16,250
(3,563)
(3,023)
24,489
89
(33)
(2,697)
2,664
2,870
(206)
(1,187)
2,345
$25,703
$-
1,011
141
4
1,156
12,044
107
772
(11,920)
$2,159
Carrying amount as of June 30:
2016 ...........................................................................
2017 ...........................................................................
$24,489
$25,703
$1,156
$2,159
$25,645
$27,862
(1) Includes Transact 24 from July 1, 2015 to December 31, 2015, and SmartSwitch Namibia and Walletdoc for the entire
period presented;
(2) The foreign currency adjustment represents the effects of the fluctuations South African rand, Nigerian Naira and the
Namibian dollar, and the U.S. dollar on the carrying value.
Equity
Loans
Total
F-33
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
10.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Equity-accounted investments (continued)
Strategic investments
DNI-4PL Contracts Proprietary Limited (“DNI”)
On June 23, 2017, the Company entered into a series of agreements pursuant to which the Company agreed to, among
other things, subscribe for 44,999,999 ordinary A shares in DNI, representing a 45% voting and economic interest in DNI, for a
subscription price of ZAR 945 million ($72.4 million) in cash. Under the terms of the agreements with DNI, the Company is
required to pay to DNI an additional amount of up to ZAR 360 million ($27.6 million), in cash, subject to the achievement of
certain performance targets by DNI. The transaction was subject to certain suspensive conditions that were fulfilled on or before
July 27, 2017, and the transaction closed on the same date. All amounts were translated at exchange rates applicable as of June
30, 2017.
Bank Frick
On January 12, 2017, the Company entered into a share purchase agreement with the Kuno Frick Family Foundation (“Frick
Foundation”) to acquire a 30% interest in Bank Frick & Co AG (“Bank Frick”), a fully licensed bank based in Balzers,
Liechtenstein, from the Frick Foundation for approximately CHF 39.8 million ($41.5 million translated at exchange rates
applicable as of June 30, 2017). The completion of the investment is subject to approval from the Financial Market Authority
Liechtenstein. Following the successful completion of this investment, the Company will have a two-year option to acquire an
additional 35% interest in Bank Frick.
Bank Frick provides a complete suite of banking services, with one of its key strategic pillars being the provision of payment
services and funding of financial technology opportunities. Bank Frick holds acquiring licenses from both Visa and MasterCard
and operates a branch in London. The Company and Bank Frick have jointly identified several funding opportunities, including
for the Company’s working capital finance, card issuing and acquiring and transaction processing activities. The pending
investment in Bank Frick has the potential to provide the Company with a stable, long term and strategic relationship with a fully
licensed bank. The Company and Bank Frick have agreed that approximately $30 million of the Bank Frick’s free equity will be
utilized as seed capital for a fund dedicated to the Company’s future activities.
Other long-term assets
Summarized below is the breakdown of other long-term assets as of June 30, 2017 and 2016
Investment in One MobiKwik Systems Private Limited (“MobiKwik”), at cost .
Long-term portion of payments to agents in South Korea amortized over the
contract period (Note 5) ......................................................................................
Policy holder assets under investment contracts (Note 11) ..................................
Reinsurance assets under insurance contracts Note 11) .......................................
Other long-term assets .........................................................................................
2017
2016
$26,317
17,290
627
191
5,271
$49,696
$-
25,897
528
171
4,525
$31,121
The Company has signed a subscription agreement with MobiKwik, which is India’s largest independent mobile payments
network, with over 55 million users and 1.5 million merchants. Pursuant to the subscription agreement, the Company agreed to
make an equity investment of up to $40.0 million in MobiKwik over a 24 month period. The Company made an initial $15.0
million investment in August 2016 and a further $10.6 million investment in June 2017, under this subscription agreement. As of
June 30, 2017, the Company owned approximately 13.5% of MobiKwik. In August 2017, MobiKwik raised additional funding
through the issuance of additional shares to a new shareholder at a 90% premium to the Company’s investments and its
percentage ownership was diluted to 12.0%.
F-34
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
10.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Other long-term assets (continued)
In addition, through a technology agreement, the Company’s Virtual Card technology will be integrated across all
MobiKwik wallets in order to provide ubiquity across all merchants in India, and as part of the Company’s continued strategic
relationship, a number of our other products including our digital banking platform, are expected to be deployed by MobiKwik
over the next year.
On June 19, 2017, the Company, through one of its subsidiaries, Net1 Applied Technologies South Africa Proprietary
Limited (“Net1 SA”), entered into a Subscription Agreement (the “Subscription Agreement”) with Cell C Proprietary Limited
(“Cell C”), a leading mobile provider in South Africa, to purchase approximately 75,000,000 class “A” shares of Cell C for an
aggregate purchase price of ZAR 2.0 billion ($153.3 million translated at exchange rates applicable as of June 30, 2017) in cash.
The Company funded the transaction through a combination of cash and the facilities described in Note 14. The transaction closed
on August 2, 2017.
11. 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
years ended June 30, 2017 and 2016:
Reinsurance
assets(1)
Insurance
contracts(2)
Balance as of July 1, 2015 ...................................................................
Increase in policy holder benefits under insurance contracts .........
Claims and policyholders’ benefits under insurance contracts .......
Foreign currency adjustment(3) .......................................................
Balance as of June 30, 2016 .................................................................
Increase in policy holder benefits under insurance contracts .........
Claims and policyholders’ benefits under insurance contracts .......
Foreign currency adjustment(3) .......................................................
Balance as of June 30, 2017 .................................................................
(1) Included in other long-term assets (refer to Note 10);
(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.
$(567)
(1,408)
801
96
(1,078)
(4,481)
4,091
(143)
$(1,611)
$183
463
(444)
(31)
171
262
(265)
23
$191
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.
F-35
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
11. REINSURANCE ASSETS AND POLICY HOLDER LIABILITIES UNDER INSURANCE AND INVESTMENT
CONTRACTS (continued)
Assets and policy holder liabilities under investment contracts (continued)
Summarized below is the movement in assets and policy holder liabilities under investment contracts during the years ended
June 30, 2017 and 2016:
Assets(1)
Investment
contracts(2)
Balance as of July 1, 2015 ...................................................................
Increase in policy holder benefits under investment contracts .......
Foreign currency adjustment(3) .......................................................
Balance as of June 30, 2016 .................................................................
Increase in policyholder benefits under insurance contracts ..........
Claims and policyholders’ benefits under insurance contracts .......
Foreign currency adjustment(3) .......................................................
Balance as of June 30, 2017 .................................................................
(1) Included in other long-term assets (refer to Note 10);
(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.
$(593)
(35)
100
(528)
(40)
11
(70)
$(627)
$593
35
(100)
528
40
(11)
70
$627
The Company does not offer any investment products with guarantees related to capital or returns.
12.
SHORT-TERM FACILITIES
Summarized below are the Company’s available short-term facilities and the amounts utilized as of June 30, 2017 and 2016,
all amounts translated at exchange rates applicable as of the period presented:
2017
2016
Available
Utilized
Available
Utilized
Europe:
Bank Frick(1) ....................................................
South Africa:
$66,579
$16,579
$-
Nedbank Limited (“Nedbank” .........................
Overdraft facility(1) ....................................
Indirect and derivative facilities ................
30,600
19,109
11,491
10,000
-
10,000
South Korea:
Hana Bank overdraft facility(1) ........................
(1) Utilized amount included in short-term facilities.
8,738
$105,917
-
$26,579
13,528
3,382
10,146
8,675
$22,203
$-
8,870
-
8,870
-
$8,870
Europe
The Company has obtained EUR 40.0 million ($45.7 million) and CHF 20 million ($20.9 million) revolving overdraft
facilities from Bank Frick. As of June 30, 2017, the Company had utilized approximately CHF 15.9 million ($16.6 million) of the
CHF 20 million facility and had not utilized any of the EUR 40 million facility. All amounts have been translated at exchange
rates applicable as of June 30, 2017.
As of June 30, 2017, the interest rate on these facilities was 5.00%. The Company has assigned all claims against amounts
due from Masterpayment customers, which have been financed from the CHF 20 million facility, plus all secondary rights and
preferential rights as collateral for this facility to Bank Frick. Masterpayment was required to open a primary business account
with Bank Frick and this account has been pledged to Bank Frick as collateral for the EUR 40 million facility. Net1 also stands as
guarantor for both of these facilities.
F-36
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
12.
SHORT-TERM FACILITIES (continued)
Europe (continued)
The EUR 40 million facility has an initial term to December 31, 2019, and will automatically be extended for a year if not
terminated with 12 months written notice. The CHF 20 million facility does not have a fixed term, however it may be terminated
by either party with six months written notice at the end of a calendar month.
South Africa
The aggregate amount of the Company’s short-term South African credit facility with Nedbank Limited (“Nedbank”) was
ZAR 400 million ($30.6 million) and consists of (i) a primary amount of up to ZAR 200 million ($15.3 million), which is
immediately available, and (ii) a secondary amount of up to ZAR 200 million ($15.3 million), which is not immediately available
(all amounts denominated in ZAR and translated at exchange rates applicable as of June 30, 2017). The primary amount
comprises an overdraft facility of up to ZAR 50 million ($3.8 million) and indirect and derivative facilities of up to
ZAR 150 million ($11.5 million), which include letters of guarantee, letters of credit and forward exchange contracts (all amounts
denominated in ZAR and translated at exchange rates applicable as of June 30, 2017).
On December 9, 2016, Nedbank issued a letter (the “Nedbank Facility Letter”) to the Company under which it agreed to
temporarily increase the overdraft facility by the secondary amount of ZAR 200 million to ZAR 250 million ($19.2 million).
As of June 30, 2017, the interest rate on the overdraft facility was 9.35%. On July 21, 2017, the interest rate reduced by
0.25% to 9.10%. The Company has ceded its investment in Cash Paymaster Services Proprietary Limited (“CPS”), a South
African subsidiary, as security for its repayment obligations under the facility. A commitment fee of 0.35% per annum is payable
on the monthly unutilized amount of the overdraft portion of the short-term facility. The Company is required to comply with
customary non-financial covenants, including, without limitation, covenants that restrict its ability to dispose of or encumber its
assets, incur additional indebtedness or engage in certain business combinations.
As of each of June 30, 2017 and 2016, respectively, the Company had not utilized any of its overdraft facility. As of
June 30, 2017, the Company had utilized approximately ZAR 130.5 million ($10.0 million, translated at exchange rates applicable
as of June 30, 2017) of its ZAR 150 million indirect and derivative facilities 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 24). As of June 30, 2016, the Company had utilized approximately ZAR
131.1 million ($8.9 million, translated at exchange rates applicable as of June 30, 2016) of its ZAR 150 million indirect and
derivative facilities.
South Korea
The Company obtained a one year KRW 10 billion short-term overdraft facility from Hana Bank, a South Korean bank, in
January 2014. The facility expired in January 2017 and was renewed for one more year, but has subsequently been cancelled
before June 30, 2017, as the facility is no longer required. The Company had ceded the warehouse it owns in South Korea as
security for its repayment obligations under the facility. As of June 30, 2016, the Company had not utilized any of its KRW 10.0
billion ($8.7 million, translated at exchange rates applicable as of June 30, 2017) overdraft facility.
F-37
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
13. OTHER PAYABLES
Summarized below is the breakdown of other payables as of June 30, 2017 and 2016:
Accruals ....................................................................................
Provisions .................................................................................
Other .........................................................................................
Value-added tax payable ...........................................................
Payroll-related payables ............................................................
Participating merchants settlement obligation ..........................
2017
2016
$10,874
8,073
8,592
5,397
1,320
543
$34,799
$12,588
10,461
7,981
5,022
992
435
$37,479
14. LONG-TERM BORROWINGS
South Korea
The Company’s wholly owned subsidiary, Net1 Applied Technologies Korea (“Net1 Korea”), signed a five-year senior
secured facilities agreement (the “Facilities Agreement”) with a consortium of South Korean banks in October 2013. The
Facilities Agreement provides for three separate facilities to Net1 Korea: a Facility A loan of up to KRW 60.0 billion ($52.4
million), a Facility B loan of up to KRW 15 billion ($13.1 million) and a Facility C revolving credit facility of up to
KRW 10.0 billion ($8.7 million) (all facilities denominated in KRW and translated at exchange rates applicable as of June 30,
2017).
The Facility A loan is repayable in three scheduled annual installments of KRW 10 billion, commencing on April 29, 2016,
and the third installment is due in April 2018, with a final installment for the remaining outstanding balance of KRW 7.9 billion
due at the maturity date (October 29, 2018). The Facility B loan was repaid in full on October 29, 2014. The Facility C revolving
credit facility is repayable in full on the maturity date. Prepayment of the revolving credit facility may be withdrawn at any time
up to three months before the maturity date.
On July 29, 2016, the Company utilized approximately KRW 0.3 billion ($0.2 million) of its Facility C revolving credit
facility to pay interest due. On the same day, the Company made unscheduled voluntary payments of KRW 20 billion
($17.8 million) towards its Facility A loan, and KRW 10 billion ($8.9 million) towards its Facility C revolving credit facility. On
October 31, 2016, the Company made an unscheduled payment of KRW 2.1 billion ($1.8 million) towards its Facility A loan as a
result of a distribution from KSNET paid to Net1 Korea which was contractually required to be applied against interest and
principal outstanding. On January 29, 2017, the Company utilized approximately KRW 0.3 billion ($0.3 million) of its Facility C
revolving credit facility to pay interest due. On April 29, 2017, the Company made a scheduled repayment of KRW 10 billion
($8.8 million) and utilized approximately KRW 0.3 billion ($0.3 million) of its Facility C revolving credit facility to pay interest
due. The Company drew approximately KRW 2.5 billion ($2.1 million) and KRW 4.0 billion ($3.8 million) during the years
ended June 30, 2016 and 2015, respectively, to pay interest due under the Facilities Agreement. The carrying value as of
June 30, 2017, was $16.2 million. As of June 30, 2017, the carrying amount of the long-term borrowings approximated its fair
value.
Interest on the loans and revolving credit facility is payable quarterly and is based on the South Korean CD rate in effect
from time to time plus a margin of 3.10% for the Facility A loan and Facility C revolving credit facility; and a margin of 2.90%
for the Facility B loan. The CD rate was 1.41% on June 30, 2017, and therefore the interest rate in effect as of June 30, 2017, for
the Facility A loan and Facility C revolving credit facility was 4.51%. A commitment fee of 0.3% is payable on any un-drawn and
un-cancelled amount of the revolving credit facility.
Total interest expense related to the facilities during the year ended June 30, 2017, 2016 and 2015, was $2.6 million,
$1.2 million and $3.6 million, respectively. The Company paid facilities fees of approximately KRW 0.9 billion ($0.9 million) on
October 29, 2013, and amortized approximately $0.1 million, $0.1 million and $0.2 million of these fees during the years ended
June 30, 2017, 2016 and 2015, respectively.
F-38
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
14. LONG-TERM BORROWINGS (continued)
South Korea (continued)
The loans under the Facilities Agreement are secured by a pledge by Net1 Korea of its entire equity interest in KSNET and a
pledge by the immediate parent of Net1 Korea (also one of the Company’s subsidiaries) of its entire equity interest in Net1 Korea.
The Facilities Agreement contains customary covenants that require Net1 Korea to maintain agreed leverage and debt service
coverage ratios and restricts Net1 Korea’s ability to make certain distributions with respect to its capital stock, prepay other debt,
encumber its assets, incur additional indebtedness, or engage in certain business combinations. The loans under the Facilities
Agreement are without recourse to, and the covenants and other agreements contained therein do not apply to, the Company or
any of the Company’s subsidiaries (other than Net1 Korea).
July 2017 Facilities
On July 21, 2017, Net1 SA entered into a Common Terms Agreement, Senior Facility A Agreement, Senior Facility B
Agreement, Senior Facility C Agreement, Subordination Agreement, Security Cession & Pledge and certain ancillary loan
documents (collectively, the “Original Loan Documents”) with FirstRand Bank Limited (acting through its Rand Merchant Bank
division) (“RMB”), a South African corporate and investment bank, and Nedbank Limited (acting through its Corporate and
Investment Banking division), an African corporate and investment bank, and any other lenders that may participate in such loans
(collectively, the “Lenders”), pursuant to which, among other things, Net1 SA may borrow up to an aggregate of ZAR 1.25 billion
to finance a portion of its investment in Cell C and to fund its on-going working capital requirements. Net1 agreed to guarantee
the obligations of Net1 SA to the Lenders and subordinate any claims it may have against Net1 SA and certain of its subsidiaries
to the Lenders’ claims against such persons. On July 26, 2017, Net1 SA entered into a letter agreement (the “Letter” and together
with the Original Loan Documents, the “Loan Documents”) with the Lenders to amend the Common Terms Agreement to, among
other things, permit the amounts borrowed under the Senior Facility B to fund the acquisition of Cell C shares and adjust the
terms of certain conditions precedent.
The Loan Documents provide for a Facility A term loan of up to ZAR 750 million, a Facility B term loan of up to ZAR 500
million, and a Facility C term loan in an amount equal to the aggregate amount of voluntary prepayments of the outstanding
principal amount of the Facility A loan. Net1 SA paid a non-refundable deal origination fee of approximately ZAR 6.3 million in
August 2017. Interest on the loans is payable quarterly based on the Johannesburg Interbank Agreed Rate (“JIBAR”) in effect
from time to time plus a margin of 2.25% for the Facility A loan, 3.5% for the Facility B loan and 2.25% for the Facility C loan.
The JIBAR rate has been set at 6.96% for the period to September 29, 2017. Funds were disbursed from the Lenders to Net1 SA
on July 27, 2017. All of the loans mature on the date falling on the second anniversary of the date of disbursement.
Principal repayments on the Facility A and Facility B loans are due in eight equal quarterly installments, beginning on
September 30, 2017. Principal repayment on the Facility C loan is to be determined by the Lenders based on the date of the
repayment of any borrowings under the Facility A loan. Voluntary prepayments are permitted without early repayment fees or
penalties. The loans are secured by a pledge by Net1 SA of, among other things, its entire equity interests in Cell C and DNI-4PL
Contracts Proprietary Limited. The Loan Documents contain customary covenants that require Net1 SA to maintain a specified
total net leverage ratio and restrict the ability of Net1 SA, and certain of its subsidiaries to make certain distributions with respect
to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make investment above specified
levels, engage in certain business combinations and engage in other corporate activities.
October 2016 Facilities
On October 4, 2016, Net1 SA, entered into a Subscription Agreement (the “Blue Label Subscription Agreement”) with Blue
Label Telecoms Limited (“Blue Label”), a JSE-listed company which is a leading provider of prepaid electricity and airtime in
South Africa. Pursuant to the Blue Label Subscription Agreement, Net1 SA intended to subscribe for approximately 117.9 million
ordinary shares of Blue Label at a price of ZAR 16.96 per share, for an aggregate price of ZAR 2.0 billion. Net1 SA entered into a
facility agreement RMB to fund ZAR 1.4 billion of the required ZAR 2 billion Blue Label transaction and paid a guarantee fee of
approximately ZAR 16.0 million during the year ended June 30, 2017. In May 2017, Blue Label and Net1 SA mutually agreed
that Net1 SA would not subscribe for the shares in Blue Label and the Blue Label Subscription Agreement was terminated.
Interest expense for the year ended June 30, 2017, includes the ZAR 16.0 million guarantee fee expensed related to the October
2017 facilities obtained from RMB.
F-39
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15. COMMON STOCK
Common stock
Holders of shares of Net1’s common stock are entitled to receive dividends and other distributions when declared by Net1’s
board of directors out of legally available funds. Payment of dividends and distributions is subject to certain restrictions under the
Florida Business Corporation Act, including the requirement that after making any distribution Net1 must be able to meet its
debts as they become due in the usual course of its business.
Upon voluntary or involuntary liquidation, dissolution or winding up of Net1, holders of common stock share ratably in the
assets remaining after payments to creditors and provision for the preference of any preferred stock according to its terms. There
are no pre-emptive or other subscription rights, conversion rights or redemption or scheduled installment payment provisions
relating to shares of common stock. All of the outstanding shares of common stock are fully paid and non-assessable.
Each holder of common stock is entitled to one vote per share for the election of directors and for all other matters to be
voted on by shareholders. Holders of common stock may not cumulate their votes in the election of directors, and are entitled to
share equally and ratably in the dividends that may be declared by the board of directors, but only after payment of dividends
required to be paid on outstanding shares of preferred stock according to its terms. The shares of Net1 common stock are not
subject to redemption.
The Company’s number of shares, net of treasury, presented in the consolidated balance sheets and consolidated statement
of changes in equity includes participating non-vested equity shares (specifically contingently returnable shares) as described
below in Note 18“— Amended and Restated Stock Incentive Plan—Restricted Stock—General Terms of Awards”. The following
table presents reconciliation between the number of shares, net of treasury, presented in the consolidated statement of changes in
equity and the number of shares, net of treasury, excluding non-vested equity shares that have not vested during the years ended
June 30, 2017, 2016 and 2015:
2017
2016
2015
Number of shares, net of treasury:
Statement of changes in equity – common stock ...........................
Less: Non-vested equity shares that have not vested as of end of
year (Note 18) ................................................................................
Number of shares, net of treasury excluding non-vested
equity shares that have not vested ............................................
56,369,737
55,271,954
46,679,565
505,473
589,447
341,529
55,864,264
54,682,507
46,338,036
Redeemable common stock issued pursuant to transaction with the IFC Investors
Holders of redeemable common stock have all the rights of enjoyed by holders of common stock, however, holders of
redeemable common stock have additional contractual rights. On April 11, 2016, the Company entered into a Subscription
Agreement (the “Subscription Agreement”) with International Finance Corporation, IFC African, Latin American and Caribbean
Fund, LP, IFC Financial Institutions Growth Fund, LP, and Africa Capitalization Fund, Ltd. (collectively, the “IFC Investors”).
Under the Subscription Agreement, the IFC Investors purchased, and the Company sold in the aggregate, approximately
9.98 million shares of the Company’s common stock, par value $0.001 per share, at a price of $10.79 per share, for gross
proceeds to the Company of approximately $107.7 million. The Company has accounted for these 9.98 million shares as
redeemable common stock as a result of the put option discussed below.
The Company has entered into a Policy Agreement with the IFC Investors (the “Policy Agreement”). The material terms of
the Policy Agreement are described below.
F-40
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15. COMMON STOCK (continued)
Common stock (continued)
Board Rights
For so long as the IFC Investors in aggregate beneficially own shares representing at least 5% of the Company’s common
stock, the IFC Investors will have the right to nominate one director to the Company’s board of directors. For so long as the IFC
Investors in aggregate beneficially own shares representing at least 2.5% of the Company’s common stock, the IFC Investors will
have the right to appoint an observer to the Company’s board of directors at any time when they have not designated, or do not
have the right to designate, a director.
Registration Rights
The Company has agreed to grant certain registration rights to the IFC Investors for the resale of their shares of the
Company’s common stock, including filing a resale shelf registration statement and taking certain actions to facilitate resales
thereunder.
Redeemable common stock issued pursuant to transaction with the IFC Investors (continued)
Put Option
Each Investor will have the right, upon the occurrence of specified triggering events, to require the Company to repurchase
all of the shares of its common stock purchased by the IFC Investors pursuant to the Subscription Agreement (or upon exercise of
their preemptive rights discussed below). Events triggering this put right relate to (1) the Company being the subject of a
governmental complaint alleging, a court judgment finding or an indictment alleging that the Company (a) engaged in specified
corrupt, fraudulent, coercive, collusive or obstructive practices; (b) entered into transactions with targets of economic sanctions;
or (c) failed to operate its business in compliance with anti-money laundering and anti-terrorism laws; or (2) the Company
rejecting a bona fide offer to acquire all of its outstanding Common Stock at a time when it has in place or implements a
shareholder rights plan, or adopting a shareholder rights plan triggered by a beneficial ownership threshold of less than twenty
percent. The put price per share will be the higher of the price per share paid by the IFC Investors pursuant to the Subscription
Agreement (or paid when exercising their preemptive rights) and the volume weighted average price per share prevailing for the
60 trading days preceding the triggering event, except that with respect a put right triggered by rejection of a bona fide offer, the
put price per share will be the highest price offered by the offeror. The Company believes that the put option has no value and,
accordingly, has not recognized the put option in its consolidated financial statements.
Preemptive Rights
For so long as the IFC Investors hold in aggregate 5% of the outstanding shares of common stock of the Company, each
Investor will have the right to purchase its pro-rata share of new issuances of securities by the Company, subject to certain
exceptions.
Sale of common stock during fiscal 2017
In February 2017, the Company sold a total of five million shares of its common stock at a price of $9.00 per share to two
investors, for aggregate gross proceeds to the Company of $45.0 million. These sales were made pursuant to stock purchase
agreements entered into on October 6, 2016, as amended. One of the investors was contractually restricted from disposing of the
shares until April 6, 2017, and the other is restricted until August 16, 2017. The sale of the shares has been registered under the
Securities Act of 1933, as amended, pursuant to the Company’s shelf registration statement on Form S-3.
F-41
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15. COMMON STOCK (continued)
Common stock repurchases
Executed under share repurchase authorizations
On February 3, 2016, the Company’s Board of Directors approved the replenishment of its share repurchase authorization to
repurchase up to an aggregate of $100 million of common stock. The authorization has no expiration date. The share repurchase
authorization will be used at management’s discretion, subject to limitations imposed by SEC Rule 10b-18 and other legal
requirements and subject to price and other internal limitations established by the Board. Repurchases will be funded from the
Company’s available cash. Share repurchases may be made through open market purchases, privately negotiated transactions, or
both. There can be no assurance that the Company will purchase any shares or any particular number of shares. The authorization
may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing
shares, liquidity and other factors that management deems appropriate.
On June 29, 2016, the Company adopted a Rule 10b5-1 plan for the purpose of repurchasing approximately $50 million of
its common stock. The 10b5-1 Plan was established in connection with the $100 million share repurchase program approved on
February 3, 2016. A plan under Rule 10b5-1 allows a company to repurchase its shares at times when it otherwise might be
prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. A broker selected by the
Company had the authority under the terms and limitations specified in the 10b5-1 Plan to repurchase shares on the Company’s
behalf in accordance with the terms thereof. The plan expired at the end of August 2016.
During the first quarter of the year ended June 30, 2017, the Company repurchased 3,137,609 shares under its share
repurchase authorization for approximately $31.6 million. During November and December 2015, the Company repurchased an
aggregate of 749,213 shares of its common stock for approximately $11.2 million under its share repurchase authorization that
was approved on August 21, 2013. During February and June 2016, the Company repurchased an aggregate of 1,677,491 shares
for approximately $15.9 million under its replenished share repurchase authorization which resulted in a total of 2,426,704 shares
repurchased for approximately $27.1 million under its various share repurchase authorizations during the year ended June 30,
2016.
The Company did not repurchase any of its shares during the years ended June 30, 2015, under this authorization.
Other repurchases
On May 24, 2017, the Company and one of its co-founders, the former chief executive officer and former member of its
board of directors, Mr. S.C.P. Belamant, entered into a Separation and Release of Claims Agreement (the “Separation
Agreement”). As contemplated by the Separation Agreement, the Company and Mr. S.C.P. Belamant also entered into a Stock
Repurchase Agreement (the “Stock Repurchase Agreement”). The Separation Agreement provided for certain payments and other
benefits to Mr. S.C.P. Belamant, including without limitation, the repurchase from Mr. Belamant by the Company of his shares of
the Company’s common stock pursuant to the Stock Repurchase Agreement and the repurchase of 252,286 of Mr. S.C.P.
Belamant in-the-money stock options at a price per option equal to (i) $10.80 minus (ii) the applicable exercise price per option.
To effectuate the repurchase of the options pursuant to the Separation Agreement, the options were exercised by Mr. S.C.P.
Belamant and the shares issued pursuant to such options were repurchased by the Company. In summary, the Company
repurchased 1,269,751 shares of its common stock from Mr. Belamant, at a price of $10.80 per share, for an aggregate
consideration of $13.7 million. The Remuneration Committee met on May 3, 2017, to discuss Mr. S.C.P. Belamant’s early
retirement, and proposed a repurchase price of $10.80 per share, which was 6 cents lower than the closing price on May 2, 2017.
During the year ended June 30, 2015, the Company entered into a Subscription and Sale of Shares Agreement with Business
Venture Investments No 1567 Proprietary Limited (RF) (“BVI”), one of the Company’s BEE partners, in preparation for any new
potential SASSA tender. Pursuant to the agreement: (i) the Company repurchased BVI’s remaining 1,837,432 shares of the
Company’s common stock for approximately ZAR 97.4 million in cash ($9.2 million translated at exchange rates prevailing as of
August 27, 2014) and (ii) BVI subscribed for new ordinary shares of Cash Paymaster Services (Pty) Ltd (“CPS”) representing
approximately 12.5% of CPS’ ordinary shares outstanding after the subscription for ZAR 15.0 million in cash (approximately
$1.4 million translated at exchange rates prevailing as of August 27, 2014).
The Company did not repurchase any of its shares during the years ended June 30, 2016, outside of the authorization.
F-42
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15. COMMON STOCK (continued)
Acquisition of non-controlling interests
During the year ended June 30, 2016, the Company acquired all of the issued share capital of Masterpayment and Smart Life
that it did not previously own for approximately $11.2 million and $0.001 million, respectively, in cash. These transactions were
accounted for as an equity transaction with a non-controlling interest and accordingly, no gain or loss was recognized in the
Company’s consolidated statement of operations. The carrying amount of the respective non-controlling interest was adjusted to
reflect the change in ownership interest in each of Masterpayment and Smart Life. The difference between the fair value of the
consideration paid and the amount by which the non-controlling interest was adjusted, of $1.3 million, was recognized in total
Net1 equity during the year ended June 30, 2016.
16. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The table below presents the change in accumulated other comprehensive (loss) income per component during years ended
June 30, 2017, 2016 and 2015:
Accumulated
Net
unrealized
income (loss)
on asset
available for
sale, net of
tax
$618
-
422
1,040
-
692
(1,732)
-
Total
$(82,741)
(56,862)
422
(139,181)
(49,479)
692
(1,732)
(189,700)
-
$0
(2,697)
29,828
$(162,569)
Accumulated
Foreign
currency
translation
reserve
$(83,359)
(56,862)
-
(140,221)
(49,479)
-
-
(189,700)
(2,697)
29,828
$(162,569)
Balance as of July 1, 2014 .............................................................
Movement in foreign currency translation reserve ...................
Unrealized gain on asset available for sale, net of tax of $97 ..
Balance as of June 30, 2015 ...........................................................
Movement in foreign currency translation reserve ...................
Unrealized gain on asset available for sale, net of tax of $159
Release of gain on asset available for sale, net of taxes of
$444 ..........................................................................................
Balance as of June 30, 2016 ...........................................................
Movement in foreign currency translation reserve related to
equity accounted investment ....................................................
Movement in foreign currency translation reserve ...................
Balance as of June 30, 2017 ...........................................................
There were no reclassifications from accumulated other comprehensive loss to comprehensive (loss) income during the year
ended June 30, 2017 and 2015, respectively. The Company released a gain of approximately $2.2 million from its accumulated
net unrealized income (loss) on asset available for sale, net of tax, to selling, general and administration expense and related taxes
of $0.4 million to income tax expense on its consolidated statement of operations during the year ended June 30, 2016, as a result
of change in accounting for Finbond to the equity method (see also Note 7). There were no other reclassifications from
accumulated other comprehensive loss to comprehensive (loss) income during the year ended June 30, 2016.
17. REVENUE
Services rendered – comprising mainly fees and commissions ........
Loan-based fees received ..................................................................
Sale of goods – comprising mainly hardware and software sales .....
2017
$533,279
53,894
22,893
$610,066
2016
$514,847
47,117
28,785
$590,749
2015
$536,046
62,235
27,698
$625,979
During the years ended June 30, 2017, 2016 and 2015, the Company did not recognize any revenue using the percentage of
completion method.
F-43
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION
Amended and Restated Stock Incentive Plan
The Company’s Amended and Restated 2015 Stock Incentive Plan (the “Plan”) was most recently amended and restated on
November 11, 2015, after approval by shareholders. No evergreen provisions are included in the Plan. This means that the
maximum number of shares issuable under the Plan is fixed and cannot be increased without shareholder approval, the plan
expires by its terms upon a specified date, and no new stock options are awarded automatically upon exercise of an outstanding
stock option. Shareholder approval is required for the repricing of awards or the implementation of any award exchange program.
The Plan permits Net1 to grant to its employees, directors and consultants incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock, performance-based awards and other awards based on its common stock. The
Remuneration Committee of the Company’s Board of Directors (“Remuneration Committee”) administers the Plan.
The total number of shares of common stock issuable under the Plan is 11,052,580. The maximum number of shares for
which awards, other than performance-based awards, may be granted in any combination during a calendar year to any participant
is 569,120. The maximum limits on performance-based awards that any participant may be granted during a calendar year are
569,120 shares subject to stock option awards and $20 million with respect to awards other than stock options. Shares that are
subject to awards which terminate or lapse without the payment of consideration may be granted again under the Plan. Shares
delivered to the Company as part or full payment for the exercise of an option or to satisfy withholding obligations upon the
exercise of an option may be granted again under the Plan in the Remuneration Committee’s discretion. No awards may be
granted under the Plan after August 19, 2025, but awards granted on or before such date may extend to later dates.
Options
General Terms of Awards
Option awards are generally granted with an exercise price equal to the market price of the Company's stock at the date of
grant, with vesting conditioned upon the recipient’s continuous service through the applicable vesting date and expire 10 years
after the date of grant. The options generally become exercisable in accordance with a vesting schedule ratably over a period of
three years from the date of grant. The Company issues new shares to satisfy stock option award exercises but may also use
treasury shares.
F-44
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Options (continued)
Valuation Assumptions
No stock options were awarded during the years ended June 30, 2017 and 2016, respectively. The fair value of each option is
estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the assumptions noted in the following
table. The estimated expected volatility is calculated based on the Company’s 250 day volatility. The estimated expected life of
the option was determined based historical behavior of employees who were granted options with similar terms. The Company
has estimated no forfeitures for options awarded in 2015. The table below presents the range of assumptions used to value options
granted during the years ended June 30, 2015:
Expected volatility ................................................
Expected dividends ...............................................
Expected life (in years) ........................................
Risk-free rate .........................................................
2015
60%
0%
3
1.0%
Restricted Stock
General Terms of Awards
Shares of restricted stock are considered to be participating non-vested equity shares (specifically contingently returnable
shares) for the purposes of calculating earnings per share (refer to Note 21) because, as discussed in more detail below, the
recipient is obligated to transfer any unvested restricted stock back to the Company for no consideration and these shares of
restricted stock are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Restricted stock
generally vests ratably over a three year period, with vesting conditioned upon the recipient’s continuous service through the
applicable vesting date and under certain circumstances, the achievement of certain performance targets, as described below.
Restricted stock awarded to non-employee directors and employees of the Company vests ratably over a three-year period.
Recipients are entitled to all rights of a shareholder of the Company except as otherwise provided in the restricted stock
agreements.
These rights include the right to vote and receive dividends and/or other distributions. However, the restricted stock
agreements generally prohibit transfer of any nonvested and forfeitable restricted stock. If a recipient ceases to be a member of the
Board of Directors or an employee for any reason, all shares of his restricted stock that are not then vested and nonforfeitable will
be immediately forfeited and transferred to the Company for no consideration.
The Company issues new shares to satisfy restricted stock awards.
Valuation Assumptions
The fair value of restricted stock is based on the closing price of the Company’s stock quoted on The Nasdaq Global Select
Market on the date of grant.
F-45
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
Market Conditions - Restricted Stock Granted in August and November 2014
In August and November 2014, respectively, the Remuneration Committee approved an award of 127,626 and 71,530 shares
of restricted stock to employees. These shares of restricted stock will vest in full only on the date, if any, the following conditions
are satisfied: (1) the closing price of the Company’s common stock equals or exceeds $19.41 (subject to appropriate adjustment
for any stock split or stock dividend) for a period of 30 consecutive trading days during a measurement period commencing on the
date that the Company files its Annual Report on Form 10-K for the fiscal year ended 2017 and ending on December 31, 2017
and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these
conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited. The $19.41 price target
represents a 20% increase, compounded annually, in the price of the Company’s common stock on Nasdaq over the
$11.23 closing price on August 27, 2014.
The 127,626 and 71,530 shares of restricted stock are effectively forward starting knock-in barrier options with a strike price
of zero. The fair value of these shares of restricted stock was calculated utilizing an adjusted Monte Carlo simulation discounted
cash flow model which was developed for the purpose of the valuation of these shares. For each simulated share price path, the
market share price condition was evaluated to determine whether or not the shares would vest under that simulation.
The “adjustment” to the Monte Carlo simulation model incorporates a “jump diffusion” process to the standard Geometric
Brownian Motion simulation, in order to capture the discontinuous share price jumps observed in the Company’s share price
movements on stock exchanges on which it is listed. Therefore, the simulated share price paths capture the idiosyncrasies of the
observed Company share price movements.
In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the
final vested value on maturity is the share price on vesting date. The value of the grant is the average of the discounted vested
values. The Company used an expected volatility of 76.01%, an expected life of approximately three years, a risk-free rate of
1.27% and no future dividends in its calculation of the fair value of the 127,626 shares of restricted stock. The Company used an
expected volatility of 63.73%, an expected life of approximately three years, a risk-free rate of 1.21% and no future dividends in
its calculation of the fair value of the 71,530 shares of restricted stock. Estimated expected volatility was calculated based on the
Company’s 30 day VWAP share price using the exponentially weighted moving average of returns.
Performance Conditions - Restricted Stock Granted in August 2015
In August 2015, the Remuneration Committee approved an award of 301,537 shares of restricted stock to employees. 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.
F-46
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
Performance Conditions - Restricted Stock Granted in August 2015 (continued)
At levels of 2018 Fundamental EPS greater than $2.88 and less than $3.76, the number of shares that will vest will be
determined by linear interpolation relative to 2018 Fundamental EPS of $3.30. Any shares that do not vest in accordance with the
above-described conditions will be forfeited. All shares of restricted stock have been valued utilizing the closing price of shares of
the Company’s common stock quoted on The Nasdaq Global Select Market on the date of grant. The Company has reversed the
stock-based compensation charge recognized to date related to the 301,537 shares of restricted stock because it believes that it is
unlikely that the 2018 Fundamental EPS target will be achieved due to the dilutive impact on the fundamental EPS calculation as
a result of issuance of the approximate 10 million shares to the IFC in May 2016.
Performance Conditions - Restricted Stock Granted in August 2016
In August 2016, the Remuneration Committee approved an award of 350,000 shares of restricted stock to executive officers.
The shares of restricted stock awarded to executive officers in August 2016 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, 2019. If that condition is satisfied, then
the shares will vest based on the level of Fundamental EPS the Company achieves for the fiscal year ended June 30, 2019 (“2019
Fundamental EPS”), as follows:
• One-third of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.60;
• Two-thirds of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.80; and
• All of the shares will vest if the Company achieves 2019 Fundamental EPS of $3.00.
At levels of 2019 Fundamental EPS greater than $2.60 and less than $3.00, the number of shares that will vest will be
determined by linear interpolation relative to 2019 Fundamental EPS of $2.80. Any shares that do not vest in accordance with the
above-described conditions will be forfeited. All shares of restricted stock have been valued utilizing the closing price of shares of
the Company’s common stock quoted on The Nasdaq Global Select Market on the date of grant.
Stock Appreciation Rights
The Remuneration Committee also may grant stock appreciation rights, either singly or in tandem with underlying stock
options. Stock appreciation rights entitle the holder upon exercise to receive an amount in any combination of cash or shares of
common stock (as determined by the Remuneration Committee) equal in value to the excess of the fair market value of the shares
covered by the right over the grant price. No stock appreciation rights have been granted.
F-47
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Stock option and restricted stock activity
Options
The following table summarizes stock option activity for the years ended June 30, 2017, 2016 and 2015:
Outstanding – July 1, 2014................
Granted under Plan: August 2014 ........
Exercised..............................................
Outstanding – June 30, 2015 .............
Exercised..............................................
Outstanding – June 30, 2016 .............
Exercised..............................................
Expired unexercised .............................
Forfeitures ............................................
Outstanding – June 30, 2017 .............
Number of
shares
2,710,392
464,410
(773,633)
2,401,169
(323,645)
2,077,524
(321,026)
(474,443)
(435,448)
846,607
Weighted
Average
Grant
Date Fair
Value ($)
4.55
Weighted
Average
Remaining
Contractual
Term
(in years)
Weighted
average
exercise
price ($)
14.16
11.23
8.35
15.34
11.62
15.92
8.97
22.51
17.88
13.87
5.38
10.00
4.74
3.65
3.80
Aggregate
Intrinsic
Value
($’000)
3,909
2,113
3,845
11,516
2,669
926
3,607
-
-
486
The following table presents stock options vesting and expecting to vest as of June 30, 2017:
Weighted
average
exercise
price
($)
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
($’000)
Number of
shares
Vested and expecting to vest
– June 30, 2017 .....................
846,607
13.87
3.80
486
These options have an exercise price range of $7.35 to $24.46.
The following table presents stock options that are exercisable as of June 30, 2017:
Number of
shares
Weighted
average
exercise
price ($)
Exercisable – June 30, 2017 .........
731,286
14.30
Weighted
Average
Remaining
Contractual
Term
(in years)
3.25
Aggregate
Intrinsic
Value
($’000)
486
F-48
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Stock option and restricted stock activity (continued)
Options (continued)
During the years ended June 30, 2017, 2016 and 2015, approximately 154,803, 373,435 and 330,967 stock options became
exercisable, respectively. During the year ended June 30, 2017, the Company received approximately $2.9 million from the
exercise of 321,026 stock options. During the year ended June 30, 2016, the Company received approximately $3.8 million from
the exercise of 323,645 stock options. During the year ended June 30, 2015, the Company received approximately $2.0 million
from 201,395 stock options exercised. The remaining 572,238 stock options were exercised through recipients delivering 336,584
shares of the Company’s common stock to the Company on September 9, 2014, to settle the exercise price due. During the year
ended June 30, 2017, employees forfeited 435,448 stock options and 474,443 stock options awarded in August 2006, expired
unexercised. There were no forfeitures during the years ended June 30, 2016 and 2015, respectively. The Company issues new
shares to satisfy stock option exercises.
Restricted stock
The following table summarizes restricted stock activity for the years ended June 30, 2017, 2016 and 2015:
Number of
Shares of
Restricted
Stock
Weighted
Average Grant
Date Fair Value
($’000)
Non-vested – July 1, 2014 ........................................
Total vested ................................................................
Total granted ................................................................
385,778
141,707
Granted – August 2014 ................................................................
71,530
Granted – November 2014 ...............................................................
213,237
(74,152)
Vested – August 2014 ................................................................
(183,334)
Vested – February 2015 ................................................................
(257,486)
Non-vested – June 30, 2015 ................................................................
341,529
319,492
Granted – August 2015 ................................................................
Vested – August 2015 ................................................................
(71,574)
589,447
Non-vested – June 30, 2016 ................................................................
Granted – August 2016 ................................................................
387,000
Granted – May 2017 ................................................................2,587
389,587
(68,091)
(200,000)
(268,091)
(205,470)
505,473
Non-vested – June 30, 2017 ................................................................
Vested – August 2016 ................................................................
Vested – June 2017 ................................................................
Total vested ................................................................
Forfeitures ................................................................
Total granted ................................................................
3,534
581
229
828
2,400
1,759
6,406
1,435
7,622
4,145
27
694
1,896
2,219
11,173
The fair value of restricted stock vested during the years ended June 30, 2017, 2016 and 2015, was $2.6 million, $1.4 million
and $3.2 million, respectively. The Company agreed to accelerate the vesting of 200,000 shares of restricted stock granted to the
Company’s former Chief Executive Officer in August 2017 pursuant to the Separation Agreement signed in May 2017.
Employees and the former Chief Executive Officer that resigned during the year ended June 30, 2017, forfeited 205,470 shares of
restricted stock that had not vested. Forfeited shares of restricted stock are returned to the Company and, in accordance with the
Plan, are available for future issuances by the Remuneration Committee.
F-49
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Stock-based compensation charge and unrecognized compensation cost
The Company has recorded a net stock compensation charge of $2.0 million, $3.6 million and $3.2 million for the years
ended June 30, 2017, 2016 and 2015, respectively, which comprised:
Allocated to
cost of goods
sold, IT
processing,
servicing
and support
Total
charge
(reversal)
Allocated to
selling,
general and
administration
Year ended June 30, 2017
Stock-based compensation charge ................................................
Reversal of stock compensation charge related to stock options
and restricted stock forfeited .........................................................
Total – year ended June 30, 2017 ...............................................
$3,905
(1,923)
$1,982
Year ended June 30, 2016
Stock-based compensation charge ................................................
Total – year ended June 30, 2016 ...............................................
$3,598
$3,598
Year ended June 30, 2015
Stock-based compensation charge ................................................
Total – year ended June 30, 2015 ...............................................
$3,195
$3,195
$-
-
$-
$-
$-
$-
$-
$3,905
(1,923)
$1,982
$3,598
$3,598
$3,195
$3,195
The stock compensation charge and reversals have been allocated to cost of goods sold, IT processing, servicing and support
and selling, general and administration based on the allocation of the cash compensation paid to the employees.
As of June 30, 2017, the total unrecognized compensation cost related to stock options was approximately $0.1 million,
which the Company expects to recognize over approximately two months. As of June 30, 2017, the total unrecognized
compensation cost related to restricted stock awards was approximately $1.7 million, which the Company expects to recognize
over approximately two years. This amount excludes the total unrecognized compensation cost, net of forfeitures, as of June 30,
2017, related to restricted stock awards that the Company expects will not vest due to it not achieving the 2018 Fundamental EPS
of approximately $3.9 million. As of June 30, 2017, the cumulative unrecorded stock-based compensation charge related to these
awards of restricted stock that the Company has determined are expected not to vest and has not expensed in its consolidated
statement of operations is approximately $2.5 million (which amount includes the $1.8 million reversed during the year ended Jun
30, 2017).
Tax consequences
The Company has recorded a deferred tax asset of approximately $0.9 million and $1.8 million, respectively, for the years
ended June 30, 2017 and 2016, related to the stock-based compensation charge recognized related to employees of Net1 as it is
able to deduct the difference between the market value on date of exercise by the option recipient and the exercise price from
income subject to taxation in the United States.
F-50
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
19. DISPOSAL OF BUSINESS
Disposal of assets related to NUETS business
On June 30, 2014, the Company sold the NUETS business, which consisted primarily of customer contracts, other than
contracts for UEPS systems in Botswana and Namibia, and equipment for approximately $2.2 million in cash. The Company
received $0.2 million of these cash proceeds in June 2014, and the remaining $1.9 million was received in July 2014, and was
included in accounts receivable, net, as of June 30, 2014.
20.
INCOME TAXES
Income tax provision
The table below presents the components of income before income taxes for the years ended June 30, 2017, 2016 and 2015:
South Africa ...................................................................
United States ..................................................................
Other ..............................................................................
Income before income taxes ........................................
$129,786
(20,902)
5,572
$114,456
$119,097
(5,915)
13,055
$126,237
$137,138
(7,286)
10,566
$140,418
2017
2016
2015
Presented below is the provision for income taxes by location of the taxing jurisdiction for the years ended June 30, 2017,
2016 and 2015:
2017
2016
2015
Current income tax
South Africa ................................................................
United States ...............................................................
Other ...........................................................................
Deferred taxation (benefit) charge .................................
South Africa ................................................................
United States ...............................................................
Other ...........................................................................
Foreign tax credits generated – United States ................
Income tax provision ...................................................
$45,857
35,986
4,686
5,185
(40)
(473)
1,123
(690)
(3,345)
$42,472
$88,807
31,815
50,750
6,242
(161)
3,044
(274)
(2,931)
(46,566)
$42,080
$48,795
39,901
3,109
5,785
(2,292)
398
485
(3,175)
(2,367)
$44,136
There were no changes to the enacted tax rate in the years ended June 30, 2017, 2016 and 2015.
The movement in the valuation allowance for the year ended June 30, 2017, is primarily attributable to a decrease resulting
from the utilization of foreign tax credits and an increase related to a valuation allowance created for net operating loss
carryforwards for the Company’s German subsidiaries. The movement in the valuation allowance for the year ended June 30,
2016, relates primarily to an increase in the valuation allowance resulting from the generation of unused foreign tax credits during
the year. The movement in the valuation allowance for the year ended June 30, 2015, relates primarily to the release of the
valuation allowance resulting from the utilization of foreign tax credits during the year.
Net1 included actual and deemed dividends received from one of its South African subsidiaries in its years ended June 30,
2017, 2016 and 2015, taxation computation. Net1 applied net operating losses against this income. Net1 generated foreign tax
credits as a result of the inclusion of the dividends in its taxable income in 2016. Net1 has applied certain of these foreign tax
credits against its current income tax provision for the year ended June 30, 2017, 2016 and 2015.
F-51
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
20.
INCOME TAXES (continued)
Income tax provision (continued)
A reconciliation of income taxes, calculated at the fully-distributed South African income tax rate to the Company’s
effective tax rate, for the years ended June 30, 2017, 2016 and 2015, is as follows:
Income tax rate reconciliation:
Income taxes at fully-distributed South African tax rates .....
Non-deductible items .........................................................
Foreign tax rate differential ................................................
Foreign tax credits ..............................................................
Taxation on deemed dividends in the United States ..........
Movement in valuation allowance .....................................
Prior year adjustments ........................................................
Income tax provision .......................................................
2017
2016
2015
28.00%
1.01%
0.00%
(0.05%)
8.00%
0.07%
0.07%
37.10%
28.00%
0.38%
7.42%
(36.88%)
34.60%
(0.09%)
(0.09%)
33.34%
28.00%
2.36%
0.06%
(1.68%)
3.46%
(0.08%)
(0.69%)
31.43%
Net1 received dividends from one of its South African subsidiaries during the year ended June 30, 2017, which resulted in an
increase in taxation on dividends received. No significant foreign tax credits were generated during the year ended June 30, 2017,
and the Company utilized foreign tax credits generated in prior years. The utilization of these foreign tax credits used in prior
years is included in the movement in the valuation allowance. The non-deductible items during the year ended June 30, 2017,
includes transaction related expenses, including legal and consulting fees incurred that are not deductible for tax purposes. Net1
received substantial dividends from one of its South African subsidiaries during the year ended June 30, 2016, which resulted in
an increase in the amount of foreign tax credits generated and an increase in taxation on dividends received. A portion of these
foreign tax credits generated were not used during the year and a valuation allowance has been created for unused foreign tax
credits. The non-deductible items during the year ended June 30, 2015, include primarily legal and consulting fees incurred that
are not deductible for tax purposes. The foreign tax rate differential represents the difference between statutory tax rates in South
Africa and foreign jurisdictions, primarily the United States.
Deferred tax assets and liabilities
Deferred income taxes reflect the temporary differences between the financial reporting and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse. The primary components of the
temporary differences that gave rise to the Company’s deferred tax assets and liabilities as of June 30, and their classification,
were as follows:
2017
2016
Total deferred tax assets
Net operating loss carryforwards ............................................................
Provisions and accruals ...........................................................................
FTS patent ...............................................................................................
Intangible assets ......................................................................................
Foreign tax credits ...................................................................................
Other .......................................................................................................
Total deferred tax assets before valuation allowance ......................
Valuation allowances ........................................................................
Total deferred tax assets, net of valuation allowance ................
Total deferred tax liabilities:
Intangible assets ......................................................................................
Other .......................................................................................................
Total deferred tax liabilities ..............................................................
Reported as
Current deferred tax assets ......................................................................
Long term deferred tax liabilities ............................................................
Net deferred income tax liabilities ....................................................
$4,946
4,413
475
829
32,574
5,717
48,954
(38,967)
9,987
9,141
6,655
15,796
5,330
11,139
$5,809
$1,982
4,245
496
733
36,750
7,448
51,654
(38,834)
12,820
11,799
6,624
18,423
6,956
12,559
$5,603
F-52
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
20.
INCOME TAXES (continued)
Deferred tax assets and liabilities (continued)
Increase in total deferred tax liabilities
Net operating loss carryforwards
Net operating loss carryforwards have increased primarily as a result of the losses incurred by the Company’s
German subsidiaries.
Intangible assets
Deferred tax liabilities – intangible assets have moderately decreased during the year ended June 30, 2017, as a result of the
amortization of KSNET, Masterpayment and Transact24 intangible assets.
Foreign tax credits
The decrease in foreign tax credits as of June 30, 2017, resulted from the utilization of foreign tax credits generated in
previous years against taxes payable associated with the dividends received by Net1 during the year ended June 30, 2017.
Increase in valuation allowance
At June 30, 2017, the Company had deferred tax assets of $10.0 million (2016: $12.8 million), net of the valuation
allowance. Management believes, based on the weight of available positive and negative evidence it is more likely than not that
the Company will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the
deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
At June 30, 2017, the Company had a valuation allowance of $39.0 million (2016: $38.9 million) to reduce its deferred tax
assets to estimated realizable value. The movement in the valuation allowance for the years ended June 30, 2017 and 2016, is
presented below:
July 1, 2015 .............................................
Charged to statement of operations .........
Utilized ...................................................
Foreign currency adjustment ...................
June 30, 2016 ....................................
Reversed to statement of operations .......
Charged to statement of operations .........
Foreign currency adjustment ...................
June 30, 2017 ....................................
Foreign
tax
credits
$20,211
16,537
-
-
$36,748
(4,174)
-
-
$32,574
Net
operating
loss carry-
forwards
$1,088
-
(128)
(29)
$931
(128)
3,107
(211)
$3,699
Total
$22,550
16,537
(128)
(125)
$38,834
(4,302)
4,684
(249)
$38,967
FTS
patent
$254
-
-
(96)
$158
-
-
(38)
$120
Other
$997
-
-
-
$997
-
1,577
-
$2,574
Net operating loss carryforwards and foreign tax credits
United States
As of June 30, 2017, Net1 had net operating loss carryforwards that will expire, if unused, as follows:
Year of expiration
U.S. net operating
loss carry
forwards
2024 ........................................................................................................
$2,242
F-53
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
20.
INCOME TAXES (continued)
Net operating loss carryforwards and foreign tax credits (continued)
United States (continued)
Net1 did not generate any additional foreign tax credits during the year ended June 30, 2017. During the year ended June 30,
2016, Net1 generated additional foreign tax credits related to the cash dividends received. Net1 had no net unused foreign tax
credits that are more likely than not to be realized as of June 30, 2017 and 2016, respectively. The unused foreign tax credits
generated expire after ten years in 2026, 2024, 2023, 2022, 2021 and 2020.
Uncertain tax positions
As of June 30, 2017 and 2016, the Company has unrecognized tax benefits of $0.5 million and $1.9 million, respectively, all
of which would impact the Company’s effective tax rate. The Company files income tax returns mainly in South Africa, South
Korea, Germany, Hong Kong, India, the United Kingdom, Botswana and in the U.S. federal jurisdiction. As of June 30, 2017, the
Company’s South African subsidiaries are no longer subject to income tax examination by the South African Revenue Service for
periods before June 30, 2013. The Company is subject to income tax in other jurisdictions outside South Africa, none of which
are individually material to its financial position, statement of cash flows, or results of operations. The Company does not expect
the change related to unrecognized tax benefits will have a significant impact on its results of operations or financial position in
the next 12 months.
The following is a reconciliation of the total amounts of unrecognized tax benefits for the year ended June 30, 2017, 2016
and 2015:
Unrecognized tax benefits - opening balance .........................................
Gross decreases - tax positions in prior periods ...................................
Gross increases - tax positions in current period ..................................
Lapse of statute limitations ..................................................................
Foreign currency adjustment ................................................................
Unrecognized tax benefits - closing balance .....................................
2017
$1,930
(2,109)
440
-
214
$475
2016
$2,322
(609)
641
-
(424)
$1,930
2015
$1,160
-
1,311
-
(149)
$2,322
As of each of June 30, 2017 and 2016, the Company had accrued interest related to uncertain tax positions of
approximately $0.1 million, respectively, on its balance sheet.
21.
EARNINGS PER SHARE
The Company has issued redeemable common stock (refer to Note 15) which is redeemable at an amount other than fair
value. Redemption of a class of common stock at other than fair value increases or decreases the carrying amount of the
redeemable common stock and is reflected in basic earnings per share using the two-class method. There were no redemptions of
common stock, or adjustments to the carrying value of the redeemable common stock during the years ended June 30, 2017, 2016
or 2015. Accordingly the two-class method presented below does not include the impact of any redemption.
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 years ended June 30, 2017, 2016 and 2015,
reflects only undistributed earnings. The computation below of basic earnings per share excludes the net income attributable to
shares of unvested restricted stock (participating non-vested restricted stock) from the numerator and excludes the dilutive impact
of these unvested shares of restricted stock from the denominator.
F-54
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
21.
EARNINGS PER SHARE (continued)
Diluted earnings per share has 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 October 2010, November 2010, February 2012, August 2014
and November 2014 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.
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 for the years ended June 30, 2017, 2016 and
2015:
2017
2016
(in thousands except percent and
per share data)
2015
Numerator:
Net income attributable to Net1 ................................................................................
Undistributed earnings ................................................................................................
Percent allocated to common shareholders (Calculation 1) ...............................
Numerator for earnings per share: basic and diluted ...........................................
$72,954
72,954
99%
$72,188
$82,454
82,454
99%
$81,370
$94,735
94,735
99%
$93,750
Denominator:
Denominator for basic earnings per share: weighted-average common
shares outstanding ........................................................................................................
Effect of dilutive securities: .......................................................................................
Stock options ..........................................................................................................
Denominator for diluted earnings per share: adjusted weighted
average common shares outstanding and assumed conversion ...........
53,966
47,234
46,247
109
242
152
54,075
47,476
46,399
Earnings per share:
Basic ..............................................................................................................
Diluted ...........................................................................................................
$1.34
$1.33
$1.72
$1.71
$2.03
$2.02
(Calculation 1)
Basic weighted-average common shares outstanding (A) .............................
Basic weighted-average common shares outstanding and unvested
restricted shares expected to vest (B) ............................................................
Percent allocated to common shareholders (A) / (B).....................................
53,966
47,234
46,247
54,539
99%
47,863
99%
46,733
99%
Options to purchase 542,711 shares of the Company’s common stock at prices ranging from $10.59 to $24.46 per share were
outstanding during the year ended June 30, 2017, but were not included in the computation of diluted earnings per share because
the options’ exercise price were greater than the average market price of the Company’s common shares. The options, which
expire at various dates through on August 27, 2024, were still outstanding as of June 30, 2017.
F-55
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
22.
SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents the supplemental cash flow disclosures for the years ended June 30, 2017, 2016 and 2015:
Cash received from interest ...........................................................................
2017
$21,130
Cash paid for interest .....................................................................................
$3,713
2016
$15,262
$3,439
2015
$16,399
$4,360
Cash paid for income taxes ............................................................................
$45,165
$42,123
$45,459
Financing activities
Treasury shares, at cost included in the Company’s consolidated balance sheet as of June 30, 2016, includes 47,056 shares of
the Company’s common stock acquired for approximately $0.5 million which were paid for on July 1, 2016. The liability for this
payment was included in accounts payable on the Company’s consolidated balance sheet as of June 30, 2016. The payment of
approximately $0.5 million is included in acquisition of treasury stock in the Company’s consolidated statement of cash flows for
the year ended June 30, 2017.
As discussed in Note 3, on January 20, 2016, the Company issued 391,645 shares of its common stock with an aggregate
issue date fair value of approximately $4.0 million as part consideration for the Company’s 56% interest in Transact24.
As discussed in Note 18, during the year ended June 30, 2015, employees exercised stock options through the delivery
336,584 shares of the Company’s common stock at the closing price on September 9, 2014 or $13.93 under the terms of their
option agreements. These shares are included in the Company’s total share count and amount reflected as treasury shares on the
consolidated balance sheet as of June 30, 2015 and consolidated statement of changes in equity for the year ended June 30, 2015.
23. OPERATING SEGMENTS
Operating segments
The Company discloses segment information as reflected in the management information systems reports that its chief
operating decision maker uses in making decisions and to report certain entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets or reports material revenues.
The Company currently has three reportable segments: South African transaction processing, International transaction
processing and Financial inclusion and applied technologies. The South African transaction processing and Financial inclusion and
applied technologies segments operate mainly within South Africa and the International transaction processing segment operates
mainly within South Korea, Hong Kong and the European Union. The Company’s reportable segments offer different products
and services and require different resources and marketing strategies and share the Company’s assets.
The South African transaction processing segment currently consists mainly of a welfare benefit distribution service provided
to the South African government, an ATM infrastructure deployed in South, and transaction processing for retailers, utilities, and
banks. Fee income is earned based on the number of recipient cardholders paid. Fee income is also earned from customers
utilizing our ATM infrastructure. Utility providers and banks are charged a fee for transaction processing services performed on
their behalf at retailers. This segment has individually significant customers that each provides more than 10% of the total revenue
of the Company. For the year ended June 30, 2017, there was one such customer, providing 22% of total revenue (2016: one such
customer, providing 21% of total revenue; 2015: one such customer, providing 24% of total revenue).
The International transaction processing segment consists mainly of activities in South Korea from which the Company
generates revenue from the provision of payment processing services to merchants and card issuers through its VAN. This
segment generates fee revenue from the provision of payment processing services and to a lesser extent from the sale of goods,
primarily point of sale terminals, to customers in South Korea. Fees generated from payment services processing and other
processing activities by Transact24 and Masterpayment are included in this segment. Finally, the segment includes start up costs
related to ZAZOO in the United Kingdom and India and generates transaction fee revenue from transaction processing of UEPS-
enabled smartcards in Botswana.
F-56
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
23. OPERATING SEGMENTS (continued)
Operating segments (continued)
The Financial inclusion and applied technologies segment derives revenue from the provision of short-term loans as a
principal and the provision of smart card accounts, as a fixed monthly fee per card is charged for the maintenance of these
accounts. This segment also includes fee income and associated expenses from merchants and card holders using the Company’s
merchant acquiring system, the sale of prepaid products (electricity and airtime) as well as the sale of hardware and software.
Finally, the Company earns premium income from the sale of life insurance products through its insurance business.
Corporate/eliminations includes the Company’s head office cost center and the amortization of acquisition-related intangible
assets. The $8.0 million paid to the Company’s founder, former chief executive officer and former member of our board of
directors during the year ended June 30, 2017, is also included in corporate/ eliminations. The $1.9 million fair value gain
resulting from the acquisition of Transact24 (refer to Note 3) and the $2.2 million gain resulting from the change in accounting for
Finbond (refer to Note 16) that were recognized during the year ended June 30, 2016, have been allocated to corporate/
elimination.
The reconciliation of the reportable segments revenue to revenue from external customers for the years ended June 30, 2017,
2016 and 2015, respectively, is as follows:
Revenue
Reportable
Segment
Inter-
segment
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Total for the year ended June 30, 2017 .........................
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Total for the year ended June 30, 2016 .........................
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Total for the year ended June 30, 2015 .........................
$249,144
176,729
235,901
$661,774
$212,574
169,807
249,403
$631,784
$236,452
164,554
272,600
$673,606
$24,518
-
27,190
$51,708
$17,615
-
23,420
$41,035
$20,521
-
27,106
$47,627
From
external
customers
$224,626
176,729
208,711
$610,066
$194,959
169,807
225,983
$590,749
$215,931
164,554
245,494
$625,979
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 years ended June 30, 2017, 2016 and 2015, respectively, is as follows:
For the years ended June 30,
2016
2015
2017
Reportable segments measure of profit or loss ................. $130,799
(33,756)
20,897
(3,484)
Income before income taxes ....................................... $114,456
Operating income: Corporate/Eliminations ...................
Interest income ..............................................................
Interest expense .............................................................
$129,774
(15,406)
15,292
(3,423)
$126,237
$150,538
(22,019)
16,355
(4,456)
$140,418
F-57
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
23. OPERATING SEGMENTS (continued)
The following tables summarize segment information which is prepared in accordance with GAAP for the years ended
June 30, 2017, 2016 and 2015:
For the years ended June 30,
2016
2015
2017
Revenues
South African transaction processing ............................... $249,144
176,729
International transaction processing .................................
Financial inclusion and applied technologies ...................
235,901
661,774
Total ..............................................................................
Operating income (loss)
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Subtotal: Operating segments ........................................
Corporate/Eliminations ..............................................
Total .....................................................................
59,309
13,705
57,785
130,799
(33,756)
97,043
Depreciation and amortization
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Subtotal: Operating segments ........................................
Corporate/Eliminations ..............................................
Total .....................................................................
Expenditures for long-lived assets
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Subtotal: Operating segments .......................................
Corporate/Eliminations .............................................
Total ....................................................................
4,614
21,366
1,422
27,402
13,976
41,378
2,473
7,745
977
11,195
-
$11,195
$212,574
169,807
249,403
631,784
51,386
23,389
54,999
129,774
(15,406)
114,368
6,157
21,852
1,158
29,167
11,227
40,394
5,101
28,029
2,667
35,797
-
$35,797
$236,452
164,554
272,600
673,606
51,008
26,805
72,725
150,538
(22,019)
128,519
7,093
17,846
808
25,747
14,938
40,685
7,008
28,205
1,223
36,436
-
$36,436
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.
Geographic Information
Revenues based on the geographic location from which the sale originated for the years ended June 30, 2017, 2016 and
2015, are presented in the table below:
South Africa ...........................................................................
South Korea ...........................................................................
Rest of world ..........................................................................
Total .................................................................................
$434,124
$153,403
$22,539
$610,066
$422,022
158,609
10,118
$590,749
$461,425
160,853
3,701
$625,979
2017
2016
2015
F-58
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
23. OPERATING SEGMENTS (continued)
Geographic Information (continued)
Long-lived assets based on the geographic location for the years ended June 30, 2017, 2016 and 2015, are presented in the
table below:
South Africa ........................................................................
South Korea ........................................................................
Rest of world ......................................................................
Total ................................................................................
$74,370
192,473
77,723
$344,566
$69,213
221,459
49,105
$339,777
$72,467
230,109
20,058
$322,634
Long-lived assets
2016
2017
2015
24. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company leases certain premises. At June 30, 2017, the future minimum payments under operating leases consist of:
Due within 1 year ....................................
Due within 2 years ..................................
Due within 3 years ..................................
Due within 4 years ..................................
Due within 5 years ..................................
$5,276
$1,496
$481
$376
$165
Operating lease payments related to the premises and equipment were $9.8 million, $8.0 million and $6.8 million,
respectively, for the years ended June 2017, 2016 and 2015, respectively.
Capital commitments
As of each of June 30, 2017 and 2016, the Company had outstanding capital commitments of approximately $0.1 million.
Purchase obligations
As of June 30, 2017 and 2016, the Company had purchase obligations totaling $2.3 million and $3.1 million, respectively.
The purchase obligations as of June 30, 2017, primarily include inventory that will be delivered to the Company and sold to
customers in July 2017.
Guarantees
The South African Revenue Service and certain of the Company’s customers, suppliers and other business partners have
asked the Company to provide them with guarantees, including standby letters of credit, issued by a South African bank. The
Company is required to procure these guarantees for these third parties to operate its business.
Nedbank has issued guarantees to these third parties amounting to ZAR 130.5 million ($10.0 million, translated at exchange
rates applicable as of June 30, 2017) and thereby utilizing part of the Company’s short-term facility. The Company in turn has
provided nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 130.5 million ($10.0 million, translated at exchange
rates applicable as of June 30, 2017). The Company pays commission of between 0.4% per annum to 2.0% per annum of the face
value of these guarantees and does not recover any of the commission from third parties.
F-59
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
24. COMMITMENTS AND CONTINGENCIES (continued)
Guarantees (continued)
The Company has not recognized any obligation related to these counter-guarantees in its consolidated balance sheet as of
June 30, 2017. The maximum potential amount that the Company could pay under these guarantees is ZAR 130.5 million
($10.0 million, translated at exchange rates applicable as of June 30, 2017). The guarantees have reduced the amount available for
borrowings under the Company’s short-term credit facility described in Note 12.
As described in Note 12, the Company, Net1 specifically has provided guarantees to Bank Frick related to the EUR 40.0
million ($45.7 million) and CHF 20 million ($20.9 million) revolving overdraft facilities provided to Masterpayment. As of June
30, 2017, Masterpayment had utilized approximately $16.6 million of CHF 20 million facility and these obligations are recorded
as short-term facilities in the Company’s consolidated balance sheet. The maximum potential amount that the Company could pay
under the guarantees to Bank Frick was $16.6 million.
Contingencies
The Company is subject to a variety of insignificant claims and suits that arise from time to time in the ordinary course of
business.
Management currently believes that the resolution of these matters, individually or in the aggregate, will not have a material
adverse impact on the Company’s financial position, results of operations and cash flows.
25. RELATED PARTY TRANSACTIONS
As described in Note 3, the Company has acquired all of the outstanding and issued ordinary shares in Transact24 that it did
not own in January 2016 and commenced consolidating Transact24 from that date. Transact24 had an existing relationship in
place between itself and a company controlled by the spouse of Transact24’s Managing Director at the time of the Transact24
acquisition. This arrangement therefore was also in place before the Managing Director became an executive officer of the
Company. This relationship was disclosed to the Company during the due diligence process and has been considered by the
Company’s management to be critical to the ongoing operations of Transact24. The company controlled by the spouse of the
managing director performs transaction processing and Transact24 provides technical and administration services to the company.
The Company has recorded revenue of approximately $4.2 million related to this relationship during the year ended June 30,
2017. Transact24’s Managing Director has an indirect interest in these transactions as a result of his relationship with his spouse,
with an approximate value of $1.6 million during the year ended June 30, 2017. As of June 30, 2017, $0.4 million is due to the
Company related to the service provided by Transact24 and this amount is included in accounts receivables, net as of June 30,
2017.
The Company has recorded revenue of approximately $1.9 million related to this relationship during the six months ended
June 30, 2016. Transact24’s Managing Director has an indirect interest in these transactions as a result of his relationship with his
spouse, with an approximate value of $0.1 million during the six months ended June 30, 2016. As of June 30, 2016, $0.4 million
is due to the Company related to the service provided by Transact24 and this amount is included in accounts receivables, net as of
June 30, 2016.
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NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2017, 2016 and 2015
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
26. UNAUDITED QUARTERLY RESULTS
The following tables contain selected unaudited consolidated statements of operations information for each quarter of
fiscal 2017 and 2016:
Three months ended
Jun 30,
2017
Mar 31,
2017
Dec 31,
2016
(In thousands except per share data)
Sep 30,
2016
Year
ended
June 30,
2017
Revenue .............................................................................. $155,056 $147,944 $151,433
25,589
Operating income ................................................................
Net income attributable to Net1 ..........................................
$18,641
Net income per share, in United States dollars ..................
Basic earnings attributable to Net1 shareholders .............
Diluted earnings attributable to Net1 shareholders ..........
24,547
$18,392
14,726
$11,289
$0.20
$0.20
$0.34
$0.33
$0.35
$0.35
$155,633 $610,066
97,043
$72,954
32,181
$24,632
$0.46
$0.46
$1.34
$1.33
Three months ended
Jun 30,
2016
Mar 31,
2016
Dec 31,
2015
(In thousands except per share data)
Sep 30,
2015
Year
ended
June 30,
2016
Revenue .............................................................................. $151,259 $134,736 $150,281
24,779
Operating income ................................................................
Net income attributable to Net1 ..........................................
$16,658
Net income per share, in United States dollars ..................
Basic earnings attributable to Net1 shareholders .............
Diluted earnings attributable to Net1 shareholders ..........
26,191
$18,420
32,183
$24,356
$0.48
$0.47
$0.40
$0.39
$0.35
$0.35
$154,473 $590,749
114,368
$82,454
31,215
$23,020
$0.49
$0.48
$1.72
$1.71
27.
SUBSEQUENT EVENTS
On July 31, 2017, the Company’s board of directors issued its former chief executive officer a 90-day written notice to
terminate his two-year consulting agreement with the Company. As described in Note 15, Mr. S.C.P. Belamant retired on May 31,
2017. The Company will not be making any termination payments to Mr. Belamant beyond the 90-day notice period.
There have been no subsequent events except as described in Note 10, related to the investments in DNI and Cell C, and in
Note 14, related to lending facilities obtained from the Lenders.
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