Net 1 UEPS Technologies, Inc. CEO’s Letter for 2019 Annual Report
Dear Fellow Shareholders:
We are glad to have our fiscal 2019 behind us. What should have been a planned and routine transition with the termination of our
SASSA contract, turned into a barrage of challenges thrown at us with far reaching repercussions, most notably the unilateral and
controversial migration of approximately two million of our EasyPay Everywhere (“EPE”) customers, and more recently an
adverse ruling from the Supreme Court to refund SASSA the ZAR 317 million plus interest that they paid us for reimbursement
of costs related to bulk enrollment in 2014. The resulting lower level of business activity coupled with our existing cost structure
left us with no choice but to take some of the hardest decisions imaginable to return to breakeven EBITDA in South Africa,
predominantly through the retrenchment of approximately 50% of our staff, while also deleveraging our balance sheet. We have
managed to accomplish both these near-term objectives.
With only legacy contract termination and legal issues remaining from the SASSA era, we now look forward to 2020 and beyond
with the enthusiasm and vigor of knowing we have free reign to push forward with our aspirations of being a global fintech player
that through its technology and experience, facilitates financial inclusion. Financial inclusion helps provide the unbanked and
underbanked with access to financial services, drive adoption and usage, offer quality and choice of products, in turn resulting in a
positive socioeconomic impact on the intended recipient. In emerging countries these are primarily individuals and in developed
countries they are usually small businesses.
As we emerge from this difficult period, we also recognize the need for us to simplify our story, structure and reporting, while
also being able to unlock value for our shareholders.
Looking ahead to 2020, imbibing the principles highlighted above, our focus will be on:
• South Africa – accelerate transition from B2B to B2C: our objective is to provide financial inclusion to low-income
individuals in South Africa through the provision of bank accounts, which in turn becomes the channel through which
we can provide access to various financial and other services in collaboration with Finbond;
• Europe – scale up our payments and blockchain offerings: We have developed and certified all the necessary
technology required to address this market opportunity and will go to market with a new brand starting in fiscal 2020.
Our efforts will be further supplemented by taking a controlling interest in Bank Frick, which has a universal pan-
European banking license and issuing and acquiring licenses with Visa and/or MasterCard. For financial inclusion, we
will offer state-of-the-art solutions for issuing, acquiring and neobank services, primarily to small businesses, as well as
launch our internally developed blockchain and crypto-asset storage products in collaboration with Bank Frick;
• Africa – rapidly grow our payment solutions: We will pursue a mobile-first approach to financial inclusion in Africa,
where the cost of physical cards and POS terminals make it prohibitively expensive to digitize transactions. Through
ZappGroup, we have begun the deployment of QR-code based payments in Ghana, which will be followed by additional
countries over the next year. Similarly, in Nigeria, Carbon is a digital consumer lender that has begun to expand its
portfolio of products to include payments and other financial services. As our footprint in these markets evolves, our on-
ground teams will begin to incorporate other Net1 products, including but not limited to UEPS/EMV;
• South Korea – implement turnaround plan: KSNET is one of the largest VAN companies in South Korea with
223,000 merchants, and the only one that is able to offer card VAN, banking VAN and payment gateway services. We
have invested in external advisors to assist us with the formulation and implementation of a turnaround plan to drive top
line growth and improving profitability, which will be an area of focus for us and KSNET in 2020; Simultaneously, we
are actively evaluating our strategic alternatives for the business, and we have received a number of indicative offers to
acquire KSNET that we are currently evaluating with the assistance of FT Partners, our corporate advisors; and
• Unlock shareholder value: There is a palpable dichotomy between the value of our businesses and investments, and the
market value of Net1. While there are a number of factors that have led to this mismatch, we recognize the need for
certain actions by the Company in order to realize some or all of the inherent value in Net1. In addition to simplifying
the business and reporting structure, our Board has already commenced with a group-wide strategic review to identify
the core businesses we need to operate and monetize the assets that are non-core to our simplified fintech strategy. We
have already commenced with the partial disposition of our interest in DNI, with the remaining 30% interest to be
realized in H1 2020. In addition to KSNET, other businesses and investments are also being evaluated - particularly if
they are not core to the group’s global fintech strategy.
At June 30, 2019, we had approximately 1.1 million EPE customers, which has been relatively stable since December 2018 but
declined from a peak of 2.9 million customers prior to SASSA’s auto-migration in August to November 2018. Our new South
African banking and financial services products will be launched in 2020 under a different brand and with a different bank
partner. We believe conservatively in 2020, we should be able to grow our customer base by at least 10% from our June 30, 2019
account base. Together with Finbond, from a distribution standpoint, we would operate the second largest bank branch
infrastructure in the country with 808 branches in addition to 1,300 ATMs and 70,000 POS terminals. The products we have
designed for the lowest income earners provide maximum functionality at the most affordable price.
Having reduced our interest in DNI from 55% to 30% in March and May 2019, the business has been deconsolidated from our
financial statements in Q4 2019. Cell C has faced some challenges due to short-term liquidity constraints and a slowing economy,
and is actively working with all stakeholders to conclude a recapitalization transaction, that will meaningfully improve its
liquidity and set it on a path to profitability.
Financial Overview and Key Metrics. In fiscal 2019, our US dollar-based results were adversely impacted by a 12% year-over-
year depreciation in the South African Rand, which remains volatile due to political and macroeconomic forces. Revenue declined
38% to $361 million (34% in ZAR1), while Fundamental EPS2 was a loss of $4.53, including negative fair value adjustments for
Cell C, impairments, a write-down of finance loans receivables, and operating losses following the expiration of our SASSA
contract and auto-migration of EPE customers, and the impact of the September 2019 Supreme Court ruling. The decline in
revenue was due to the expiration of our SASSA contract in Q1 2019, lower fee and financial services revenue from our EPE
customer base, as well as lower revenue in South Korea due to the regulatory changes and fewer prepaid airtime and value-added
services. Consolidated operating margin was negative 31% in fiscal 2019 compared to positive 10% a year ago, due to the reasons
highlighted above.
Continuously Innovating. Innovation is in Net1’s DNA and we will continue to provide relevant and accessible solutions for our
increasingly diverse global customer base, while creating new mobile-based solutions along with Cell C, MobiKwik, ZappGroup
and Carbon and new blockchain, virtual financial asset storage and processing solutions through IPG.
Management and Governance. We remain committed to expanding our management team and a large part of our focus in fiscal
2020 will be focused on building out management, product, sales and geographic specialists required to support our product-
driven strategy, in turn driving higher and sustainable revenue and earnings.
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 our business given the
perceived reliance on SASSA, the volatility of the South African Rand, and political and regulatory interference in South Africa.
The steps and actions we have taken to drive the new Net1 are meaningful, and we expect to deliver tangible benefits of our
strategy starting in fiscal 2020, building off the more stable base experienced in Q4 2019. We have positioned the company to
address the opportunities in South Africa, Europe, Africa and South Korea, while expending meaningful effort to unlock
shareholder value.
1 ZAR 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.
I would like to extend my sincere thanks to my colleagues on the Board, my unflagging management team and all of Net1’s
employees for their dedication and tireless pursuit of excellence in serving our new and existing customers, our communities and
for constantly striving to return Net1 to a leadership position within our industry.
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 (loss) income................................
Operating (loss) income margin ...................
Net (loss) income Net1 .................................
(Loss) Earnings per share:
Basic ($) ..................................................
Diluted ($) ...............................................
Fundamental net (loss) income3 ...................
Fundamental (loss) earnings per share3:
Basic ($) ..................................................
Number of employees ...................................
Cash flows (used in) provided by operating
activities........................................................
Cash and cash equivalents .................................
Total assets ............................................................
Total equity ...........................................................
Year Ended June 30(R)
2017
As
restated
2016
As
restated
2018
As
restated
612,889
58,949
10%
64,246
1.13
1.13
113,720
2.00
8,379
610,066
97,043
16%
73,070
1.34
1.33
94,721
1.74
5,358
590,749
114,368
19%
82,137
1.72
1.71
92,113
1.92
5,701
2015
As
restated
625,979
128,519
21%
94,735
2.03
2.02
108,205
2.32
4,764
2019
360,990
(113,508)
(31%)
(307,618)
(5.42)
(5.42)
(256,906)
(4.53)
3,146
(4,460)
46,065
672,936
319,429
132,605
90,054
1,217,314
640,986
97,161
258,457
1,448,829
598,802
116,552
223,644
1,261,649
601,784
135,258
117,583
1,315,108
477,351
(R) – Certain 2018, 2017, 2016 and 2015 amounts restated - refer to Item 6 and Note 1 to our audited consolidated financial
statements included in Item 8 of our Annual Report on Form 10-K in this Annual Report for additional information.
Operating segments information
(in United States dollar thousands)
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 ............
2019
2018
2017
2016
2015
Year Ended June 30,
96,038
148,268
146,184
390,490
(29,500)
360,990
(30,771)
2,837
(14,758)
(42,692)
(70,816)
(113,508)
268,047
180,027
221,906
669,980
(57,091)
612,889
42,796
(12,478)
55,372
85,690
(26,741)
58,949
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
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 recognizes the importance of social-economic transformation in our society and is committed to contribute to meaningful
transformation through the Black Economic Empowerment process. In fiscal 2019, despite our extremely challenging trading
conditions experienced, we proudly contributed ZAR 10.5 million to these initiatives. 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 are committed to responsible corporate citizenry through support of social transformation and job creation. We believe that
this will ensure sustainable stability for future generations.
Our objectives to promote transformation, growth and prosperity in South Africa’s economy through active involvement in
programs that support the meaningful participation of black South Africans, including black women and youth, in the national
economy and particularly within the Information Communications Technology (“ICT”) sector.
We achieve these objectives through the establishment of programs in South Africa to assist:
• Management and skills development;
• Socio economic development; and
• Enterprise development, especially small and medium enterprises, promoting the entry of black entrepreneurs into the
mainstream of economic activity, and the advancement of co-operatives.
Management and Skills Development
We support several educational initiatives across a number of discipline focus areas, specifically within the ICT sector, including
the provision of resources. We also support education initiatives in relation to educational funding, upgrading of ICT equipment
and training programs.
We believe that we can support the education of children by providing schools with the necessary resources, infrastructure and
support required. Providing children in disadvantaged areas a fair opportunity to reach their potential is vital to the progression of
South Africa. The following educational initiatives form part of our educational funding initiative:
LFP and The Business School of South Africa
We are passionate about developing skills, particularly for unemployed youth, through learnership programs. We provide learners
with the opportunity to improve their skills and obtain nationally recognized qualifications through partnership with accredited
learning institutions. We have partnered with LFP Training Consultants, an accredited provider of education and training, for the
delivery of various learning programs.
LFP is a fully accredited institution through which we have provided learnerships to over 26 disabled, unemployed individuals.
We also pay these learners a stipend for the duration of the course.
We have continued our strong association with The Business School of South Africa (Pty) Ltd (“BSSA”). BSSA is a Level 1
Broad-Based Black Economic Empowerment (“B-BBEE”) Supplier in terms of the Amended Codes of Good Practice and offers a
number of training programs. We have provided learnerships to over 30 able and disabled unemployed individuals with BSSA as
the main training/skills development provider and we have also paid these learners a stipend for the duration of their studies.
Excalibur Skills and Learnerships
Excalibur is a Level 2 B-BBEE contributor with 51% black women ownership. Excalibur partnered with a few small learnership
companies to offer its clients the ultimate learnership experience: service, affordability and step by step feedback. It has a 3-step
process, and recruits all types of learners, performs a pre-assessment of the learner and then decides on the correct type of
learnership for the learner to achieve the best results. Excalibur has provided learnerships to 20 individuals and also pays these
learners market related stipends for the duration of the learnerships commencing from the first month of the contract.
SAME Foundation
The S.A. Medical and Education Foundation (the “SAME Foundation”) provides schools with the necessary resources,
infrastructure and support which are essential to the education of children. The SAME Foundation implements school monitoring
and support after the completion of a project. This allows them to measure the impact of the investment and assist further to
ensure objectives are reached. We have partnered with the SAME Foundation to establish two new science laboratories, nine fully
equipped mathematics classes and to launch a computer centre which includes all the necessary hardware and software to ensure
that learners and teachers have the opportunity to study computer literacy and further aims to introduce Computer Applied
Technology to the curriculum. These projects have given learners and teachers access to all the resources they need to follow the
curriculum effectively, as well as provide them with a learning-conducive environment. E-learning systems containing learning
software have been made available in every classroom.
ACTION for the Blind and Disabled Children
Action for the Blind and Disabled Children (“ACTION”) undertakes to provide computer literacy to less fortunate children at no
cost. Many of the blind and disabled youngsters enrolled with ACTION hail from rural areas. ACTION enables disabled, blind or
deaf learners to achieve fulfilling employment in a competitive job market by providing above average IT qualifications. As Net1
believes in the importance of education – especially for disabled, blind and/or deaf children who do not have the privilege of
technology in their classrooms and care facilities – we partnered with ACTION. In partnership with ACTION, Net1 has funded
22 disabled students to enroll for Microsoft programs (National Certificate: Information Technology: End User Computing) that
will enable them to write the Microsoft Office Specialist exams, which are internationally recognized. All computers are equipped
with Job Access with Speech software which enables the computer to audibly read what appears on the screen.
Other
We have also contributed to Kungwini Welfare Organisation, the Melisizwe Computer Lab Project and Jicama 89.
Social Economic Development
Our contributions are made with the intent to transform, uplift and empower communities. We support a number of beneficiaries
and work in partnership with various Non-profit Organizations (“NPOs”) and local community members with the goal to support
projects which are efficient, sustainable and valuable to the community. Our primary funding focus areas include:
• Education through improved teacher and learnership programs, providing necessary resources including bursaries;
• Community development through child and youth care centers – programs which support substance abuse awareness and
awareness against violence specifically aimed at children and women; and
• The promotion of entrepreneurship and job creation and increased employment through skills development programs
targeted at youth and community-based, informal entrepreneurs.
Reach for a Dream
Reach for a Dream provides continuous hope to children fighting life-threatening illness through the fulfilment of their dreams
and to offer help to many children facing these illnesses. Fulfilling dreams enables these children to experience a fun aspect of life
which they do not get to participate in due to their illness. The positive effect of the “dream come true” lingers, and the children
often respond better to their medication and treatment. These children between the ages of 3 and 18 years have used their dreams
to fight illnesses such as cancer, cystic fibrosis, muscular dystrophy, kidney failure, blood disorders and heart conditions. We
contributed towards “laptop dreams” by enriching children’s lives with making dreams come true and as a result, distracting them
from medication and the hospital environment. The partnership has contributed towards offering children magical moments to
regain their childhood which is being lost to illness.
Other
We have also contributed to Thandanani, E-Classroom (Pty) Ltd, Melisizwe School Computer Project NPC, Pretoria Police
Rugby Club, Lantern School, Kingsway Centre of Concern, RoundAbout Watersolutions, Jicama 89 CPO, The Last Hope
Organisation NPO, Kungwini Welfare Organisation, Grannies Who Care, Hope For All Outreach NPC and Christ Church
Christian Care Centre.
Enterprise Development
Net1 believes in equal and fair opportunities for all, including the empowerment and improvement of previously disadvantaged
individuals and communities. We are currently working with various partners to explore and create corporate social development
initiatives which will bring about sustainable and scalable outcomes.
We have partnered with Tshokoma Business Consultancy as part of our enterprise development with the main focus of creating a
sustainable environment for growth in the small enterprise sector. This is critical for the sustainable economic growth of South
Africa. Through this partnership value added enterprise development has been implemented which will develop small businesses,
and in particular, create sustainable small businesses which will, in effect, create more employment and empower the previously
disadvantaged. Tshokoma Business Consultancy uses a triple-down approach to poverty alleviation and sustainable development.
This is achieved by employing individuals from townships and rural areas, thereby creating synergistic impact on previously
disadvantaged areas. The direct and indirect impact of the investment includes the following:
9 jobs retained from the previous financial year;
15 permanent jobs created;
8 temporary jobs created;
13 jobs provided to women;
1 job provided to people with disabilities;
21 jobs created for youth;
12 enterprises established for men;
15 enterprises established for women;
27 enterprises established for youth;
28 direct procurement opportunities and clients acquired during the period;
22 indirect procurement opportunities and clients acquired during the period;
•
•
•
•
•
•
•
•
•
•
•
• Procurement towards 68 SMMEs within the Tshokoma ecosystem;
•
34 essential training and courses attended at formal institutions;
•
55 essential training and courses attended through online platforms;
•
8 international investment opportunities; and
•
11 local investment opportunities.
Additional information
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 2019 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 2019 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 a reconciliation to the directly comparable GAAP measure. The presentation of fundamental net (loss)
income and fundamental (loss) earnings per share and headline (loss) earnings per share are non-GAAP measures.
Why we use non-GAAP measures
Management believes that the fundamental net (loss) income and (loss) 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 (loss) income and (loss) earnings per share is GAAP net (loss) income and (loss) 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 (loss) income to fundamental net (loss) income for our last five
fiscal years:
GAAP .......................................................................................................
Impairment loss ..................................................................................
Intangible asset amortization, net of tax .............................................
Loss on disposal of DNI .....................................................................
Retrenchment costs, net ......................................................................
Transaction-related costs ....................................................................
Intangible asset amortization, net related to non-controlling interest .
Accreted interest on DNI contingent consideration ............................
Intangible asset amortization, net (equity-accounted investments) ....
Stock-based compensation charge ......................................................
Facility fees for debt ...........................................................................
Non-recurring Mastertrading allowance for doubtful accounts ..........
Loss resulting from acquisition of DNI ..............................................
Refund of South Korean indirect taxes ...............................................
Change in US tax rate .........................................................................
Profit on sale of XeoHealth ................................................................
Former CEO separation payment, net of tax.......................................
Refund for KSNET litigation ..............................................................
US government investigations-related and US lawsuit expenses .......
Gain resulting from acquisition of Transact24 ...................................
Accounting change for Finbond .......................................................
Fundamental ............................................................................
2019
(307,618)
19,745
16,290
5,771
4,514
3,485
(2,737)
1,848
1,082
393
321
-
-
-
-
-
-
-
-
-
-
(256,906)
Net income (USD’000)
2017
72,954
2018
64,246
2016
82,454
20,917
9,385
-
-
2,239
-
-
2,908
2,607
589
7,803
4,614
(1,985)
860
(463)
-
-
-
-
-
113,720
-
10,491
-
-
3,347
-
-
-
1,982
1,268
-
-
-
-
-
5,200
(643)
122
-
-
94,721
-
8,413
-
-
1,018
-
-
-
3,598
138
-
-
-
-
-
-
-
133
(1,909)
(1,732)
92,113
2015
94,735
-
11,263
-
-
-
-
-
-
3,195
208
-
-
-
-
-
-
(1,354)
158
-
-
108,205
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, 2019
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:
Trading
Title of Each Class
Common Stock,
par value $0.001 per share
Symbol(s) Name of Each Exchange on Which Registered
UEPS
The Nasdaq Stock Market LLC
(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 every Interactive Data File
required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such
Yes [X] No [ ]
files).
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:
[ ] Large accelerated filer
[ ] Non-accelerated filer
[X] Accelerated filer
[X]
Smaller reporting company
[ ]
Emerging growth 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.
[ ]
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, 2018 (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 $174,172,483. This calculation does not reflect a determination that persons are affiliates for any
other purposes.
As of September 23, 2019, 56,568,425 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 2019 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, 2019
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
Item 16. Form 10-K Summary
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 2020 fiscal year, which runs from
July 1, 2019 to June 30, 2020.
ITEM 1. BUSINESS
Overview
We are a leading provider of financial technology, or fintech, products and services to the unbanked and underbanked in a
number of emerging and developed economies. In emerging economies these customers are typically individuals, while in
developed countries, they are primarily small businesses. We have developed and own most of our payment technologies, and
where possible, utilize this technology to provide financial and value-added services to our customers by including them into the
formal financial system.
Our core payment technology is called the Universal Electronic Payment System, or UEPS, and its EMV interoperable
derivative, UEPS/EMV, utilizes a form of distributed ledger technology, providing decentralized and biometrically secure smart
cards that operate in real-time but both off-line and on-line, unlike traditional payment systems offered by major banking
institutions that require immediate access through a communications network to a centralized computer.
Our off-line UEPS system also offers the highest level of availability and affordability by removing any components that
are costly and prone to outages. Our UEPS/EMV solution enables our traditional 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, 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 under-banked customers, including social welfare grant recipients. In addition to
effecting purchases, cash-backs and any form of payment, our system can be used for banking, healthcare management, money
transfers, voting and identification.
Our transaction processing services include multiple forms of payment processing. We operate leading merchant
processors in South Africa through EasyPay and in South Korea through KSNET, a fixed and mobile ATM infrastructure in
South Africa, as well as end-to-end issuing, acquiring and processing services across Asia and Europe through our International
Payments Group, or IPG. We managed more than 300,000 merchants worldwide and processed more than three billion
transactions in Fiscal 2019. With two decades of experience in cryptography and secure transactions, through IPG, we have
established a leadership position in partnership with Bank Frick & Co. AG, or Bank Frick, a Liechtenstein-based bank, in
Europe focused on cryptocurrency processing and the development of a number of block-chain related products such as our new
crypto-asset storage product.
Our financial inclusion products and services are delivered through our UEPS-based core banking system, providing a
low-cost, biometrically secure transactional bank account to our customers, and distributing a number of financial, telecom and
other value-added products through this platform in order to garner a greater share of wallet. In South Africa, this system is
currently deployed under the brand EasyPay Everywhere, or EPE, and at June 30, 2019, we have approximately 1.1 million
active customers on the platform.
Our technology businesses include the development and deployment of our UEPS and Mobile Virtual Card, or MVC,
solutions worldwide, cryptographic solutions including the STS-6 standard for utility vending solutions, hardware security
modules or HSM, chip and subscriber identity module, or SIM, cards, and the reselling of point of sale equipment.
2
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: Dozens of national governments have adopted policies to expand financial inclusion to
their citizens. According to the most recent World Bank’s 2017 Global Findex Database, 69% of adults worldwide have access
to an account at a financial institution or through a mobile money service. In developing economies, this percentage is 63%. As
a result, 1.7 billion adults around the world remain entirely excluded from the financial system. Globally, 20% of the banked
population have inactive accounts, i.e. no transactions for twelve months, taking the market opportunity to well over 2 billion
adults. 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, also in cash.
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. The power
of financial technology to expand access to, and use of accounts is particularly relevant in sub-Saharan Africa, where 21% of
adults have a mobile money account. Globally, the share of adults who borrow from formal sources, has remained flat between
2014 and 2017 at 23%, which implies that half of the borrowers globally rely on informal lenders resulting in exorbitant
borrowing costs, questionable recovery practices and the inevitable downward debt spiral. 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,
while also allowing them to build a credit history and gain access to the broader formal financial services industry.
Over the past two decades we have issued millions of cards across more than ten developing countries, and therefore our
track record and scale uniquely position us to continue further geographical penetration of our technology in additional
emerging countries.
Similarly, in developed countries, Small and Micro Enterprises, or SMEs, frequently fall into the underbanked category
due to cumbersome and costly efforts to secure banking relationships, payment processing and credit. According to a Deloitte
report, titled Digital banking for small and medium-sized enterprises Improving access to finance for the underserved, on
Digital Banking for Small Businesses, several factors drive low financial inclusion of SMEs, including 1) limited financial
infrastructure such as poor coverage by credit bureaus limit availability and cost of securing credit; 2) inadequate distribution
channels limit banks from reaching and servicing SMEs in either the physical or digital space; 3) lack of cash-flow visibility
forces banks to adopt stringent collateral-based credit risk models which hinder lending to SMEs without collateral; and 4)
regulations and compliance costs adversely impact banks from serving small customers and invariably drive up costs.
3
These inefficiencies have created an opportunity for neo-or-challenger banks and fintech companies to improve reach and
coverage for SMEs and accelerate access to, and reduce cost of banking and financial services. Our issuing, acquiring and
platforms together with our e-money licenses and relationship with Bank Frick, a European bank in which we have a sizeable
strategic investment, allows SMEs to open accounts and accept electronic payments almost instantly, letting them focus on
running their core business.
Transaction processing services: The continued global growth of retail credit, debit and prepaid card transactions is
reflected in the May 2019 Nilson Report, according to which worldwide annual general purpose card dollar volume increased
19.1% to $33.7 trillion in 2018, while transaction volume increased by 22.4% to 406.3 billion transactions and cards issued
increased by 10.4% to 13.2 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 largest Value-added network, or VAN, processors, and we provide
card processing, banking value-added services and payment gateway functionality to more than 223,000 retailers. IPG operates
as an established end-to-end provider of issuing, acquiring, and processing, particularly for small merchants or those with
significant cross-border operations. Another key differentiator of IPG is its extensive catalog of licenses and regulated entities,
including some within the fast-growing fields of cryptocurrencies and blockchain. IPG is ably supported by Bank Frick.
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 MVC technology focuses on card-not-present transactions and enables interoperability between
closed or semi-closed networks, and has been deployed in South Africa, India and the United States. Additionally, through
ZappGroup Africa, one of our strategic investments, we are able to provide QR technology to emerging countries in Africa,
allowing them leapfrog the 50+ year old card technology and go straight to mobile, as many countries like China, India, Nigeria,
Ghana and Kenya have done.
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. The 2017 Global Findex Database: Measuring Financial Inclusion and the Fintech Revolution states that 21% of
adults in Sub-Saharan Africa have a mobile-money account – nearly twice the percentage compared to 2014. In developing
economies, 19% of adults reported making at least one direct payment using a mobile money account, a mobile phone, or the
internet.
Mobile phones are therefore increasingly viewed as a channel through which this underserved population can gain access
to formal financial and other services. Our UEPS, MVC and QR code 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.
Our Strategy
Our core purpose is to improve people’s lives by bringing financial inclusion to the world’s under-banked customers and
helping small businesses access the financial services they need to prosper. We achieve this through our unique ability to
efficiently digitize or tokenize the expensive and difficult to achieve last mile of financial inclusion.
Our strategy varies by geography and service, and accordingly our approach is based on four pillars which are
supplemented by our strategic investments:
South Africa—we own or control most of the components of the vertical chain in South Africa, from core banking to
lending and insurance to payments, processing and value-added services as well as a significant last mile distribution network.
Our focus remains squarely on the underbanked population who are low-wage earners or those receiving welfare grants, as well
as any customers accessing our payment infrastructure, ATMs and bill payment platforms.
Our EPE banking product 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. At June 30, 2019,
we had approximately 1.1 million active EPE customers. Going forward, we will also work more closely with Finbond Group
Limited, or Finbond, a South African bank in which we have a significant strategic investment, to issue new and expanded
banking and financial services offerings. Additionally, our combined branch, point-of-sale and ATM network with Finbond,
would make us the second largest bank in South Africa from a distribution and coverage perspective.
4
We are also one of the leading independent transaction processors, and have deployed the most extensive distribution
network comprising of mobile and fixed ATM’s and POS devices to the country’s large unbanked and under-banked population,
we are the largest third-party processor of retail merchant transactions, bill payments and 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 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 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.
Africa—Depending on the country, only 10% to 30% of the adult populations have access to financial services and thus
the deployment of cloud-based bank-in-a-box and mobile-based solutions, together with strong local partners, remains a
substantial opportunity for us. Today we are operational in nine African countries through our Virtual Top Up, or VTU,
offerings in partnership with MTN, UEPS is deployed as the national payment system in Ghana and extensively used in
Namibia and Botswana, a rapidly growing digital consumer finance business in Nigeria through OneFi, and our relatively new
QR-based payment initiatives through ZappGroup Africa. We also intend to increase cooperation across our operations in
various African countries to build a substantial continent-wide fintech platform that is home to a billion people.
Our mobile-first approach is predicated on the belief 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.
Europe and Asia (ex-Korea)—This opportunity is driven by IPG and focuses primarily on the SME market as well as
solutions utilizing blockchain and cryptocurrencies. IPG was created by combining a number of regional assets and licenses to
form a comprehensive international payments business providing issuing, acquiring and processing, supported by Bank Frick in
Europe. IPG has developed new, state-of-the-art issuing and acquiring platforms that have now been certified by Visa and
MasterCard.
In India, we own an interest in MobiKwik, one of the largest digital financial services platforms in India with over 80
million users. MobiKwik helps us gain entry to a large and complex market and we have already deployed our MVC
technology, allowing their wallet to become interoperable and offering an effective disbursement tool for their loan products.
South Korea—KSNET in Korea is one of the largest VANs in the country with 223,000 merchants and over 359,000 POS
deployed. It processed in excess of 1.7 billion transactions in fiscal 2019. KSNET is also the only one of the large VANs that
provides Card VAN, Banking VAN and payment gateway, or PG, services. Banking VAN and payment gateway markets are
faster growing and are an area of focus for KSNET. We are introducing new products such as working capital finance to
leverage their high-fixed cost infrastructure.
Our Businesses
Our company is organized into the following business lines:
South African Banking and 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 in a convenient or cost-effective
manner. Our banking product, EPE, 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.
5
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 or credit life insurance premiums on our loans. We also offer our customer base
affordable insurance products relevant to this market segment, focusing on group life and funeral insurance policies.
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 business unit has been allocated to our South African transaction processing reporting segment.
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 223,000 merchants and
an extensive direct and indirect sales network. The merchant base is predominantly serviced via a network of independent
agents. KSNET’s core operations comprise three primary product offerings, namely card VAN, 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. Approximately 78% of KSNET’s revenue comes from the provision of payment
processing services to merchants and card issuers through its card VAN. KSNET has also started providing working capital
financing to those merchants where we provide payment processing services.
This business unit has been allocated to our International transaction processing reporting segment.
International Payments Group
IPG is based out of Hong Kong, China, and is an end-to-end payment service provider. IPG includes our processing
business based in Munich, Germany, and holds e-money licenses in the United Kingdom and in Europe, and provides debit and
credit card acquiring in Europe, the UK, and Asia including China. Additionally, IPG provides Automated Clearing House, or
ACH, processing in the United States, and card acquiring services for cryptocurrency exchanges such as Bitstamp and Bitpanda.
In collaboration with Bank Frick, IPG provides a number of banking and processing services to small merchants. Through
a joint, collaborative approach, IPG and Bank Frick have established a blockchain development division to create new, first-to
market differentiated solutions to harness the capabilities of a bank and a processor.
This business unit has been allocated to our International transaction processing reporting segment.
Applied Technology
Our Applied Technology business unit is managed from Johannesburg, South Africa, and is responsible for various
individual lines of business:
• Payment Infrastructure—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 biometrically-enabled
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.
• 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.
6
• 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,
cryptocurrency, 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 financial inclusion and applied technologies reporting segments.
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 unbanked and underbanked cardholders.
We further intend to differentiate our value proposition for our end users by offering bundled lifestyle products to include
affordable telephony solutions in addition to banking and finance, as well as the development of new payment technologies
specifically for mobile phones. 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 EPE transactional account and
our financial services offering, our competitors include the local traditional and digital banks, insurance companies, micro-
lenders and other transaction processors. The South African banks and 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.
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 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 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.
7
IPG competitors typically include local or regional issuers, acquirers and processors as well as a few large multinational
companies such as Wirecard and WorldPay. A number of new fintech entrants and neo-banks, usually locally or occasionally
regionally such as Stripe, Revolut, N26, Klarna, Transferwise, and Digibank are also rapidly establishing their market presence.
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,
Facebook, Samsung and PayPal; local and global fintech companies; as well as companies specifically focused on mobile
payments such as Ant Financial, WeChat, M-Pesa and Square.
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 21 to our audited consolidated financial statements included in this annual report contains detailed financial
information about our operating segments for fiscal 2019, 2018 and 2017. 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:
2019
$’000
212,722
138,426
9,842
360,990
Revenue
2018
$’000
433,421
153,314
26,154
612,889
2017
$’000
434,124
153,403
22,539
610,066
2019
$’000
143,924
149,390
83,972
377,286
Long-lived assets
2018(R)
$’000
496,442
177,388
116,643
790,473
2017(R)
$’000
72,443
192,473
77,723
342,639
South Africa ...................
South Korea ...................
Rest of world .................
Total ...........................
(R) Long-lived assets as of June 30, 2018 and 2017, restated to correct the misstatement discussed in Note 1 to the audited
consolidated financial statements. Long-lived assets as of June 30, 2018 and 2017, decreased by $2.0 million and 1.9 million,
respectively, following the restatement.
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
2018(1)
2019
2017
Management ..................................................................
South African transaction processing ............................
International transaction processing ..............................
Financial inclusion and applied technologies(2) .............
Total ...........................................................................
186
869
330
1,761
3,146
272
1,902
330
5,875
8,379
236
2,487
354
2,281
5,358
(1) Fiscal 2018 number of employees includes 2,651 DNI employees, of which 51 are included in management and 2,600
are included in Financial inclusion and applied technologies. We sold our controlling interest in DNI during fiscal 2019.
(2) Financial inclusion and applied technologies includes employees allocated to corporate/ eliminations activities.
On a functional basis, five of our employees were part of executive management, 148 were employed in sales and
marketing, 181 were employed in finance and administration, 271 were employed in information technology and 2,541 were
employed in operations. Our staffing levels have reduced significantly from fiscal 2018 following the expiration of our SASSA
contract in September 2018 and the deconsolidation of DNI in March 2019.
As of June 30, 2019, approximately 195 of the 257 employees we have in South Korea who perform international
transaction-based activities were members of a union in Korea. We believe that we have a good relationship with our employees
and these unions.
8
Corporate history
Net1 was incorporated in Florida in May 1997. In 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 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
Alex M.R. Smith
Philip S. Meyer
Phil-Hyun Oh
Nanda Pillay
Age
49
50
62
60
48
Title
Chief Executive Officer and Director
Chief Financial Officer, Treasurer, Secretary, and Director
Managing Director: International Payments Group
Chief Executive Officer and President, KSNET, Inc.
Managing Director: Southern Africa
Herman Kotzé has been our Chief Executive Officer since May 2017 and was our Chief Financial Officer, Secretary and
Treasurer from June 2004 to February 2018. 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.
Alex M.R. Smith has been our Chief Financial Officer, Treasurer and Secretary since March 2018. Mr. Smith joined Allied
Electronics Corporation Limited, or Altron, a JSE-listed company in 2006 and from August 2008 until February 2018, Mr.
Smith served as a director and its Chief Financial Officer. Prior to joining Altron, Mr. Smith worked in various positions at
PricewaterhouseCoopers in Edinburgh, Scotland and Johannesburg from 1991 to 2005. Mr. Smith holds a bachelor of law
(honours) degree from the University of Edinburgh and is a member of the Institute of Chartered Accountants of Scotland.
Philip Meyer has been the Managing Director of IPG since February 2018 and also serves as 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 degree 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 Financial Services,
EasyPay, and SmartSwitch Botswana.
9
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
Management has identified certain conditions or events, which, considered in the aggregate, could
raise substantial doubt about our ability to continue as a going concern and our auditors have drawn
attention to this uncertainty in their report on our consolidated financial statements. Management has
developed a plan to mitigate our going concern risk. If we are unable to execute our plan, it is possible
that we will exhaust our resources and will be unable to continue operations. If we cannot continue as a
viable entity, our shareholders would likely lose most or all of their investment in us.
Our audited consolidated financial statements were prepared under the assumption that we would continue our operations
as a going concern. Our independent registered public accounting firm included an explanatory paragraph regarding a going
concern uncertainty in its report on our consolidated financial statements as of, and for the year ended, June 30, 2019, indicating
that, as discussed in Note 1 to such audited consolidated financial statements, we are experiencing difficulty in generating
sufficient cash flow to meet our obligations and sustain our operations, which raises substantial doubt about our ability to
continue as a going concern. Continued operations and our ability to continue as a going concern are dependent on our ability to
execute our plan described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Consideration of Going Concern,” and there are no assurances that we will be
able to execute such plan. Uncertainty concerning our ability to continue as a going concern may also hinder our ability to
obtain future financing.
Our audited consolidated financial statements do not include any adjustments that may result from the outcome of this
uncertainty. If we are unable to execute our plan, it is possible that we will exhaust our resources and will be unable to continue
operations. If we cannot continue as a viable entity, our shareholders would likely lose most or all of their investment in us. See
also “—Our ability to return to profitability and positive cash flow is substantially dependent on our ability to execute our
strategic plan in South Africa” and “—Ongoing losses and cash demands may place the group under liquidity pressure,
particularly if various asset realizations are not concluded.
SASSA’s migration of EPE customers to the SAPO account during the first half of fiscal 2019
resulted in the loss of a significant portion of our EPE customer base. Unless we are able to maintain
our EPE customer base, our South African financial services business will likely become unsustainable
and result in the closure of most or all of that business.
During September and October 2018, SASSA migrated those of our EPE customers who had not submitted to SASSA a
signed Annexure C form and failed to process many of the Annexure C forms submitted by our potential customers. As a result,
we experienced a decline in the EPE customer base to under 1.1 million EPE accounts receiving grants during December 2018
and January 2019. These same factors have had an adverse impact on our ability to sign up new customers to the EPE product
and, as a result, we have experienced very low levels of gross new EPE accounts. As described under “Item 3.—Legal
Proceedings—Legal proceedings against SASSA in respect of transfer of grant payments from EPE to SAPO accounts”, we
commenced legal proceedings against SASSA challenging its actions but, in late January 2019, the High Court ruled that
SASSA may pay grants into SAPO accounts unless the grant recipient has delivered a signed Annexure C form to SASSA.
While our EPE customer base has been relatively stable since November 2018, any decision by SASSA to migrate more of
our EPE customers to SAPO accounts would threaten our entire South African financial services business and materially and
adversely affect our business, results of operations, financial condition and cash flows.
Even if we are able to maintain a sufficient EPE customer base, we may still face challenges in
transforming our South African operations to a business-to-consumer model through our EPE bank
account and ATM infrastructure.
Following the conclusion of the SASSA contract on September 30, 2018, we refocused our resources and technology on
the provision of financial inclusion services to our target market. In particular we enabled our mobile ATM payment
infrastructure to become part of the South African National Payment System and concentrated on taking our ATMs to the rural
populations of South Africa so that they have the same access to financial inclusion as they had during the tenure of our
contract, without the many inconveniences and inefficiencies of SASSA’s new payment model.
10
While we believe that our financial services offerings are convenient and cost-effective, the success of our strategy will
depend on the extent to which South African customers continue to use our financial products and services on a widespread
basis. As discussed in the risk factor immediately above, SASSA’s unilateral decision to move EPE customers to the SASSA
account and the subsequent judgment that has limited our ability to oppose SASSA’s actions, will likely make it more difficult
for us to attract and retain as many EPE customers as we had previously planned.
Even if we continue to maintain our current EPE customer base, to the extent where such business remains viable, other
factors may prevent us from successfully operating and growing our South African financial services business include, but are
not limited to:
•
•
•
•
•
•
•
•
•
•
•
reduced adoption and utilization of our EPE accounts and related products and services;
insufficient utilization of our ATM infrastructure, especially our mobile ATM infrastructure;
inability to access sufficient funding for our ATM infrastructure;
competition in the marketplace;
restrictions imposed by SASSA or government on the manner in which recipients may transact;
additional and/ or protracted legal proceedings with SASSA or other parties;
political interference;
changes in the regulatory environment;
dependence on existing suppliers to provide the hardware (such as ATMs, cards and POS devices) we require to
execute our rollout as anticipated;
logistical and communications challenges; and
loss of key technical and operations staff.
Our ability to return to profitability and positive cash flow is substantially dependent on our ability
to execute our strategic plan in South Africa.
No assurance can be provided that, if we fail to effectively execute our strategic plan in South Africa, we will be able to
return to profitability and, even if we do return to profitability, extended periods of profitability and net income do not assure
positive cash flows. Future periods of net losses from operations could result in negative cash flow and may hamper ongoing
operations and prevent us from sustaining or expanding our business. We cannot assure you that we will achieve, sustain or
increase profitability on a quarterly or annual basis in the future. If we do not achieve, sustain or increase profitability, our
business will be materially and adversely affected and our share price may decline.
Ongoing losses and cash demands may place the group under liquidity pressure, particularly if
various asset realizations are not concluded.
During the last twelve months, we have seen a significant decline in our cash balances due to significant operating losses,
which were attributed primarily to the significant losses we incurred during the six-month extension of the SASSA contract and
the exceptional bad debt write-offs caused by the migration of EPE customers to SAPO accounts by SASSA. While we have
taken significant actions in the last six months to reduce the debt on our balance sheet, should our operating performance not
improve, or if various adverse events occur, then our liquidity may come under significant pressure. This would have a material
adverse effect on our business, cash flows, results of operations and financial condition.
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.
The South African public, media, non-governmental organizations and political parties have utilized a number of
platforms, including social media, to criticize SASSA over its failure to implement the orders of the Constitutional Court over
the last two years and express their dissatisfaction with the state of affairs. Among the criticisms, we have been accused of being
responsible 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
allegations 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. 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.
11
We have been ordered by the Supreme Court to repay to SASSA certain reimbursed implementation
costs. We are analyzing the ruling in order to determine our next course of action, but if we are
ultimately required to repay substantial monies to SASSA, such repayment would adversely affect our
results of operations, financial position and cash flows.
In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced a legal proceeding in
the High Court seeking an order by the Court to review and set aside the decision of SASSA’s Chief Executive Officer to
approve a payment to us of ZAR 317.0 million (approximately ZAR 277 million, excluding VAT) and directed us to repay the
aforesaid amount, plus interest. Corruption Watch claimed that there was no lawful basis to make the payment to us, and that the
decision was unreasonable and irrational and did not comply with South African legislation. We were named as a respondent in
this legal proceeding.
On February 22, 2018, the matter was heard by the Gauteng Division, Pretoria of the High Court of South Africa. On
March 23, 2018, the High Court ordered that the June 15, 2012 variation agreement between SASSA and CPS be reviewed and
set aside. CPS was ordered to refund ZAR 317.0 million to SASSA, plus interest from June 2014 to date of payment. On April
4, 2018, we filed an application seeking leave to appeal the whole order and judgment of the High Court because we believed
that the High Court erred in its application of the law and/or in fact in its findings. On April 25, 2018, the High Court rejected
the application seeking leave to appeal. CPS filed an application seeking leave to appeal the whole order and judgment of the
High Court with the Supreme Court of Appeal. In September 2018, CPS received notification from the Supreme Court that its
petition seeking leave to appeal had been granted. The matter was heard on September 10, 2019. On September 30, 2019 the
Supreme Court dismissed our appeal and ordered us to pay Corruption Watch’s costs. We are analyzing the ruling in order to
determine our next course of action. We have recorded a liability of $34.0 million (ZAR 479.4 million, translated at exchange
rates applicable as of June 30, 2019, comprising the refund of ZAR 317.0 million, accrued interest of ZAR 161.0 million and
estimated costs of ZAR 1.4 million) in our audited consolidated balance sheet as of June 30, 2019 in the caption other payables.
In addition, in an April 2014 ruling, the Constitutional Court ordered SASSA to re-run the tender process and required us
to file with the Court, after completion of our SASSA contract in March 2017, an audited statement of our expenses, income and
net profit under the contract. The March 2018 Constitutional Court order contains a similar requirement that we file an audited
statement of our expenses, income and net profit within 30 days of the completion of the contract. We have filed the required
independently audited information with the Constitutional Court as ordered and the auditors expressed an unqualified opinion
with an emphasis of matter regarding the basis of preparation and restriction as to use. The Constitutional Court also ordered
SASSA to audit the audited information filed with the Constitutional Court and SASSA appointed an independent firm to audit
our submission. The independent audit is currently underway and we understand that the independent firm is due to file its
report by October 31, 2019. Parties to the March 2018 court proceedings also requested the Constitutional Court to consider
further orders, including the repayment of any profits derived by CPS under its SASSA contract. The Constitutional Court did
not provide for this in its March 2018 order; however, 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.
The pricing recommended by National Treasury to the Constitutional Court for our services
provided at pay points for the period from April 1, 2018 through September 30, 2018, has not yet been
paid and we have commenced legal action for payment against SASSA. If we are not paid, or if the
amount ultimately paid to us is not commercially reasonable, our results of operations, financial
position and cash flows would be adversely affected.
Under the Constitutional Court order of March 23, 2018, related to the extension of the SASSA contract to September 30,
2018 in respect of the recipients paid at cash pay points, we were granted permission to approach National Treasury to request
revised pricing of the contract. National Treasury provided a recommendation to the Constitutional Court in compliance with
their order at a price per recipient of R51.00 (VAT inclusive) per month. Although we offered to accept this amount in respect
of the three months ended June 30, 2018 when the number of recipients paid approximated two million per month, we asked the
Constitutional Court to reconsider the last three months of the contract. In line with SASSA’s public statements, there was a
material reduction in the number of recipients paid at the pay points during July, August and September 2018.
In December 2018, we received correspondence from the Constitutional Court informing the parties that it believes that
“nothing prevents the parties from coming to an agreement on increased payments without court sanction, and if they do not,
normal legal processes in other courts must be filed to determine the effects.” We engaged SASSA directly in order to resolve
this matter however we were not able to reach an amicable agreement and have commenced legal action as described under
“Item 3.—Legal Proceedings—Dispute with SASSA regarding payment of fees for the last six months of the contract”. If we do
not receive payment from SASSA, our results of operations, financial position and cash flows would be adversely affected.
12
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 Proprietary Limited, or Cell C, utilizing a combination of existing cash reserves and external debt from South
African banks.
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 retain
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. For instance, in December 2018, we recorded an impairment loss of $7.0 million
related to goodwill identified in the T24 acquisition and in March 2019, we recorded an impairment loss of $5.3 million related
to the certain intangible assets identified in the DNI acquisition. In March 2018, we recorded an impairment loss of $19.9
million related to the goodwill identified in the Masterpayment and Masterpayment Financial Services acquisitions. Finally,
acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the
acquisition.
We have not achieved the expected benefits from our Cell C and DNI investments and may incur
further losses related to these investments.
We invested more than $240 million, in aggregate, to acquire a 15% interest in Cell C and a 55% controlling interest in
DNI. At the time of each investment, we believed that there were potential synergies that we could derive from each of these
transactions, including the integration of certain of our service offerings with those of Cell C and DNI. However, we have not
yet realized some of the synergies that we had anticipated to achieve by now, and it is possible that we may not realize such
synergies at all.
Attempting to integrate these service offerings may be disruptive to us, and we may not be able to integrate these offerings
successfully. Even if we are able to achieve this integration, our customers may not use these services to the extent that we
expect they will. Any such failure could adversely impact our business or the businesses of Cell C and DNI, which could, in
turn, reduce the value of our investments in them. Additionally, attempting to integrate Cell C’s and DNI’s offerings with our
own may adversely impact our other business and operational relationships. Our inability to achieve the expected synergies
from the Cell C and DNI transactions may have a material adverse effect on our business, results of operations or financial
condition.
In addition, Cell C and DNI may not be able to successfully execute their respective business plans, which may adversely
affect, or impair, the carrying value of our investments in them. As an example, during the year ended June 30, 2019, we
recorded a loss related to the change in fair value for Cell C of $167.5 million which adversely impacted our results of
operations and financial position. Our investments in Cell C and Cedar Cellular Investment 1 (RF) (Pty) Ltd, or Cedar Cellular,
8.625% notes were carried at $0 as of June 30, 2019, refer to Notes 7 and 9 to our audited consolidated financial statements for
additional information regarding these investments. We also incurred a loss of $5.8 million during the year ended June 30, 2019,
related to the reduction in our investment in DNI from 55% to 30%.
We have granted a call option to DNI to acquire our remaining 30% interest in DNI in order to
improve our liquidity. If we are unable to dispose of our entire, or a partial interest in DNI, in the short-
term our financial position and cash flows may be adversely affected.
We have determined to sell all or a portion of our remaining investment in DNI in order to generate additional liquidity to
fund certain of our other businesses. On May 3, 2019, our wholly owned subsidiary, Net1 Applied Technologies South Africa
Proprietary Limited, or Net1 SA, entered into an agreement pursuant to which it granted a call option to DNI to acquire Net1
SA’s remaining 30% interest in DNI. The option expires on December 31, 2019, but may be exercised at any time prior to
expiration.
13
The option strike price is calculated as ZAR 2.827 billion ($200.8 million, translated at exchange rates applicable as of
June 30, 2019) less any special distribution made by DNI multiplied by Net1 SA’s retained interest (i.e. assuming no special
distribution, the strike price for the 30% retained interest is ZAR 859.3 million, or $61.0 million, translated at exchange rates
applicable as of June 30, 2019). The call option may be split into smaller denominations, but Net1 SA cannot be left with less
than 20% unless the whole remaining interest is disposed of. DNI may nominate another party to exercise the call option in the
place of DNI, provided that the nominated party acquires call options representing at least 1.0% of DNI’s voting and
participation interests.
If we are unable to dispose of our entire, or a partial interest in DNI, in the short-term our financial position and cash flows
may be adversely affected.
DNI generates most of its revenue by providing services to or on behalf of Cell C, principally
through the sale of mobile phone starter packs. Our results of operations, financial condition and cash
flow would suffer materially if DNI were to lose its contractual relationships with Cell C.
DNI’s business comprises of a number of separate entities that are primarily involved in the distribution of mobile phone
starter packs, mainly on behalf of Cell C. DNI also provides funding for the expansion of Cell C’s mobile telecommunications
infrastructure. If Cell C were to terminate any of these contractual relationships that have multi-year notice periods, it would
have a material adverse effect on our results of operations, financial condition and cash flow as a consequence of the impact on
DNI. In particular our remaining 30% interest in DNI is likely to be worth less in the event that these contractual relationships
are terminated.
We have 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 have credit facilities from Rand Merchant Bank, a division of FirstRand Bank Limited, or RMB, and Nedbank
Limited, South African banks. The facilities are secured by intercompany cross-guarantees, a guarantee from Net1 and a pledge
by Net1 SA of its entire equity interests in Cell C, DNI and FIHRST. The terms of the lending arrangement contain covenants
that require Net1 SA to maintain certain asset cover ratios 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 without the approval of the lenders.
In addition, DNI has a three year revolving credit facility of ZAR 200 million ($14.2 million, translated at exchange rates
applicable as of June 30, 2019) from RMB to expand its operations. We are a reversionary guarantor of this credit facility as a
result of our shareholding in DNI. The revolving credit facility is secured by intercompany cross-guarantees within the DNI
group and a pledge by DNI of its entire equity interests in its subsidiaries. The terms of the lending arrangement contain
customary covenants that require DNI to remain in accordance with specified net senior debt to EBITDA and EBITDA to net
senior interest ratios and restrict the ability of DNI, 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 without the approval of the lenders.
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, 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 may be unable to secure the necessary facilities that will enable us to maintain the cash
requirements for our ATM network
The expansion of our fixed and mobile ATM network, along with an increase in our consumer banking client base,
necessitates access to large amounts of cash to stock the ATMs and maintain uninterrupted service levels. We currently utilize
debt facilities that expire in September 2020 to fund these ATMs. Any adverse change to the terms of these credit facilities, a
significant reduction in the amounts available under these credit facilities, or our failure to increase our facilities if required, will
have an adverse impact on our ability to continue uninterrupted operation of our ATM network and our revenues from this
business. We will also suffer reputational damage if our service levels are negatively impacted due to the unavailability of cash.
14
We face competition from the incumbent retail banks in South Africa and SAPO in the unbanked
market segment, which could limit our growth.
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 2018 FinScope SA 2018 Fact Sheet, a survey conducted by the FinMark Trust, a non-
profit independent trust, 80% of South Africans are banked. As the competition to bank the unbanked in South Africa
intensifies, we may not be successful in marketing our low-cost products 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.
Furthermore, as a result of SASSA’s migration of customers to SAPO during the first half of fiscal 2019, we saw a significant
increase in the number of our customers no longer receiving their grant income into their EPE bank account. This resulted in a
very significant increase in unrecoverable amounts and a significant bad debt expense. As EPE accounts have remained largely
stable since November 2018, we have seen our recoverability risk return to levels consistent with our previous experience.
Nevertheless, these events have increased our recoverability risk and the risk that our allowance is insufficient.
Our 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 Korean lending activities and
previously 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 and other working capital finance
receivables because these are new offerings 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. 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 may face competition from other companies that offer innovative payment technologies and
payment processing, which could result in the 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, new digital and fintech entrants 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.
15
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. Also, economic
confidence in South Africa, our main operating environment, is currently low and as a result the risk of an economic downturn
is inflated. 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, the sales of mobile phone starter packs, the take-up of the
financial services we offer and the ability of our customers to repay our microloans or to pay their insurance premiums, 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 Officer, and Mr. Alex Smith, our Chief Financial Officer.
Many of our key responsibilities in South Africa are currently performed by Messrs. Kotzé and Smith, as well as by Mr. Nanda
Pillay, our Managing Director: Southern Africa. 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.
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. In addition, the growth and future profitability of IPG is reliant on Mr.
Philip Meyer’s leadership, industry knowledge and contacts. We do not maintain any “key person” life insurance policies.
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 targeted
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.
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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.
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 Mauritius (in V2
Limited) and our non-controlling investments in Nigeria, Liechtenstein and India.
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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.
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 pre-fund certain merchant and customer payments in South Africa and South Korea and a
significant level of payment defaults by these merchants or customers would adversely affect us.
We pre-fund the settlement of funds to certain merchants and customers in South African and South Korea. 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 through our payment
infrastructure in South Africa.
Many cardholders use our services to access cash using their debit 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 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.
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.
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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/or private contracts and/or risk not being in
compliance with any government and/or private contracts which we have already entered into. In
addition, it is possible that we may be required to increase the black shareholding of our company in a
manner that could dilute your ownership and/or change the companies from which we purchase goods
or procure services (to companies with a better BEE Contributor Status Level).
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 from time to time,
and the Amended BEE Codes of Good Practice, 2013, or BEE Codes, and any sector-specific codes of good practice, or Sector
Codes, published pursuant thereto. Sector Codes are fully binding between and among businesses operating in a sector for
which a Sector Code has been published. Achievement of BEE objectives is measured by a scorecard which establishes a
weighting for the various elements. Save for certain instances where entities are only required to obtain an affidavit (for
example, exempted micro enterprises and a qualifying small enterprise that is 51% Black Owned or 100% Black Owned (as
defined in the BEE Codes and/or Sector Codes)), scorecards are independently reviewed by accredited BEE verification
agencies which issue a certificate that presents an entity’s BEE Contributor Status Level.
Certain of our South African businesses are subject to either the Information, Communications and 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 was promulgated on November 7, 2016. Likewise, the Financial Services Sector Code has been amended
and aligned with the new BEE Codes, and was promulgated on December 1, 2017.
We have taken a number of actions as a company to increase empowerment of black (as defined under applicable
regulations) 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 (either directly or indirectly). Such sales or placements of shares could have a dilutive impact on your
ownership interest, which could cause the market price of our stock to decline.
We expect that our BEE Contributor Status Level will be important for us in order to remain competitive in the South
African marketplace and we continually seek ways to improve our BEE Contributor Status Level, especially the ownership (so-
called “equity element”) element thereof. We have entered into various BEE transactions in the past in an effort to improve our
score, including transactions in which we issued equity to BEE partners.
It is possible that we may find it necessary to issue additional shares to improve our BEE Contributor Status Level. 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.”
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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.
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 often 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, but there was a brief reoccurrence in early calendar 2019. Eskom requires significant funding
from the South African government in order to continue to operate.
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
raise sufficient funding to operate and/ or 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, interest rates and rates of corporate tax,
which could increase our operating costs and thereby reduce our profitability. Furthermore, the South
African government requires additional income to fund future government expenditures and may be
required, among other things, to increase existing income taxes rates, including the corporate income
tax rate, amend existing tax legislation or introduce additional taxes.
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. Higher interest rates
increase the cost of our debt financing, though conversely they also increase the amount of income we earn on any cash
balances. The South corporate income tax rate, of 28%, is higher than the Federal income tax rate, of 21%, as a result of changes
to U.S. tax legislation following the enactment of the Tax Cuts and Jobs Act in December 2017.
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The South African government has announced a number of new programs and initiatives that may require funding from a
variety of sources, including from an increase existing income taxes rates, including the corporate income tax rate; amendments
to existing South African tax legislation; or through the introduction of additional taxes. An increase in the effective South
African corporate income tax rate will adversely impact our profitability and cash flow generation.
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, 2019, approximately 29% of our
cash and cash equivalents (excluding restricted cash) 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.
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 and Southeast Asia and Central 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 UK 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.
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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 $138.4 million and $9.7 million of our revenue and operating income, respectively, for
our 2019 fiscal year. In the last few years, tension in the Korean peninsula has increased because of concern about potential acts
of military aggression or cyber-attacks. KSNET is a transaction processor and 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.
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 loans to our customers, which would harm our business.
Moneyline provides microloans to our EPE 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.
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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 UK
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.
In addition, we have to comply with the UK 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 UK
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.
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We do not have a South African banking license and, therefore, we provide our EPE 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 EPE 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 EPE business
activities requires us to be registered as a bank in South Africa or to have access to an existing banking license.
We are not currently so registered, but we have an agreement with Grindrod Bank that enables us to implement our EPE
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.
We have recently commenced issuing consumer banking products through our relationship with Finbond, in the form of
our Kanako and Infinity products, with Finbond taking the place of Grindrod in respect of these products. However, it would not
be readily achievable to transfer our EPE solution from Grindrod to Finbond.
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 the 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” and personal financial information. New laws in this area, such as GDPR, 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.
The General Data Protection Regulation, or GDPR, took effect on May 25, 2018, in the European Union and introduced
direct compliance obligations for data controllers and data processors. National Data Protection Agencies, or NDPAs, are now
able to impose fines for violations ranging from 2% to 4% of annual worldwide turnover, or 10 million to 20 million euro,
whichever is greater. NDPAs have the power to carry out audits, request information, and obtain access to premises. Businesses
must be able to demonstrate that the personal data of any data subject can be lawfully processed on one of the six specified
grounds. The GDPR adopts a risk-based approach to compliance, under which businesses bear responsibility for assessing the
degree of risk that their processing activities pose to data subjects. Businesses are required to perform data protection impact
assessments before any processing that uses new technology and is likely to result in a high risk to data subjects. The GDPR
requires businesses to maintain records of their processing activities. Clear rules around data breach notifications and the
processing of personal data in such a manner that the personal data can no longer be attributed to a specific individual have been
set out by the GDPR. In addition, under the GDPR, data subjects have new rights, for example, the right to request that
businesses delete their personal data (the right to be forgotten); to object to their personal data being processed; and to obtain a
copy of their personal data within a set time frame.
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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.
Amendments to the NCA were signed into law in South Africa in August 2019. There is general
consensus in the financial services community in South Africa that the debt-relief bill will restrict the
ability of financial services providers to provide lending products to certain low-income earners and will
increase the cost of credit to these consumers. Compliance with these amendments may adversely
impact our micro-lending operations in South Africa.
In August 2019, the National Credit Amendment Bill, or debt-relief bill, was signed into law in South Africa. The effective
date of the debt-relief bill has not yet been announced. There is general consensus in the financial services community in South
Africa that the debt-relief bill will restrict the ability of financial services providers to provide lending products to certain low-
income earners and will increase the cost of credit to these consumers. Compliance with the debt-relief bill may adversely
impact our micro-lending operations in South Africa.
The debt-relief bill is a debt-relief intervention that forms part of an amendment to the NCA and is intended to assist over-
indebted individuals who earn less than a prescribed monthly minimum, currently ZAR 7,500, and have unsecured debt of no
more than ZAR 50,000. Individuals that have not commenced a debt counseling process, have not been sequestrated and are not
subject to an administration order may seek debt relief under the debt-relief bill. Applications for debt relief are expected to be
processed by the NCR and will then be submitted to the National Consumer Tribunal, or NCT.
The NCR will first assess whether an applicant can meet its debt obligations by paying a lower installment over an
extended period of no more than five years, a so called debt re-arrangement. This process is similar to the debt counseling
provisions in existing legislation, except the applicant would not pay for the debt counselor and therefore does not enjoy the
services of the counselor. If the applicant has no income, the NCR will recommend that the applicant’s debts be suspended for
24 months in the hopes that the applicant’s circumstances improve in order to service the debt over time. During this period,
interest and fees under the debt arrangement will cease and the applicant is required to attend a financial literacy program
provided by the NCR. If the applicant’s circumstances improve during this period, and the applicant is able to meet its debt
obligations, the NCR will recommend a debt re-arrangement to the NCT. If the applicant’s circumstances do not improve after
24 months, the NCR will apply to the NCT for the debt to be written off.
A credit provider may not enforce any rights under a credit agreement if the associated debt is written off. All or part of a
credit agreement will be deemed reckless under the NCA if a credit provider enters into a credit agreement (other than a
consolidated loan) with an applicant while under debt relief. An applicant furnishing false information when applying for debt
relief may be fined or imprisoned for not longer than two years, or both, and is permanently prohibited from applying for debt
relief.
We expect that it will take us, and other financial services providers, some time to fully understand, interpret and
implement this new legislation in our lending processes and practices. Non-compliance with the provision of this new
legislation may result in financial loss and penalties, reputational loss or other administrative punishment.
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 2019 fiscal year, our stock price ranged from a low
of $2.78 to a high of $9.66. 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;
significant fair value adjustments in respect of investments;
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;
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general conditions in the markets in which we operate; and
economic and financial conditions.
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 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 to 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.
Approximately 39% of our outstanding common stock is owned by three 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 38% of our outstanding
common stock is owned by three shareholders. Based on their most recent SEC filings disclosing ownership of our shares, IFC
Investors, International Value Advisers, LLC, or IVA, and Prescott Group Management, LLC, beneficially owned
approximately 18%, 14% and 8% of our outstanding common stock, respectively.
The interests of the IFC Investors, IVA and Prescott, may be different from or conflict with the interests of our other
shareholders. As a result of the ownership by the IFC Investors, IVA and Prescott, 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.
We have identified a material weakness in our internal control over financial reporting that, if not
remediated, could result in additional material misstatements in our financial statements.
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 control 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.
We identified a material weakness in our internal control over financial reporting where the control over the review of the
accounting for non-routine complex transactions did not operate effectively. As a result, the control did not operate effectively
in determining the correct classification in the statement of operations of the $34.0 million accrual for the implementation costs
to be refunded to SASSA following the September 30, 2019 Supreme Court ruling. Accordingly, the material weakness remains
unremediated as of June 30, 2019.
Under the supervision and with the participation of our management, including our chief executive officer and our chief
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-
15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our chief executive officer and our chief financial
officer concluded that our disclosure controls and procedures were not effective as of June 30, 2019, due to the material
weakness in internal control over financial reporting as described above.
We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to
remediate the control deficiencies that led to our material weakness in our internal control over financial reporting or that they
will prevent potential future material weaknesses. While we continue to dedicate resources and management time to ensuring
that we have effective internal control 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.
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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;
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 in respect of South Africa, 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,
Johannesburg, 224 financial services branches, 98 financial service express stores and 40 depot facilities. We also lease
additional office space in Johannesburg, Cape Town and Durban, South Africa; London, United Kingdom; Seoul, South Korea;
Hong Kong; Mumbai, India; Pietà Malta and Black River, Mauritius. These leases expire at various dates through 2022. 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
Legal proceedings against SASSA in respect of transfer of grant payments from EPE to SAPO accounts
On November 13, 2018, a number of grant beneficiaries and Moneyline Financial Service Proprietary Limited, or
Moneyline, one of our subsidiaries, filed an urgent application with the Gauteng Division of the High Court of South Africa
seeking among other things, an order (1) declaring that biometric consent for the transfer of grant payments to EPE accounts
conforms with the requirements of the Social Assistance Regulations, (2) prohibiting SASSA from stopping the payment of
social grants into EPE accounts that were opened with biometric consent prior to January 1, 2018, when SASSA issued a new
directive that completion by recipients of a SASSA-prescribed “Annexure C” form would be required in order for those
recipients to have their grant payments deposited into their private bank accounts (as opposed to SAPO bank accounts), (3)
directing SASSA to process all Annexure C forms within two weeks of submission and (4) directing SASSA to make all grant
payments in accordance with duly completed and submitted Annexure C forms.
On November 28, 2018, the High Court issued an interim order directing SASSA to pay the social grants of those EPE
clients who had previously provided biometric consent and elected to receive their social grants into their EPE accounts,
pending the issuance of a final judgment. SASSA was also ordered to process any Annexure C forms within two weeks of the
submission of such forms.
On January 29, 2019, the High Court handed down its final judgment, reversing the portion of its November 28, 2018,
interim order that directed SASSA to pay grants into the EPE accounts of recipients who made those biometric elections without
submitting the Annexure C forms. The effect of the final judgment is that while SASSA is required to promptly pay social
grants into EPE accounts of those recipients who have signed the Annexure C forms electing to have their grants paid that way,
SASSA is not required to pay grants into the EPE accounts of those recipients who have not submitted the Annexure C forms,
despite having provided their previous biometric consent and may continue to auto-migrate those grants to SAPO accounts. The
court did not award costs.
On February 13, 2019, we applied for leave to appeal the order granted on January 29, 2019 and were granted leave on
March 12, 2019. We filed the record on July 10, 2019 and the Supreme Court directed the parties to file their respective heads of
argument. Once the directive has been complied with, the Supreme Court will allocate a hearing date for the appeal. We cannot
predict how the Supreme Court will rule on the matter.
On February 8, 2019, Moneyline launched an application to interdict SASSA from taking any steps of its own volition to
direct payment of the social grants of the grants recipients, who received payment of their grants into their EPE accounts in
January, 2019, into any accounts other than their EPE accounts into which SASSA had made payments in January 2019. The
application was heard on February 28, 2019 and the High Court handed down an order directing Moneyline to provide SASSA
with a list of the 696,246 individuals who opened EPE accounts in 2018 and who were not paid by SASSA into those accounts
in January 2019. SASSA was ordered to verify the information provided by Moneyline within 14 days and to file an affidavit
within a further 15 days, with the outcome of the verification process and detailing procedures followed by it, including a
description of how SASSA administered the migration of beneficiaries to SAPO. The High Court furthermore ordered that any
party is entitled to approach it for appropriate relief thereafter. SASSA filed its supplementary affidavit on April 23, 2019. On
May 16, 2019, Moneyline filed a replying affidavit to SASSA’s supplementary affidavit. SASSA’s attorneys have indicated that
SASSA undertook to file a further supplementary affidavit, but to date we have not received same. Moneyline will, after
consultation with its legal counsel, decide whether to seek any further relief from the High Court.
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Constitutional Court order regarding extension of contract with SASSA for six months for cash payments
March 2017 Constitutional Court order
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, or the March 2017 order. The
Constitutional Court ordered that SASSA and CPS were 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, on the same
terms and conditions as those included in the expiring contract plus additional requirements 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 March 2017 order also included public accountability provisions that directly impacted CPS. These provisions are
similar to those included in the Constitutional Court’s April 2014 order, and require CPS to 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. CPS duly complied with the order in that it filed the previously mentioned statements for the period
ended March 31, 2017 on May 30, 2017. SASSA was 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 required 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 planned to ensure the payment of
social grants after the end of the 12-month contract extension period, details of the steps taken in that regard, what further steps
they would take, and when they would take each future step, so as to ensure that the payment of all social grants is made when
due after the expiry of the 12-month period. The Constitutional Court also directed that these reports must include the applicable
time-frames for the various deliverables which formed 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 were also required to
immediately report to the Constitutional Court and explain the reasons 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 would (i) adequately safeguard
personal data obtained during the payment process and ensure that such data remain private and may not be used for any
purpose other than the payment of grants; and (ii) preclude 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 of South Africa, 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.
March 2018 Constitutional Court order
Further to the March 2017 order, SASSA and certain other parties, including the independent panel of experts appointed
by the Constitutional Court, have made various submissions to the Constitution Court. Argument was heard on March 6, 2018
and on March 23, 2018, the Constitutional Court issued an order reiterating that SASSA and CPS have a constitutional
obligation to pay social welfare grants and that the contract between SASSA and CPS, for the payment of social grants to
beneficiaries who are paid in cash (i.e. those grant recipients who receive their grants at pay points), be extended for a further
six months to September 30, 2018, or March 2018 order. The Constitutional Court’s order provides for the payment of these
grants under the extended contract’s terms and conditions. The Constitutional Court permitted CPS to request National Treasury
to evaluate and recommend the price to be charged by CPS for the payment of grants in cash under the extended contract.
National Treasury submitted its recommendations to the Constitutional Court on April 30, 2018, proposing fee levels that were
materially lower than CPS had requested, but significantly higher than the current fee levels. We submitted a responding
affidavit to the Constitutional Court on May 11, 2018, in which we requested the Constitutional Court to direct that the matter
be referred back to Treasury to recommend a minimum monthly fee. In December 2018, we received correspondence from the
Constitutional Court informing the parties that it believes that “nothing prevents the parties from coming to an agreement on
increased payments without court sanction, and if they do not, normal legal processes in other courts must be filed to determine
the effects.” We decided not to enter into further negotiations with SASSA and invoiced it in accordance with Treasury’s
recommendations. SASSA only paid us a portion of the amount invoiced and refuses to pay the balance. On June 6, 2019, we
instituted legal action against SASSA for the outstanding fees of ZAR 358.2 million.
30
The Constitutional Court included public accountability provisions in its March 2018 order that directly impact CPS.
These provisions are similar to those included in the Constitutional Court’s April 2014 and March 2017 orders and require CPS
to provide SASSA with an independently audited statement of expenses incurred, income received and profit earned under the
contract. We have filed the required independently audited information with the Constitutional Court as ordered for the period
ended September 30, 2018, on November 8, 2018, and the auditors expressed an unqualified opinion with an emphasis of matter
regarding the basis of preparation and restriction as to use. The Constitutional Court also ordered SASSA to audit the audited
information filed with the Constitutional Court and SASSA appointed an independent firm to audit our submission. The
independent audit is currently underway and the independent firm is due to file its report by October 10, 2019. Furthermore, the
Constitutional Court directed SASSA to send this audited information to National Treasury for its approval prior to submission
to the Constitutional Court.
The Constitutional Court also included public accountability provisions in its March 2018 order that impact the Minister of
Social Development and SASSA. These provisions are similar to those included in the March 2017 order and require the
Minister and SASSA to file reports with the Constitutional Court at the end of every month, commencing in April 2018 and
ending in August 2018, regarding the implementation of the Constitutional Court’s order. The Minister and SASSA are also
required to immediately report and explain any material changes, and the consequences of such changes, to the circumstances
included in the reports previously submitted to the Constitutional Court.
The Constitutional Court also ordered SASSA to ensure that the payment method determined by it must (i) adequately
safeguard beneficiaries’ personal data obtained during the payment process and ensure that such data remains private and not
used for any purpose other than the payment of grants; and (ii) preclude a contracting party from inviting beneficiaries to “opt-
in” to share confidential information for the marketing of goods and services.
The independent panel of experts, appointed by the Constitutional Court, was directed to (i) evaluate the implementation of
the cash payment of social grants from the date of the order until September 2018, (ii) evaluate the steps proposed and taken by
SASSA for any competitive bidding process or any other processes aimed at the appointment of a new contract or contracts for
the cash payment of social grants by SASSA, (iii) evaluate the steps proposed or taken by SASSA for SASSA itself to
administer and pay grants in the future, and (iv) file reports with the Constitutional Court, by the 15th of each month from May
2018 to September 2018, relating to the period from April 1, 2018 to the date of each report, describing the steps that the panel
has taken to evaluate the matters referred to in (i) through (iii) above, the results of their evaluation and any recommendations.
On August 31, 2018, SASSA and its Chief Executive Officer, in her official capacity, were ordered by the Constitutional
Court to pay the costs related to the March 2018 Order.
Dispute with SASSA regarding payment of fees for the last six months of the contract
Following the March 23, 2018 Constitutional Court order for a six-month extension of our contract with SASSA for
payment of grants in cash at pay points only, we were allowed to charge our monthly fee based on the previously contracted rate
of ZAR 16.44 (including VAT) per cash pay point recipient. Given that we only serviced the highest-cost beneficiaries, the
Constitutional Court allowed us to approach the National Treasury in order for them to make a fair determination of the price
we should be paid for services rendered. National Treasury recommended a rate of ZAR 51.00 (including VAT) per cash pay
point recipient per month to the Constitutional Court. Contrary to SASSA’s stance, the Constitutional Court on December 5,
2018, ruled that they are not required to ratify the Treasury recommended rate, and that CPS and SASSA must agree on the
pricing. To date we have not reached an agreement with SASSA on the pricing and have issued summons to commence legal
proceedings to record an amount in accordance with National Treasury recommendation. We cannot predict whether we will be
successful in these legal proceedings, if the matter will be heard or how the Court will rule on the matter if it is heard.
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 sought to
restrict deductions from social grants paid to beneficiaries to direct deductions only. 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 rights of beneficiaries to transact freely after the money is deposited into their bank accounts.
We brought the application for a declaratory order because SASSA sought to lend a broader interpretation to the meaning
of the term “deductions” to include 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.
31
We believe that SASSA’s broad interpretation of the Regulations is flawed and inaccurate for a number of reasons,
including but not limited to, the following:
(a) It would unjustifiably infringe beneficiaries’ fundamental rights to contractual freedom and self-autonomy.
(b) It would limit beneficiaries’ ability to pay for those products or services through the utilization of their bank accounts
in the manner they so choose, which would (i) be a major setback to the national objective of financial inclusiveness;
(ii)introduce financial and security risks for beneficiaries; and (iii) result in significant price increases for these
products and services.
(c) It impermissibly encroaches on the jurisdiction and regulatory powers of the SARB and the Payments Association of
South Africa, which regulate the national payment system.
(d) It would constitute a retrogressive regulatory measure that conflicts with the government’s constitutional obligation to
improve access to social security and assistance, in that it would deprive beneficiaries of the advantages of the
national payment system and the convenient, low cost, reliable and ubiquitous payment system that they currently
have under the CPS payment system.
Several other industry participants launched similar proceedings, and the SARB also filed an affidavit in which it sets out
its position.
The matter was heard on October 17 and 18, 2016 and on May 9, 2017, the Pretoria High Court issued a declaratory order
that the Social Assistance Act and Regulations do not restrict social grant recipients in the operation of their bank accounts. The
order clarified 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 June 20, 2017, the Pretoria High Court refused the Minister of Social Development, SASSA and Black Sash’s
applications 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, SASSA and the Black Sash served applications petitioning the Supreme Court to grant them leave to
appeal to either the Supreme Court or to a full bench of the Pretoria High Court. On September 29, 2017, the Supreme Court
referred the petitions to oral argument. The oral argument in respect of the petitions was heard on August 16 and 17, 2018. The
matter was heard on August 16, 2018, by the Supreme Court. The Supreme Court granted the Black Sash the right to intervene
but dismissed the application for leave to appeal with costs.
Challenge to Payment by SASSA of Additional Implementation Costs
to
of
the
recovery
additional
As previously disclosed, in June 2014, we received approximately ZAR 277.0 million, excluding VAT, from SASSA,
related
beneficiary
re-registration process in fiscal 2012 and 2013. After the award of the tender, SASSA requested that CPS biometrically register
all social grant beneficiaries (including child grant beneficiaries) and collect additional information for each child grant
recipient. CPS agreed to SASSA’s request and, as a result, performed approximately 11.0 million additional registrations
beyond those that CPS tendered for the quoted service fee. Accordingly, we sought reimbursement from SASSA, supported by a
factual findings certificate from an independent auditing firm. SASSA agreed to pay us the ZAR 277.0 million as full settlement
of the additional costs we incurred.
implementation
costs we
incurred
during
the
In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced legal proceedings in
the Pretoria High Court of South Africa seeking an order by the Pretoria High Court to review and set aside the decision of
SASSA’s Chief Executive Officer to approve payment to us of ZAR 317.0 million (approximately ZAR 277 million, excluding
VAT) and directing us to repay the aforesaid amount, plus interest. Corruption Watch claimed that there was no lawful basis to
make the payment to us, and that the decision was unreasonable and irrational and did not comply with South African
legislation. CPS was named as a respondent in this legal proceeding.
On February 22, 2018, the matter was heard by the Pretoria High Court. On March 23, 2018, the Pretoria High Court
ordered that the June 15, 2012 variation agreement between SASSA and CPS be reviewed and set aside. CPS was ordered to
refund ZAR 317.0 million to SASSA, plus interest from June 2014 to date of payment. On April 4, 2018, we filed an application
seeking leave to appeal the whole order and judgment of the Pretoria High Court with the Pretoria High Court because we
believed that it erred in its application of the law and/or in fact in its findings. On April 25, 2018, the Pretoria High Court
refused the application seeking leave to appeal.
32
On May 23, 2018, CPS delivered its petition seeking leave to appeal the whole order and judgment of the Pretoria High
Court with the Supreme Court. On June 21, 2018, Corruption Watch delivered a responding affidavit and, on July 4, 2018, CPS
delivered its replying affidavit. In September 2018, CPS received notification from the Supreme Court that its petition seeking
leave to appeal had been granted. The matter was heard on September 10, 2019. On September 30, 2019, the Supreme Court
dismissed the appeal and ordered us to pay Corruption Watch’s costs, including that of two counsel. We are discussing further
legal steps with our counsel.
On July 9, 2019, the Supreme Court issued correspondence demanding an explanation from SASSA as to why it decided to
abandon its defense in the matter and instructed SASSA to be legally represented at the hearing on September 10, 2019. SASSA
filed its explanatory affidavit on August 2, 2019.
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 and argument on these points was heard on November 27, 2015, before three tribunal members. Two ruled against us
and one upheld our points. We are appealing the majority ruling to the High Court. This matter was heard on December 4, 2018,
by a full bench of the Pretoria High Court. We still await judgment. 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.
Initiation of legal proceedings against a PG Purchasing customer regarding non-payment of working capital finance
loans receivable
In January 2019, we filed a Petition with the District Court of Dallas County, Texas (“Texas district court lawsuit”),
naming Permian Crude Transport, LP, f/k/a Permian Crude Transport, LLC, d/b/a Permian Transport & Trading (“PCT”), and
Centurion Marketing, LLC d/b/a Jupiter Marketing & Trading, LLC (“Centurion” and collectively with PCT, “PCT/Centurion”)
as defendants regarding the recovery of working capital finance loans receivable made to PCT/Centurion by our wholly owned
subsidiary, PG Purchasing. This lawsuit was in its initial stages. Trial was set for December 2, 2019. However, the Texas district
court lawsuit was administratively closed following PCT’s filing for bankruptcy in June 2019 and Centurion’s filing for
bankruptcy in July 2019 (“PCT/Centurion bankruptcy matters”). The Texas district court lawsuit may be re-opened if the
PCT/Centurion bankruptcy matters are lifted.
We cannot predict if the Texas district court lawsuit will be re-opened, and if it is re-opened, the outcome of the matter.
Also, we cannot predict the outcome of the PCT/Centurion bankruptcy matters.
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.
33
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.
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 September 12, 2019, there were 12 shareholders of
record of our common stock. A substantially greater number of holders of our common stock are beneficial holders whose
shareholders of record are banks, brokers, and other financial institutions (i.e. “street name”). 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 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, debt commitments, 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 and, as of June 30, 2019, we had utilized approximately $47.5
million of this authorization and approximately $52.5 million remains available. The authorization has no expiration date. We
did not repurchase any shares of our common stock during fiscal 2019.
34
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, 2014, 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)
NASDAQ Industrial Index
S&P 500 Index
Net1
s
r
a
l
l
o
D
200
180
160
140
120
100
80
60
40
20
-
2014
2015
2016
2017
Fiscal year ended June 30,
2018
2019
35
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, 2019 and 2018, and for the three years
ended June 30, 2019, have been derived from our audited 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, 2017, 2016 and 2015
and for the years ended June 30, 2016 and 2015, have been derived from our consolidated financial statements, which are not
included herein, and have been restated as noted below, which is unaudited. 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.
As discussed in the Note 1 to our audited consolidated financial statements included in Item 8—“Financial Statements and
Supplementary Data.”, our historic consolidated financial statements have been corrected to give effect to the restatement.
Accordingly, certain of the selected consolidated financial data presented in the table below has been corrected to give effect to
the restatement as indicated.
Consolidated Statements of Operations Data
(in thousands, except per share data)
Revenue(2)........................................................................................
Cost of goods sold, IT processing, servicing and support ...
Selling, general and administrative(3) .......................................
Depreciation and amortization ...................................................
Impairment loss .............................................................................
Operating (loss) income...............................................................
Change in fair value of equity securities .................................
Interest income ...............................................................................
Interest expense .............................................................................
Impairment of Cedar Cellular note ...........................................
(Loss) Income before income taxes ..........................................
Income tax expense ......................................................................
Net (loss) income attributable to Net1 .....................................
(Loss) Income from continuing operations per share:
2019(1)
$360,990
215,348
202,056
37,349
19,745
(113,508)
(167,459)
7,229
10,724
12,793
(303,026)
3,725
(307,618)
Year Ended June 30(R)
2017
(as restated)
$610,066
292,383
179,262
41,378
-
97,043
-
20,897
3,484
2018
(as restated)
$612,889
304,536
193,003
35,484
20,917
58,949
32,473
17,885
8,941
2016
(as restated)
2015
$590,749 $625,979
297,856
290,101
158,919
145,886
40,685
40,394
-
-
128,519
114,368
-
-
16,355
15,292
4,456
3,423
100,366
48,597
64,246
114,456
42,506
73,070
126,237
42,009
82,137
140,418
44,136
94,735
Basic .............................................................................................
Diluted .........................................................................................
$(5.42)
$(5.42)
$1.13
$1.13
$1.34
$1.33
$1.72
$1.71
$2.03
$2.02
(R) Income tax expense, net income attributable to Net1 and Income from continuing operations per share: Basic and Diluted
for the years ended June 30, 2018 and 2017, restated to correct the misstatement discussed in Note 1 to the audited consolidated
financial statements. Year ended June 30, 2016, restated as follows: Income tax expense (decreased by 0.1 million), net income
attributable to Net1 (decreased by 0.2 million) and Income from continuing operations per share: Basic (unchanged) and Diluted
(unchanged).
(1) Impacted by expiration of SASSA contract in September 2018. Also impacted by inclusion of DNI for the first nine months
of fiscal 2019 – refer to Note 3 to the audited consolidated financial statements, which also includes discontinued operation
disclosures related to DNI.
(2) Revenue for the year ended June 30, 2019, includes revenue that has been reversed of $19.7 million (ZAR 277.6 million) as
a result of the Supreme Court ruling discussed in Note 13 to our audited consolidated financial statements, and selling, general
and administrative includes $14.3 million (ZAR 201.8 million) related to the Supreme Court ruling.
(3) Includes an allowance for doubtful financial loans receivable of $28.8 million in 2019 and separation payment of $8.0
million paid to our former chief executive officer in 2017.
36
Additional Operating Data:
(in thousands, except percentages)
Cash flows (used in) provided by operating activities ......
Cash flows provided by (used in) investing activities ......
Cash flows (used in) provided by financing activities ......
2019(1)
$(4,460)
$64,476
Year ended June 30,
2017(1)
2018(1)
$97,161
$132,305
$180,748 $(114,071)
$40,469
2016(1)
$116,552
$5,756
$13,645
2015(1)
$135,258
$80,783
$16,784
$(24,714) $(473,479)
(31.4%)
Operating (loss) income margin(2) .........................................
(1) Cash flows provided by (used in) investing activities include movements in settlement assets and cash flows (used in)
provided by financing activities include movement in settlement liabilities.
(2) Fiscal 2019 operating loss margin was (14%) before retrenchment costs, the impact of the SASSA implementation costs
accrual (refer to Note 13 of our audited consolidated financial statements), and impairment losses (refer to Note 10 of our
audited consolidated financial statements for a full description of the impairment losses). Fiscal 2018 operating income margin
was 13% before the impairment loss (Refer to Note 10 of our audited consolidated financial statements for a full description of
the impairment loss). Fiscal 2017 operating income margin was 18% before the separation payment of $8.0 million paid to our
former chief executive officer.
19.4%
14.6%
15.9%
20.5%
Consolidated Balance Sheet Data:
(in thousands)
Cash, cash equivalents and restricted cash .....................
Total current assets before settlement assets ..................
Goodwill .................................................................................
Intangible assets ....................................................................
Total assets(R) .........................................................................
Total current liabilities before settlement obligations .
Total long-term debt ............................................................
Total equity(R) ........................................................................
2019
$121,511
232,171
149,387
11,889
672,936
174,667
-
$319,429
2018
(as restated)
$87,075
277,794
169,079
27,129
1,217,314
133,486
5,469
$640,986
As of June 30,
2017
(as restated)
$258,457
465,735
188,833
38,764
1,448,829
80,859
7,501
$598,802
2016
(as restated)
$223,644
386,998
179,478
48,556
1,261,649
65,486
43,134
$601,784
2015
(as restated)
$117,583
301,874
166,437
47,124
1,315,108
82,198
50,762
$477,351
(R) Total assets and total equity as of June 30, 2018, restated to correct the misstatement discussed in Note 1 to the audited
consolidated financial statements. As of June 30, 2017, 2016 and 2015, restated as follows: total assets (2017 and 2016:
decreased by 1.9 million; 2015: decreased by 1.8 million) and total equity (2017: decreased by 1.5 million; 2016 and 2015:
decreased by 1.4 million).
37
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 financial technology, or fintech, products and services to the unbanked and underbanked in a
number of emerging and developed economies. In emerging economies these customers are typically individuals, while in
developed countries, they are primarily small businesses. We have developed and own most of our payment technologies, and
where possible, utilize this technology to provide financial and value-added services to our customers.
Sources of Revenue
We generate our revenues by charging transaction fees to merchants, financial service providers, utility providers, bill
issuers, employers, and cardholders; by providing loans and insurance products and by selling hardware, licensing software and
providing related technology services.
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 provide
bank accounts on a monthly fee basis, and charge fees 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. Here we can act as the principal in operating a business that can be better delivered through our UEPS.
The revenue and costs 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 223,000
merchants and to card issuers in South Korea through our value-added-network. Through IPG we generate fee revenue through
the provision of payment service provider and card issuing and acquiring services in primarily Europe, China and the U.S. The
revenue and costs at of all of these businesses are reflected in our International transaction processing segment.
Finally, we have investments, business partnerships or joint ventures to provide us with an opportunity to introduce our
financial technology solutions to markets such as Bank Frick in Europe, Finbond in South Africa and North America, OneFi in
Nigeria, V2 in sub-Sahara Africa, 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 believe that this flexible approach enables us to drive adoption of our solution while capturing the value created by the
implementation of our technology.
38
Developments during Fiscal 2019
Restructuring of South African operations and strategy for financial inclusion initiatives in South
Africa
Following the auto-migration of a substantial portion of our EPE customers in fiscal 2019, we faced a significant reduction
in the number of accounts, transactions, fees, and consumption of financial and value-added services. In addition, customers
who had loans or insurance policies and had been migrated, unwittingly defaulted on their regular payments. Our rural-South
African distribution business has a high-fixed cost structure with physical locations, assets and employees. The decline in
revenue coupled with the high-fixed costs resulted in significant operating losses for the company over the past year. Beginning
in late January, we commenced an aggressive restructuring initiative to reduce our physical infrastructure and headcount in
order to right size the business given the current level of business activity. We have made meaningful progress in this regard and
achieved our target of reaching a breakeven EBITDA on a monthly basis for the month of July 2019, one month later than
originally expected.
Restructuring of South African operations – In late January 2019, we commenced with an extensive cost reduction
exercise, which included a reduction of over 2,500 employees (being close to 50% of our original staff complement), a
reduction in the availability of our mobile ATM infrastructure, and the termination of certain leases. During the second half of
2019, we incurred retrenchment costs of $6.3 million related to the reduction of personnel both in the field and at the head office
level.
Increasing collaboration with Finbond - We have actively worked with the Finbond teams to identify synergies between
our organizations in order to address the market opportunity for the millions of unbanked and under-banked South Africans.
Finbond has been certified to become an issuer of UEPS/EMV cards, and in early Q4 2019, we initiated a pilot using our
biometrically-enabled UEPS/EMV cards. We expect to commercially launch this initiative during Q2 2020, at which point we
believe we can once again start growing our customer base.
Stabilization of financial services - Our lending and insurance businesses have stabilized in the second half of fiscal 2019
due to a steadier base of active EPE accounts. This stability now provides us with the opportunity to re-direct our efforts to
growing these business lines, although this will be done cautiously to manage the risk of any potential future auto-migration of
customers. We have begun discussions with other financial services providers, including Finbond, to use our EPE base as a
distribution channel for their own lending products.
Our loan book increased slightly in the fourth quarter of fiscal 2019 and, following the write off of the loans that were
provided against in Q2 2019, we have seen the level of non-performing loans return broadly to historical levels. For insurance,
the number of policies paid up has also stabilized and the lapses related to the increased non-payment returned to more normal
levels in the fourth quarter of fiscal 2019.
SASSA Contract Expiration
Although we have not been involved operationally with SASSA since September 30, 2018, we have been actively trying to
resolve all legal and legacy outstanding items that would allow us to focus on our core business.
Settlement of payment of fees due for the last six months of the SASSA contract – Following the March 23, 2018
Constitutional Court order for a six-month extension of our contract with SASSA for payment of grants in cash at pay points
only, we were allowed to charge our monthly fee based on the previously contracted rate of ZAR 16.44 (including VAT) per
cash pay point recipient. Given that we only serviced the highest-cost beneficiaries, the Constitutional Court allowed us to
approach the National Treasury in order for them to make a fair determination of the price we should be paid for services
rendered. National Treasury recommended a rate of ZAR 51.00 (including VAT) per cash pay point recipient per month to the
Constitutional Court. Contrary to SASSA’s stance, the Constitutional Court on December 5, 2018, ruled that they are not
required to ratify the Treasury recommended rate, and that CPS and SASSA must agree on the pricing. To date we have not
reached an agreement with SASSA on the pricing and have commenced legal proceedings to receive an amount in accordance
with National Treasury recommendation.
Auto-migration of EPE customers to SAPO – As part of SASSA’s migration to SAPO, a number of EPE customers were
auto-migrated by SASSA between August and October 2018, where post office accounts were unilaterally opened for
beneficiaries by SASSA, often without the customer’s consent. We initiated a legal process to halt this migration and to try and
recover some of our EPE customers who had been migrated despite completing the mandatory documentation for electing to be
paid in a private bank account. On January 29, 2019, we received an adverse order in that the court declined to reverse the auto-
migration process. Following this order, we followed a multi-faceted approach to try and address the auto-migration issue. First,
we were granted leave to appeal the order, which we are pursuing. Second, the court granted an order requiring SASSA to
account for the process to auto-migrate approximately 700,000 of the EPE accounts who had submitted Annexure C forms to
SAPO. Third, we are considering taking the decision of the minister for administrative review.
39
While the first and third actions are longer processes, we are currently reviewing SASSA’s response to the second action
and will determine if there is any further action that can be taken as a result. The risk of our remaining EPE customers being
auto-migrated still exists, but there has been no further auto-migration since November 2018.
We are relieved that we have finally concluded our contract with SASSA on September 30, 2018. We are extremely proud
of our achievements of uninterrupted grant delivery to 11.0 million social grant recipients since the inception of our contract in
April 2012, and the annual saving of more than ZAR 2.0 billion that our biometric payment technology realized for government
due to the elimination of fraudulent grants.
Progress on various corporate activities
As part of the extensive strategic review of all of our businesses and investments, we have made progress on multiple
fronts:
Disposal of DNI – We have concluded two transactions to reduce our investment in DNI. First, in March 2019, we reduced
our holding in DNI from 55% to 38% through the sale of 17% in DNI for ZAR 400 million. We utilized the proceeds from this
sale to settle the contingent purchase consideration of ZAR 400 million, which related to the achievement of certain
performance targets by DNI. Second, in May 2019, we sold an additional 8% of DNI to RMB, and used the proceeds to early-
settle the majority of our outstanding long-term borrowings. Third, also in May 2019, we granted DNI a call option to acquire
our remaining 30% interest in DNI at a strike price of ZAR 859 million, or $61.0 million translated at exchange rates applicable
as of June 30, 2019, in order to monetize our remaining investment in DNI. We expect the call option to be exercised prior to
the expiry on December 31, 2019.
Early repayment of long-term debt – We utilized ZAR 15.0 million of our cash reserves and the proceeds from the sale of
an 8% interest in DNI to early-settle our ZAR 230.0 million long-term borrowings in full. This has strengthened our balance
sheet and improved our liquidity profile in South Africa as we reposition the business.
Progress in Korea – Our advisors assisting with improving the growth and profitability in Korea completed the first phase
of their project during our third quarter of 2019, which consisted of the identification of actionable items. In phase two, which
commenced at the end of our fourth quarter of 2019, they are working with management to implement the near-term action
items identified in the first phase. We expect the overall exercise to take another 6-12 months before we see meaningful
improvements in operating performance. In parallel, our board is reviewing the strategic alternatives for this business and we
appointed a financial advisor, FT Partners, to assist us in evaluating such alternatives.
Cell C – Cell C has had a difficult six months and has come under increasing pressure on its liquidity due to its high level
of debt and the associated servicing costs. During the third quarter of fiscal 2019, Cell C signed a term sheet with the Buffet
consortium, but the implementation of this capitalization has been delayed. As a result, Cell C requested shareholder support
and in September 2019, we agreed to provide up to ZAR 300 million of support to the company through the purchase of prepaid
airtime. This, along with support from Blue Label Telecoms and Cell C’s debt providers, should provide a liquidity platform to
Cell C to enable it to conclude revised commercial arrangements with MTN, as well as a recapitalization of the business. Our
investments in Cell C and Cedar Cellular notes were carried at $0 as of June 30, 2019, refer to Notes 7 and 9 to our audited
consolidated financial statements for additional information regarding these investments.
International Activities
IPG – The restructuring and re-organization of IPG is now complete with Malta having become the centralized operation
of our international activities. IPG’s new card issuing and merchant acquiring platforms have been certified. As part of Visa’s
merger with Visa Europe, Bank Frick is required to undergo recertification with Visa, which is currently underway and expected
to be completed during calendar 2019. Once completed, IPG is expected to begin the deployment of its new products to the
European SME market. During fiscal 2019, IPG also secured approval from the Mauritian regulators to become a principal
member of China UnionPay for international issuing and acquiring. This approval has been shared with UnionPay, and we are
awaiting their acceptance of the same. Our beta prototype crypto-asset storage product is now ready, and we believe we will
begin commercially rolling out this market-leading product with Bank Frick in the first half of fiscal 2020.
Bank Frick – Bank Frick continues to develop its capacity and expertise in relation to cryptocurrency and blockchain
technology. It has expanded its headcount; however, its performance was slightly lower than anticipated, which was largely due
to investments in expanding headcount and improving systems. Bank Frick continues to work closely with IPG regarding our
acquiring, processing and cryptocurrency storage solution initiatives.
On October 2, 2019, we exercised an option to acquire an additional 35% interest in Bank Frick from the Kuno Frick
Family Foundation. We will pay an amount, the Option Price Consideration, for the additional 35% interest in Bank Frick,
which represents the higher of CHF 46.4 million ($46.5 million at exchange rates on October 2, 2019) or 35% of 15 times the
average annual normalized net income of the Bank over the two years ended December 31, 2018.
40
The shares will only transfer on payment of the Option Price Consideration, which shall occur on the later of (i) 180 days
after the date of exercise of the option; (ii) in the event of any regulatory approvals being required, 10 days after receipt of
approval (either unconditionally or on terms acceptable to both parties); and (iii) 10 days after the date on which the Option
Price Consideration is agreed or finally determined.
ZappGroup – Our new Africa-focused investment, ZappGroup, made significant strides in its first year of existence.
During Q2 2019, ZappGroup signed up the largest bank in Ghana and went live with a beta product. During the third quarter of
fiscal 2019, ZappGroup progressed its live testing and also signed up two of the three largest mobile operators in Ghana.
ZappGroup has also integrated with the largest merchant network (allowing it to reach many more merchants) and is expecting
to achieve commercial launch in the second quarter of fiscal 2020. ZappGroup also commenced activities to sign customer
contracts in Nigeria and is working closely with us and OneFi.
OneFi – Given the success of it digital lending product, Pay-Later, in fiscal 2019, OneFi has rebranded as Carbon,
expanding its offering as a full-fledged digital financial services platform that offers bill payments, fund transfers and savings,
in addition to loans. OneFi is currently disbursing approximately 50,000 new loans per month.
India – We have deployed our virtual card technology with MobiKwik to its users. In fiscal 2019, MobiKwik applied for
direct membership with Visa and became an associate member in Q4 2019. Given this is the first time a non-bank has been
approved as a Visa member in India, the Visa/MobiKwik application has been submitted to the central bank for approval. Once
approved, it is expected to allow MobiKwik to expand issuing virtual cards to its millions of customers. MobiKwik itself has
performed ahead of expectations, primarily due to its successful transition to being a digital financial services provider. In June
2019, MobiKwik recorded unaudited annualized revenue of $55 million, up from $17 million in June 2018. It has been
contribution margin positive since October 2018 and was close to EBITDA breakeven at the end of June 2019. Digital financial
services now account for approximately 25% of MobiKwik’s total monthly revenue, compared to zero during the previous fiscal
year and it is currently disbursing in excess of 70,000 new loans per month.
Critical Accounting Policies
Our audited 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.
Valuation of investment in Cell C
We have elected to measure our investment in Cell C, an unlisted equity security, at fair value using the fair value option.
Changes in the fair value of this equity security are recognized in the caption change in fair value of equity securities in our
audited consolidated statements of operations. The tax impact related to the change in fair value of equity securities is included
in income tax expense in our audited consolidated statements of operation. The determination of the fair value of this equity
security requires us to make significant judgments and estimates. We base our estimates on assumptions we believe to be
reasonable but that are unpredictable and inherently uncertain. Refer to Note 7 of our audited consolidated financial statements
regarding the valuation inputs and sensitivity related to our investment in Cell C.
We used a discounted cash flow model to determine the fair value of our investment in Cell C as of June 30, 2019, and
valued Cell C at $0.0 (zero) at June 30, 2019. We have changed our valuation methodology from an EV/ EBITDA model to a
discounted cash flow approach due to anticipated changes in Cell C’s business model and the current challenges faced by the
business, which would not have been captured by the previous valuation approach. We utilized the latest business plan provided
by Cell C management for the period ending December 31, 2024, and the following key valuation inputs were used:
Weighted Average Cost of Capital:
Long term growth rate:
Marketability discount:
Minority discount:
Net adjusted external debt(1):
Deferred tax (incl. assessed tax losses(1)):
(1) translated from ZAR to U.S. dollars at exchange rates applicable as of June 30, 2019.
Between 15% and 20% over the period of the forecast
4.5%
10.0%
15.0%
ZAR 13.9 billion ($648.9 million), includes R6.4 billion of leases liabilities
ZAR 2.9 billion ($20.6 million)
We believe the Cell C business plan is reasonable based on the current performance and the expected changes in the
business model.
41
We used an adjusted EV/ EBITDA model to determine the fair value of our investment in Cell C for the first, second and
third quarter of fiscal 2019 and for fiscal 2018, and we considered Cell C’s adjusted earnings before interest, taxation,
depreciation and amortization, or EBITDA, and its historical net debt position. We were also required to select an appropriate
EBITDA multiple based on Cell C’s peer group, which comprises various African and emerging market mobile
telecommunications operators and the appropriate marketability discount related to the investment in order to determine its fair
value.
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.
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 2019 indicated that the fair value of our reporting units exceeded their carrying values, with the exception of the $14.4
million of goodwill impaired during fiscal 2019, as discussed in Note 10 to our audited consolidated financial statements.
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 2018 and 2017 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. For instance, in fiscal 2019, we recorded an impairment loss of $5.3 million related to intangible assets
acquired (customer relationships) in the DNI acquisition as a result of Cell C entering into a roaming arrangement with another
South African mobile telecommunications network provider which extended Cell C’s network coverage. This arrangement
impacted the identified customer relationship recognized.
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 the
foreseeable future. A valuation allowance is created if it is determined that a deferred tax asset will not be realized in the
foreseeable future. Any change to the valuation allowance would be charged or credited 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 2019, fiscal 2018 and 2017, respectively, we recorded a net increase of $68.6 million, $9.6 million and $0.1
million to our valuation allowance. As of June 30, 2019 and 2018, the valuation allowance related to deferred tax assets was
$116.4 million and $48.7 million, respectively.
42
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. We have also utilized a bespoke adjusted Monte Carlo simulation discounted cash flow model to measure the fair
value of restricted stock with market conditions granted to employees and directors. The stock-based compensation cost related
to these valuations has been recognized on a straight line basis. These valuation 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
$0.4 million, $2.6 million and $2.0 million for fiscal 2019, 2018 and 2017, 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 provided.
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. 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.
Accounting for transactions following September 2019 Supreme Court ruling
As discussed under Item 3—“Legal Proceedings— Challenge to Payment by SASSA of Additional Implementation Costs”
the Supreme Court denied our appeal and we have recorded a liability of $34.0 million as of June 30, 2019, comprising a
revenue refund of $19.7 million (ZAR 277.6 million), and other expenses totaling $14.3 million (ZAR 201.8 million).
Other payables - accrual of implementation costs to be refunded to SASSA
On September 30, 2019, the Supreme Court delivered its ruling in the matter, declining CPS’ appeal and awarding costs
against CPS. CPS is liable to repay SASSA ZAR 317.0 million, plus interest from June 2014 to date of payment. As a result, we
have recorded the liability at June 30, 2019, of $34.0 million (ZAR 479.4 million, translated at exchange rates applicable as of
June 30, 2019, comprising a revenue refund of $19.7 million (ZAR 277.6 million), accrued interest of $11.4 million (ZAR 161.0
million), unclaimed indirect taxes of $2.8 million (ZAR 39.4 million) and estimated costs of $0.1 million (ZAR 1.4 million)).
43
We are discussing further legal steps with our counsel. Management does not agree with the findings of the Supreme Court
and may appeal the matter with the Constitutional Court. While management believes that its arguments in defense of the matter
have merit, it has had to apply its judgment, including the fact that both the High Court and the Supreme Court have ruled
against CPS, to determine whether to record a liability as of June 30, 2019. If management determines to further appeal the
matter, it is unable to predict (a) whether the Constitutional Court will hear the matter, or (b) if they do hear the matter, the
outcome of those additional proceedings.
While management does not agree with the Supreme Court ruling, we respect the rule of law in South Africa, and will
discharge our legal obligations as mandated under South African law as they fall due once all available legal process available
to us have been exhausted. We considered the High Court and Supreme Court rulings and the uncertainty regarding the further
appeal process in our assessment that it is probable that an amount will need to be refunded to SASSA, although this is not an
admission that our legal arguments do not have merit. This, taken together with the rulings that specify a quantifiable amount
payable to SASSA, formed the basis for the accrual of the liability of $34.0 million as of June 30, 2019.
Revenue – variation in transaction price following September 2019 Supreme Court ruling
Management considers a component of the $34.0 million to be refunded to SASSA, specifically the ZAR 277.6 million
($19.7 million) of revenue recorded in fiscal 2014 related to a June 2012 agreement, to be a variation in the price charged to
SASSA under our February 2012 SASSA contract. Even though it is an involuntary refund to be paid to SASSA, the Supreme
Court ruled that we were not entitled to charge SASSA for the additional enrolments performed because, in the courts view, the
February 2012 contract contained all the performance obligations and pricing parameters related to the enrolment of all
beneficiaries, and not just cardholder recipients, and we should not have sought a recovery of implementation costs in fiscal
2014 from SASSA for the additional enrolment services provided under the June 2012 agreement. As noted above, management
does not agree with the findings of the courts and has had to exercise its judgment in determining whether the reversal of
revenue represents a price variation (accounted for as a reduction in revenue in fiscal 2019) or a nonreciprocal transfer.
Recent Accounting Pronouncements
Recent accounting pronouncements adopted
Refer to Note 2 of our audited consolidated financial statements for a full description of recent accounting
pronouncements, including the dates of adoption and effects on financial condition, results of operations and cash flows.
Recent accounting pronouncements not yet adopted as of June 30, 2019
Refer to Note 2 of our audited consolidated financial statements for a full description of recent accounting pronouncements
not yet adopted as of June 30, 2019, 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,
2018
12.8557
14.4645
11.5526
13.7255
2019
14.1926
15.4335
13.1528
14.0840
2017
13.6147
14.8114
12.4379
13.0535
KRW : $ average exchange rate ...........
Highest KRW : $ rate during period ....
Lowest KRW : $ rate during period .....
Rate at end of period ............................
1,135
1,195
1,108
1,156
1,098
1,156
1,056
1,114
1,141
1,210
1,092
1,144
44
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
F2019 ZAR
F2018 ZAR
F2017 ZAR
KRW: US $ Exchange Rates
First quarter
Second quarter
Third quarter
Fourth quarter
:
$
S
U
W
R
K
1,300
1,250
1,200
1,150
1,100
1,050
1,000
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
F2019 KRW
F2018 KRW
F2017 KRW
45
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, 2019, 2018 and 2017, 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,
2018
12.6951
1,095
2019
14.2688
1,136
2017
13.6182
1,146
Balance sheet items: $1 = ZAR .....................
Balance sheet items: $1 = KRW ...................
14.0840
1,156
13.7255
1,114
13.0535
1,144
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 audited consolidated financial statements, and supplementally in ZAR, because ZAR is the
functional currency of the entities which contribute the majority of our results 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 audited consolidated financial statements is included in Note 21 to those statements.
We consolidated DNI for the first nine months of fiscal 2019 and accounted for it using the equity method from April 1,
2019. DNI is accounted for as an equity-accounted investment for 11 months of fiscal 2018. Fiscal 2017 includes
Masterpayment Financial Services Limited, or Ceevo FS, from November 1, 2016 and Pros Software from October 1, 2016.
Refer also to Note 3 to the audited consolidated financial statements.
Fiscal 2019 Compared to Fiscal 2018
The following factors had an influence on our results of operations during fiscal 2019 as compared with the same period in
the prior year:
• Decline in revenue: Our revenues declined 30% in ZAR primarily due to the expiration of our SASSA contract, a
significant decline in EPE account numbers driven by SASSA’s auto-migration of accounts to SAPO, a reduction in
EPE-related financial and value-added services and transaction fees due to a smaller customer base, and lower
contribution from KSNET, but partially offset by the inclusion of DNI for three quarters;
• Significant operating losses: Lower revenue, coupled with a high-fixed cost infrastructure and write-downs due to
limited recoverability of dues from customers, resulted in a significant operating loss. During February 2019, we
accelerated a restructuring of our South African operations to bring our cost structure in-line with our current customer
base and were successful in reaching EBITDA breakeven in the month of July 2019. We incurred $6.3 million in
retrenchment costs during fiscal 2019;
Interest expense: Net interest expense increased due to lower average cash balances and higher short-term borrowing
to fund ATMs, partially offset by the early settlement of long-term debt in May 2019;
•
•
• Non-cash losses, impairments and fair-value adjustments: We incurred a $5.8 million non-cash loss on our partial
disposal of DNI, impairment losses of $19.7 million, a fair value adjustment loss of $167.5 million for Cell C and a
$12.8 million impairment of our Cedar Cellular note;
Implementation costs to be refunded to SASSA of $34.0 million: We recorded an accrual of $34.0 million related to
the September 2019 Supreme Court ruling comprising a revenue refund of $19.7 million (ZAR 277.6 million), accrued
interest of $11.4 million (ZAR 161.0 million), unclaimed indirect taxes of $2.8 million (ZAR 39.4 million) and
estimated costs of $0.1 million (ZAR 1.4 million)); and
• Adverse foreign exchange movements: The U.S. dollar appreciated 12% against the ZAR and 4% against the KRW
during fiscal 2019, which adversely impacted our reported results.
46
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 .....................................................................
Impairment loss ............................................................................................
Operating (loss) income ...............................................................................
Change in fair value of equity securities ......................................................
Loss on disposal of DNI ...............................................................................
Interest income .............................................................................................
Interest expense ............................................................................................
Impairment of Cedar Cellular note ...............................................................
(Loss) income before income tax expense ...................................................
Income tax expense ......................................................................................
Net (loss) income before earnings from equity-accounted investments .......
Earnings from equity-accounted investments ..............................................
Net (loss) income .........................................................................................
Continuing .............................................................................................
Discontinued ..........................................................................................
Less (Add) net income (loss) attributable to non-controlling interest ..........
Continuing .............................................................................................
Discontinued ..........................................................................................
Net (loss) income attributable to us ..............................................................
Continuing .............................................................................................
Discontinued ..........................................................................................
2019(A)
In U.S. Dollars
(U.S. GAAP)
Year ended June 30,
2018(A)(B)
(As
restated)
$ ’000
612,889
304,536
193,003
35,484
20,917
58,949
32,473
-
17,885
8,941
-
100,366
48,597
51,769
11,597
63,366
60,975
2,391
(880)
(880)
-
64,246
61,752
2,391
$ ’000
360,990
215,348
202,056
37,349
19,745
(113,508)
(167,459)
5,771
7,229
10,724
12,793
(303,026)
3,725
(306,751)
1,482
(305,269)
(307,959)
2,690
2,349
(1,352)
3,701
(307,618)
(306,607)
(1,011)
$ %
change
(41%)
(29%)
5%
5%
(6%)
nm
nm
nm
(60%)
20%
nm
nm
(92%)
nm
nm
nm
nm
13%
nm
nm
nm
nm
nm
nm
(A) Refer to Note 3 to the audited consolidated financial statements for discontinued operations disclosures.
(B) Refer to Note 1 to the audited consolidated financial statements for additional information regarding the restatement.
47
Table 4
Revenue ........................................................................................................
Cost of goods sold, IT processing, servicing and support ............................
Selling, general and administration ..............................................................
Depreciation and amortization .....................................................................
Impairment loss ............................................................................................
Operating (loss) income ...............................................................................
Change in fair value of equity securities ......................................................
Loss on disposal of DNI ...............................................................................
Interest income .............................................................................................
Interest expense ............................................................................................
Impairment of Cedar Cellular note ...............................................................
(Loss) income before income tax expense ...................................................
Income tax expense ......................................................................................
Net (loss) income before earnings from equity-accounted investments .......
Earnings from equity-accounted investments ..............................................
Net (loss) income .........................................................................................
Continuing .............................................................................................
Discontinued ..........................................................................................
Less (Add) net income (loss) attributable to non-controlling interest ..........
Continuing .............................................................................................
Discontinued ..........................................................................................
Net (loss) income attributable to us ..............................................................
Continuing .............................................................................................
Discontinued ..........................................................................................
In South African Rand
(U.S. GAAP)
Year ended June 30,
2019(A)
ZAR ’000
5,151,147
3,072,908
2,883,239
532,951
281,751
(1,619,702)
(2,389,556)
82,349
103,154
153,026
182,549
(4,324,028)
53,154
(4,377,182)
21,147
(4,356,035)
(4,394,420)
38,385
33,519
(19,292)
52,811
(4,389,554)
(4,375,128)
(14,426)
2018(A)(B)
(As
restated)
ZAR ’000
7,780,687
3,866,114
2,450,193
450,473
265,544
748,363
412,248
-
227,052
113,507
-
1,274,156
616,943
657,213
147,225
804,438
774,084
30,354
(11,172)
(11,172)
-
815,610
785,256
30,354
$ %
change
(34%)
(21%)
18%
18%
6%
nm
nm
nm
(55%)
35%
nm
nm
(91%)
nm
nm
nm
nm
26%
nm
nm
nm
nm
nm
nm
(A) Refer to Note 3 to the audited consolidated financial statements for discontinued operations disclosures.
(B) Refer to Note 1 to the audited consolidated financial statements for additional information regarding the restatement.
The decrease in revenue was primarily due to lower contributions received from our South African operations as a result of
the end of our CPS contract with SASSA, which also resulted in fewer SASSA Grindrod-account grant recipients using the
South African National Payment System to access their grants; the reversal of revenue of $19.7 million (ZAR 277.6 million)
following the September 2019 Supreme Court ruling; the loss of our EPE account holders resulting in lower transaction fees;
fewer prepaid airtime and value-added services sales; decreases in our insurance and lending activities and lower revenue
contributions from South Korea and IPG; which was partially offset by the inclusion of DNI and higher fee and transaction
income from our ATM offerings.
The decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer SASSA Grindrod-
account grant recipients utilizing the South African National Payment System which resulted in lower transaction costs incurred
by us and fewer prepaid airtime sales, which was partially offset by the inclusion of DNI and expenses to support and expand
our EPE and ATM offerings. Our fiscal 2019 expense also included certain committed fixed and variable costs (including
security, vehicle-related expenditures, banking fees and other transaction costs) that relate to the maintenance and expansion of
our financial inclusion initiatives. SASSA’s actions to convert grant recipients to the new SAPO account, often unilaterally and
without the recipient’s consent, resulted in us incurring certain expenses without any associated significant revenue generated
from these activities. For instance, for a period during the year we deployed our mobile payment infrastructure into areas in
which we believed that EPE accountholders would utilize our infrastructure, however these individuals did not use the
infrastructure because they were auto-migrated to new SAPO accounts.
In ZAR, the increase in selling, general and administration expense was primarily due to an increase in our allowance for
doubtful finance loans receivable of approximately $28.8 million (ZAR 411.0 million), additional costs recorded related to the
September 2019 Supreme Court ruling of $14.3 million (ZAR 201.8 million), the inclusion of DNI, payment of $6.3 million
(ZAR 88.5 million) of retrenchment packages, an increase in costs at IPG as part of its restructuring and re-establishment
initiatives. Fiscal 2019 expenses also included committed fixed and variable costs (including premises and staff costs) that
related to the maintenance and expansion of our financial inclusion initiatives. Fiscal 2018 included the impact of an allowance
for doubtful Mastertrading working capital finance receivables of $7.8 million and a $4.6 million non-cash loss on re-
measurement of the previously held equity interest in DNI upon acquisition.
48
Depreciation and amortization increased primarily due to the amortization of acquired intangible assets related to the DNI
acquisition, partially offset by an increase in the number of tangible assets that became fully depreciated.
During fiscal 2019, we recognized an impairment loss of approximately $19.7 million, which included $7.0 million related
to entire amount of IPG goodwill, $6.2 million primarily related to the impairment of goodwill recognized pursuant to the 2004
Aplitec transaction and $5.3 million related to DNI customer relationships. We reviewed and impaired goodwill allocated to
T24 given the lower than expected revenues, profits and cash flows generated by T24 following the consolidation and
restructuring of IPG over the period through December 2018, which resulted in several business lines being terminated or
meaningfully reduced. We also reviewed certain customer relationships identified as part of our acquisition of DNI for
impairment because Cell C recently entered into a roaming arrangement with another South African mobile telecommunications
network provider which will extend Cell C’s network coverage and this arrangement impacted the identified customer
relationship recognized. As a consequence, we recorded an impairment loss of $5.3 million related to a portion of the customer
relationship. Refer to Notes 3 and 10 of our audited consolidated financial statements for additional information regarding the
impairment losses.
During fiscal 2018, we reviewed for impairment the goodwill identified and recognized pursuant to the Masterpayment
and Masterpayment Financial Services acquisitions in April 2016 and November 2017, respectively, due to uncertainty
surrounding the timing and amount of future net cash inflows following changes in the business strategy. As a consequence of
this review, our 2018 impairment loss of $20.9 million included an impairment loss of approximately $19.9 million related to
the entire carrying value of this goodwill acquired.
Our operating (loss) income margin for fiscal 2019 and 2018 was (31.4%) and 9.6% respectively. We discuss the
components of operating income margin under “—Results of operations by operating segment.” Our fiscal 2019 operating loss
margin resulted from lower revenue, the impact of the September 2019 Supreme Court ruling, an increase in our allowance for
doubtful finance loans receivable, impairment losses and losses incurred running our financial inclusion infrastructure. Our
fiscal 2019 operating loss margin was (14.0%) excluding the impact of the September 2019 Supreme Court ruling, the $19.7
million impairment losses and the $6.3 million in retrenchment costs incurred. Our fiscal 2018 operating margin was 14.6%
excluding the $20.9 million impairment loss, the $7.8 million allowance for doubtful finance loans receivable, the $4.6 million
DNI re-measurement and the $2.5 million South Korean indirect tax refund.
The change in fair value of equity securities represents a non-cash fair value adjustment (loss) gain related to Cell C of
$(167.5 million) and $32.5 million during fiscal 2019 and 2018, respectively. The fiscal 2019 adjustment was caused by current
challenges faced by Cell C’s business. Refer to Note 7 of our audited consolidated financial statements for the methodology and
inputs used in the fair value calculation.
We recognized a non-cash loss of $5.8 million in fiscal 2019 related to the reduction in our equity holding in DNI from
55% to 30% during that year.
Interest on surplus cash decreased to $7.3 million (ZAR 103.1 million) from $17.9 million (ZAR 227.1 million), due
primarily to the lower average daily ZAR cash balances resulting from our significant investments over the last two years as
well as cash utilized to fund operating losses in the South African operations during fiscal 2019.
Interest expense increased to $10.7 million (ZAR 153.0 million) from $8.9 million (ZAR 113.5 million), due to increased
borrowings which we obtained to partially fund our strategic investments and fund our ATMs, which was partially offset by a
reduction in our long-term South African debt. Interest expense for fiscal 2018 included interest on our South Korean debt,
which was fully repaid in October 2017.
We recorded an impairment loss of $12.8 million related to our Cedar Cellular note as discussed in Note 9 of our audited
consolidated financial statements.
Fiscal 2019 tax expense was $3.7 million (ZAR 53.2 million) compared to $48.6 million (ZAR 616.9 million) in fiscal
2018. Our effective tax rate was adversely impacted by the valuation allowances created related to the deferred tax assets
recognized in respect of net operating losses incurred by our South African businesses, the non-deductible impairment losses,
the DNI disposal losses, and other non-deductible expenses, including transaction-related expenditure and non-deductible
interest on our South African long-term debt facility. The deferred tax impact of the change in the fair value of our investment
in Cell C also impacted the effective rate for fiscal 2019, as this amount is recorded at a lower rate (at a capital gains rate) than
the South African statutory rate. During fiscal 2019, we reversed the entire deferred tax liability of approximately $6.1 million
recorded as of June 30, 2018, as a result of decrease in the carrying value of Cell C to below the initial cost.
49
In addition, the June 30, 2019, carrying value of our investment in Cell C is less than its initial cost which results in a
capital gains tax benefit for tax purposes. However, we do not expect to realize any significant capital gains in the foreseeable
future and have provided a valuation allowance of $31.7 million related to this capital gains tax benefit deferred tax asset. Our
effective tax rate for fiscal 2018 was 48.4% and higher than the South African statutory rate as a result of an impairment loss, a
valuation allowance related to an allowance for doubtful working capital finance receivables created, the DNI re-measurement
loss on acquisition, non-deductible expenses (including transaction-related expenditure and non-deductible interest on our South
African long-term facility) and the impact of the changes in U.S. federal statutory tax law.
DNI was consolidated during the first three quarters of fiscal 2019, which adversely impacted our (loss) earnings from
equity-accounted investments during fiscal 2019 because the contribution from DNI was excluded from such line item during
the majority of fiscal 2019. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our
first quarter and its annual results during our fourth quarter.
Table 5
2019
$ ’000
Year ended June 30,
2018A
(as restated)
$ ’000
$ %
change
Bank Frick ...............................................................................................
Share of net income ..........................................................................
Amortization of intangible assets, net of deferred tax.......................
Other .................................................................................................
DNI .........................................................................................................
Share of net income ..........................................................................
Amortization of intangible assets, net of deferred tax.......................
Finbond ...................................................................................................
Other .......................................................................................................
Earnings from equity accounted investments ...................................
(A) Refer to Note 1 to the audited consolidated financial statements for additional information regarding the restatement.
(1,542)
1,109
(567)
(2,084)
865
1,380
(515)
2,828
(669)
1,482
(606)
201
(403)
(404)
7,005
9,510
(2,505)
5,194
4
11,597
154%
452%
41%
416%
nm
nm
nm
(46%)
nm
nm
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below
Table 6
Operating Segment
Revenue:
South African transaction processing ...............
International transaction processing .................
Financial inclusion and applied technologies ...
Continuing ..................................................
Discontinued ...............................................
Subtotal: Operating segments ...............
Corporate/Eliminations and intersegment
eliminations ......................................................
Consolidated revenue ...............................
Continuing ............................................
Discontinued .........................................
Operating (loss) income:
South African transaction processing ...............
International transaction processing .................
Financial inclusion and applied technologies ...
Continuing ..................................................
Discontinued ...............................................
Subtotal: Operating segments ...............
Corporate/Eliminations .....................................
Continuing ..................................................
Discontinued ...............................................
Consolidated operating (loss) income
Continuing ......................................
Discontinued ...................................
2019
$ ’000
96,038
148,268
146,184
89,847
56,337
390,490
(29,500)
360,990
304,653
56,337
(30,771)
2,837
(14,758)
(39,158)
24,400
(42,692)
(70,816)
(58,097)
(12,719)
(113,508)
(125,189)
11,681
50
In U.S. Dollars (U.S. GAAP)
Year ended June 30,
2018
$ ’000
% of
total
% of
total
%
change
27%
41%
40%
24%
16%
108%
(8%)
100%
84%
16%
27%
(2%)
13%
34%
(21%)
38%
62%
51%
11%
100%
110%
(10%)
268,047
180,027
221,906
221,906
-
669,980
(57,091)
612,889
612,889
-
42,796
(12,478)
55,372
55,372
-
85,690
(26,741)
(22,127)
(4,614)
58,949
63,563
(4,614)
44%
29%
36%
36%
-
109%
(9%)
100%
100%
-
73%
(21%)
94%
94%
-
146%
(46%)
(38%)
(8%)
100%
108%
(8%)
(64%)
(18%)
(34%)
(60%)
nm
(42%)
(48%)
(41%)
(50%)
nm
nm
nm
nm
nm
nm
nm
165%
163%
nm
nm
nm
nm
Table 7
Operating Segment
Revenue:
South African transaction processing ...............
International transaction processing .................
Financial inclusion and applied technologies ...
Continuing ..................................................
Discontinued ...............................................
Subtotal: Operating segments ...............
Corporate/Eliminations and intersegment
eliminations ......................................................
Consolidated revenue ...............................
Continuing ............................................
Discontinued .........................................
Operating (loss) income:
South African transaction processing ...............
International transaction processing .................
Financial inclusion and applied technologies ...
Continuing ..................................................
Discontinued ...............................................
Subtotal: Operating segments ...............
Corporate/Eliminations .....................................
Continuing ..................................................
Discontinued ...............................................
Consolidated operating (loss) income
Continuing ......................................
Discontinued ...................................
In South African Rand (U.S. GAAP)
Year ended June 30,
2019
ZAR
’000
1,370,414
2,115,710
2,085,973
1,282,072
803,901
5,572,097
(420,950)
5,151,147
4,347,246
803,901
(439,087)
40,483
(210,589)
(558,765)
348,176
(609,193)
(1,010,509)
(829,015)
(181,494)
(1,619,702)
(1,786,384)
166,682
% of
total
27%
41%
40%
24%
16%
108%
(8%)
100%
84%
16%
27%
(2%)
13%
34%
(21%)
38%
62%
51%
11%
100%
110%
(10%)
2018
ZAR
’000
3,402,883
2,285,461
2,817,119
2,817,119
-
8,505,463
(724,776)
7,780,687
7,780,687
-
543,299
(158,409)
702,953
702,953
-
1,087,843
(339,480)
(280,905)
(58,575)
748,363
806,938
(58,575)
% of
total
%
change
44%
29%
36%
36%
-
109%
(9%)
100%
100%
-
73%
(21%)
94%
94%
-
146%
(46%)
(38%)
(8%)
100%
108%
(8%)
(60%)
(7%)
(26%)
(54%)
nm
(34%)
(42%)
(34%)
(44%)
nm
nm
nm
nm
nm
nm
nm
198%
195%
nm
nm
nm
nm
South African transaction processing
The decrease in segment revenue and operating income was primarily due to the substantial decrease in the number of
SASSA grant recipients paid under our SASSA contract as the contract expired at the end of the first quarter of fiscal 2019. Our
revenue and operating income was also adversely impacted by the significant reduction in the number of SASSA grant
recipients with SASSA-branded cards linked to Grindrod bank accounts as well as a lower number of EPE accounts. These
decreases in revenue and operating income were partially offset by higher transaction revenue as a result of increased usage of
our ATMs and EasyPay. Operating income for this operating segment for fiscal 2019 included a $1.1 million impairment loss
and retrenchment costs of $4.7 million (ZAR 65.9 million).
Our operating (loss) income margin for fiscal 2019 and 2018 was (32.0%) and 16.0%, respectively. Excluding the
impairment loss of $1.1 million and restructuring costs of $4.7 million, the segment operating loss and operating loss margin for
fiscal 2019 were $24.9 million and (26.0%), respectively.
International transaction-based activities
Segment revenue was lower during fiscal 2019, primarily due to a contraction in IPG transactions processed, specifically
meaningfully lower crypto-exchange and China processing activity, and lower KSNET revenue as a result of lower transaction
values processed. Operating income during fiscal 2019 was adversely impacted by a $7.0 million impairment loss in respect of
IPG. Operating income during fiscal 2018 was adversely impacted by a $19.9 million impairment loss, a Mastertrading
allowance for doubtful working capital finance receivable of $7.8 million, and was positively impacted by an ad hoc refund of
indirect taxes of $2.5 million in Korea. Excluding the combined impact of the impairment losses, the allowance for doubtful
finance loans receivable and the ad hoc tax refund, operating income during fiscal 2019 was lower compared to fiscal 2018 due
to a decrease in IPG revenues and ongoing losses at Masterpayment during fiscal 2019, but such decrease was partially offset by
an improved contribution from KSNET primarily as a result of lower depreciation expense.
51
IPG continues to work in close collaboration with Bank Frick and our other specialist departments to develop bespoke
blockchain-based solutions, including a highly secure but easily accessible crypto-asset storage solution for crypto-asset
investors and exchanges and incurred research and development expenses of approximately $1.4 million in fiscal 2019 related to
this project.
Operating (loss) income margin for fiscal 2019 and 2018 was 1.9% and (6.9%), respectively. Excluding the goodwill
impairment, segment operating income and margin for fiscal 2019 were $9.8 million and 6.6%, respectively. Excluding the
impairment loss, the Mastertrading allowance for doubtful working capital finance receivables and the ad hoc tax refund,
segment operating income and margin for fiscal 2018 were $12.6 million and 7.0%, respectively.
Financial inclusion and applied technologies
Segment revenue decreased primarily due to fewer prepaid airtime and value-added services sales, lower lending and
insurance revenues, and a decrease in inter-segment revenues, partially offset by the consolidation and inclusion of DNI for the
nine months to March 31, 2019. We reported an operating loss in fiscal 2019 compared with fiscal 2018, primarily due to the
allowance for doubtful finance loans receivable of $23.4 million recognized in the second quarter, a $6.3 million impairment
loss and expenses incurred to maintain and expand our financial service infrastructure, partially offset by the contribution from
DNI. Operating loss for this operating segment for fiscal 2019 included retrenchment costs of $1.6 million (ZAR 22.6 million).
Operating (loss) income margin for the Financial inclusion and applied technologies segment was (10.1%) and 25.0%
during fiscal 2019 and 2018, respectively. Excluding the impairment loss of $6.3 million and restructuring costs of $1.6 million,
the segment operating loss and operating loss margin for fiscal 2019 were ($6.9) million and (4.7%), respectively.
Corporate/ Eliminations
Our corporate expenses generally include acquisition-related intangible asset amortization; expenses incurred related to
acquisitions and investments pursued; expenditure related to compliance with the Sarbanes-Oxley Act of 2002; non-employee
directors’ fees; executive bonuses; stock-based compensation; legal fees; audit fees; directors and officer’s insurance premiums;
and elimination entries.
Our corporate expenses increased primarily due to the accrual of $14.3 million related to the September 2019 Supreme Court
ruling, a $5.3 million impairment loss as well as higher acquired intangible asset amortization, non-employee director expenses,
transaction-related expenditures and external service provider fees, and were partially offset by the reversal of stock-based
compensation charges of $1.9 million related to forfeiture of awards. Corporate/ Eliminations for fiscal 2019, also includes the
impact of the reversal of revenue related to the September 2019 Supreme Court ruling. Our corporate expenses for fiscal 2018
include a $0.5 million profit related to the sale of XeoHealth and a $4.6 million non-cash loss on re-measurement of the
previously held equity interest in DNI.
Fiscal 2018 Compared to Fiscal 2017
The following factors had an influence on our results of operations during fiscal 2018 as compared with the same period in
the prior year:
• Decline in revenue: Our revenues declined 6% in ZAR primarily due to the payment of 82% fewer grant recipients
during the fourth quarter of fiscal 2018, being only those recipients paid at cash pay points as per the Constitutional
Court order of March 23, 2018, but partially offset by EPE revenue and operating income growth driven primarily by
the expansion of our customer base and increased utilization of our ATM infrastructure and volume growth in our
lending and insurance activities during fiscal 2018 coupled with operating efficiencies, which resulted in an improved
contribution to our financial inclusion revenue and operating income;
• Decrease in operating income: Lower revenue, coupled with an increase in our allowance for doubtful working capital
finance receivables, a non-cash loss on re-measurement of the previously held equity interest in DNI upon acquisition,
the impact of October 2017 annual salary increases for our South African employees, an increase in our allowance for
doubtful microlending finance loans receivable, and an increase in goods and services purchased from third parties,
resulted in lower operating income compared with in fiscal 2017;
• Non-cash losses, impairments and fair-value adjustments: During fiscal 2018 we incurred impairment losses of $20.9
million related to the impairment of goodwill, an allowance for credit losses related to doubtful working capital finance
receivables of $7.8 million, a $4.6 million non-cash loss on re-measurement of the previously held equity interest in
DNI, and a fair value adjustment gain of $32.5 million for Cell C; and
• Adverse foreign exchange movements: The U.S. dollar depreciated by 7% against the ZAR and 4% against the KRW
during fiscal 2018 compared with fiscal 2017, which positively impacted our reported results.
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 8
Revenue ........................................................................................................
Cost of goods sold, IT processing, servicing and support ............................
Selling, general and administration ..............................................................
Depreciation and amortization .....................................................................
Impairment loss ............................................................................................
Operating income .........................................................................................
Change in fair value of equity securities ......................................................
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 ...................................................................................................
Continuing .............................................................................................
Discontinued ..........................................................................................
(Add) Less net (loss) income attributable to non-controlling interest .........
Continuing .............................................................................................
Discontinued ..........................................................................................
Net income attributable to us .......................................................................
Continuing .............................................................................................
Discontinued ..........................................................................................
2018(A)(B)
In U.S. Dollars
(U.S. GAAP)
Year ended June 30,
2017(A)(B)
(As
restated)
$ ’000
610,066
292,383
179,262
41,378
-
97,043
-
20,897
3,484
114,456
42,506
71,950
2,814
74,764
74,648
-
1,694
1,694
-
73,070
73,070
-
$ ’000
612,889
304,536
193,003
35,484
20,917
58,949
32,473
17,885
8,941
100,366
48,597
51,769
11,597
63,366
60,975
2,391
(880)
(880)
-
64,246
61,752
2,391
$ %
change
0%
4%
8%
(14%)
nm
(39%)
nm
(14%)
157%
(12%)
14%
(28%)
312%
(15%)
(18%)
nm
(152%)
(152%)
nm
(12%)
(15%)
nm
(A) Refer to Note 3 to the audited consolidated financial statements for discontinued operations disclosures.
(B) Refer to Note 1 to the audited consolidated financial statements for additional information regarding the restatement.
53
Table 9
Revenue ........................................................................................................
Cost of goods sold, IT processing, servicing and support ............................
Selling, general and administration ..............................................................
Depreciation and amortization .....................................................................
Impairment loss ............................................................................................
Operating income .........................................................................................
Change in fair value of equity securities ......................................................
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 ...................................................................................................
Continuing .............................................................................................
Discontinued ..........................................................................................
(Add) Less net (loss) income attributable to non-controlling interest .........
Continuing .............................................................................................
Discontinued ..........................................................................................
Net income attributable to us .......................................................................
Continuing .............................................................................................
Discontinued ..........................................................................................
In South African Rand
(U.S. GAAP)
Year ended June 30,
2018(A)(B)
ZAR ’000
7,780,687
3,866,114
2,450,193
450,473
265,544
748,363
412,248
227,052
113,507
1,274,156
616,943
657,213
147,225
804,438
774,084
30,354
(11,172)
(11,172)
-
815,610
785,256
30,354
2017(A)(B)
(As
restated)
ZAR ’000
8,308,001
3,981,730
2,441,226
563,493
-
1,321,552
-
284,580
47,446
1,558,686
578,855
979,831
38,322
1,018,153
1,018,153
-
23,069
23,069
-
995,084
995,084
-
$ %
change
(6%)
(3%)
0%
(20%)
nm
(43%)
nm
(20%)
139%
(18%)
7%
(33%)
284%
(21%)
(24%)
nm
(148%)
(148%)
nm
(18%)
(21%)
nm
(A) Refer to Note 3 to the audited consolidated financial statements for discontinued operations disclosures.
(B) Refer to Note 1 to the audited consolidated financial statements for additional information regarding the restatement.
In ZAR, the decrease in revenue was primarily due to lower prepaid airtime sales, a decline in the number of SASSA
biometrically-enabled UEPS/EMV grant recipients paid and fewer ad hoc terminal sales, which was partially offset by higher
revenue from Masterpayment and Transact 24, EPE and related ATM services, and growth in our insurance business. KSNET’s
revenue contribution was flat compared with fiscal 2017 due to the ongoing impact of regulatory changes in South Korea.
In ZAR, the decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer prepaid
airtime and ad hoc terminal sales, which was partially offset by increases in goods and services purchased from third parties,
higher expenses incurred due to increased usage of the South African National Payment System by beneficiaries, and
inflationary pressures on the cost base.
Our selling, general and administration expense increased primarily due to an increase in our allowance for doubtful
working capital finance receivables of $7.8 million, a $4.6 million non-cash loss on re-measurement of the previously held
equity interest in DNI upon acquisition, the impact of October 2017 annual salary increases for our South African employees, an
increase in our allowance for doubtful microlending finance loans receivable, and an increase in goods and services purchased
from third parties. These increases were partially offset by lower agent incentive costs paid in Korea due to weaker trading
conditions in fiscal 2018, lower executive remuneration and fewer transaction related expenses in fiscal 2018. In fiscal 2017,
our selling, general and administration expense included an $8.0 million separation payment to our former chief executive
officer, a $3.8 million allowance for credit losses related to a specific customer, and a $1.8 million reversal of stock-based
compensation charges related to awards of restricted stock with performance conditions.
Our operating income margin for fiscal 2018 and 2017 was 9.6% and 15.9%, respectively. Our fiscal 2018 margin was
14.6% excluding the $20.9 million impairment loss, the $7.8 million allowance for doubtful finance loans receivable, the $4.6
million DNI re-measurement and the $2.5 million South Korean indirect tax refund. Our fiscal 2017 margin was 17.5%
excluding the $8.0 million separation payment to our former chief executive officer, the $3.8 million allowance for doubtful
finance loans receivable and the $1.8 million stock-based compensation reversal. We discuss the components of operating
income margin under “—Results of operations by operating segment.”
Depreciation and amortization decreased primarily due to lower overall amortization of intangible assets that are fully
amortized and tangible assets that are fully depreciated.
54
The change in fair value of equity securities represents the change in fair value of Cell C recorded during the year ended
June 30, 2018.
Interest on surplus cash decreased to $17.9 million (ZAR 227.1 million) from $20.9 million (ZAR 284.6 million), due
primarily to lower average daily ZAR cash balances, partially offset by interest earned on the loan to Finbond and the listed
Cedar Cellular note.
Interest expense increased to $8.9 million (ZAR 113.5 million) from $3.5 million (ZAR 47.4 million), largely due to
interest on the South African facility we obtained to partially fund our investment in Cell C and DNI, somewhat offset by a
lower average long-term debt balance on our South Korean debt and a lower interest rate.
Fiscal 2018 tax expense was $48.6 million (ZAR 616.9 million) compared to $42.5 million (ZAR 578.9 million) in fiscal
2017. Our effective tax rate for fiscal 2018 was 48.4% and higher than the South African statutory rate as a result of an
impairment loss, a valuation allowance related to an allowance for doubtful working capital finance receivables created, the
DNI re-measurement loss on acquisition, non-deductible expenses (including transaction-related expenditure and non-deductible
interest on our South African long-term facility) and the impact of the changes in U.S. federal statutory tax law. Our effective
tax rate for the fiscal 2017 was 37.1% and higher than the South African statutory rate as a result of non-deductible expenses
(including consulting and legal fees) and the tax attributable to distributions from our South African subsidiary.
Earnings from equity-accounted investments increased primarily due to the inclusion of our portion of earnings from DNI
and Bank Frick and an increase, in USD, in 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. The table below presents the
relative earnings (loss) from our equity accounted investments:
Table 10
2018A
(as
restated)
$ ’000
Year ended June 30,
2017A
(as
restated)
$ ’000
$ %
change
DNI ............................................................................................................
Share of net income .............................................................................
Amortization of intangible assets, net of deferred tax..........................
Bank Frick ..................................................................................................
Share of net income .............................................................................
Amortization of intangible assets, net of deferred tax..........................
Other ....................................................................................................
Finbond ......................................................................................................
Other ..........................................................................................................
Earnings from equity accounted investments ......................................
(A) Refer to Note 1 to the audited consolidated financial statements for additional information regarding the restatement.
7,005
9,510
(2,505)
(606)
201
(403)
(404)
5,194
4
11,597
-
-
-
-
-
-
-
2,653
161
2,814
nm
nm
nm
nm
nm
nm
nm
96%
nm
nm
55
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below
In U.S. Dollars (U.S. GAAP)
Year ended June 30,
2017
$ ’000
% of
total
% of
total
44%
29%
36%
36%
-
109%
(9%)
100%
100%
-
73%
(21%)
94%
94%
-
146%
(46%)
(38%)
(8%)
100%
108%
(8%)
249,144
176,729
235,901
235,901
-
661,774
(51,708)
610,066
610,066
-
59,309
13,705
57,785
57,785
130,799
(33,756)
(33,756)
-
97,043
97,043
-
41%
29%
39%
39%
-
109%
(9%)
100%
100%
-
61%
14%
60%
60%
-
135%
(35%)
(35%)
-
100%
100%
-
%
change
8%
2%
(6%)
(6%)
-
1%
10%
-
-
-
(28%)
nm
(4%)
(4%)
-
(34%)
(21%)
(34%)
nm
(39%)
(35%)
nm
Table 11
Operating Segment
Revenue:
South African transaction processing............
International transaction processing ..............
Financial inclusion and applied technologies
Continuing ...............................................
Discontinued ...........................................
Subtotal: Operating segments ............
Intersegment eliminations .............................
Consolidated revenue ............................
Continuing .........................................
Discontinued ......................................
Operating income (loss):
South African transaction processing............
International transaction processing ..............
Financial inclusion and applied technologies
Continuing ...............................................
Discontinued ...........................................
Subtotal: Operating segments ............
Corporate/Eliminations .................................
Continuing ...............................................
Discontinued ...........................................
Consolidated operating income
(loss) ..................................................
Continuing ...................................
Discontinued ................................
2018
$ ’000
268,047
180,027
221,906
221,906
-
669,980
(57,091)
612,889
612,889
-
42,796
(12,478)
55,372
55,372
85,690
(26,741)
(22,127)
(4,614)
58,949
63,563
(4,614)
56
Table 12
Operating Segment
Revenue:
South African transaction processing............
International transaction processing ..............
Financial inclusion and applied technologies
Continuing ...............................................
Discontinued ...........................................
Subtotal: Operating segments ............
Intersegment eliminations .............................
Consolidated revenue ............................
Continuing .........................................
Discontinued ......................................
Operating income (loss):
South African transaction processing............
International transaction processing ..............
Financial inclusion and applied technologies
Continuing ...............................................
Discontinued ...........................................
Subtotal: Operating segments ............
Corporate/Eliminations .................................
Continuing ...............................................
Discontinued ...........................................
Consolidated operating income
(loss) ..................................................
Continuing ...................................
Discontinued ................................
In South African Rand (U.S. GAAP)
Year ended June 30,
2018
ZAR
’000
3,402,883
2,285,461
2,817,119
2,817,119
-
8,505,463
(724,776)
7,780,687
7,780,687
-
543,299
(158,409)
702,953
702,953
-
1,087,843
(339,480)
(280,905)
(58,575)
% of
total
44%
29%
36%
36%
-
109%
(9%)
100%
100%
-
73%
(21%)
94%
94%
-
146%
(46%)
(38%)
(8%)
748,363
806,938
(58,575)
100%
108%
(8%)
2017
ZAR
’000
3,392,893
2,406,731
3,212,547
3,212,547
-
9,012,171
(704,170)
8,308,001
8,308,001
-
807,682
186,637
786,928
786,928
-
1,781,247
(459,696)
(459,696)
-
1,321,551
1,321,551
-
% of
total
%
change
41%
29%
39%
39%
-
109%
(9%)
100%
100%
-
61%
14%
60%
60%
-
135%
(35%)
(35%)
-
100%
100%
-
-
(5%)
(12%)
(12%)
-
(6%)
3%
(6%)
(6%)
-
(33%)
nm
(11%)
(11%)
-
(39%)
(26%)
(39%)
nm
(43%)
(39%)
nm
South African transaction processing
In ZAR, the increase in revenue from our South African transaction processing segment was primarily due to higher EPE
related fee and transaction revenue and increased inter-segment transaction processing activities, partially offset by a decline in
the number of social welfare grants distributed. The March 2018 Constitutional Court order extended our grant distribution
service only for grant recipients that are paid at cash pay-points and, therefore, on April 1, 2018, we introduced a monthly fee to
recipients who continued to utilize the SASSA Grindrod card that was issued to them under our 2012 SASSA contract.
Our operating income margin decreased as a result of the fees earned from SASSA and grant recipients on current pricing
terms not being sufficient to cover CPS’ fixed cost to maintain the majority of its cash pay-points, as well as increases in goods
and services purchased from third parties and annual salary increases granted to our South African employees. During fiscal
2018, we also recognized a $1.1 million impairment loss related to goodwill allocated to a business that ceased trading during
the year. Operating income margin in our South African transaction processing segment for fiscal 2018 and 2017 was 16.0%
and 23.8%, respectively.
International transaction-based activities
Segment revenue was higher during fiscal 2018 due to an increase in processing activities, particularly related to
Masterpayment’s cryptocurrency processing launched in December 2017, partially offset by the ongoing impact of regulatory
changes in South Korea on KSNET’s revenue. Operating income during fiscal 2018 was lower due to an impairment loss of
$19.9 million in respect of Masterpayment, an increase in our allowance for doubtful working capital finance receivable of $7.8
million and a decrease in profitability at KSNET, partially offset by an ad hoc refund of indirect taxes of $2.5 million in Korea.
Operating income during fiscal 2017 included an allowance for doubtful working capital finance receivable of $3.8 million and a
refund of approximately $0.8 million that had been paid several years ago in connection with industry-wide litigation in Korea
that was finalized.
57
Operating income margin for fiscal 2018 and 2017 was (6.9%) and 7.8%, respectively. Excluding the Mastertrading
allowance for doubtful working capital finance receivables, the impairment loss and the indirect taxes refund received, segment
operating income and margin for fiscal 2018 were $12.6 million and 7.0%, respectively. Excluding the Mastertrading allowance
for doubtful working capital finance receivables and the refund received, segment operating income and margin for fiscal 2017
were $16.7 million and 9.4% respectively.
Financial inclusion and applied technologies
Segment revenue decreased primarily due to fewer prepaid airtime and other value added service sales and lower lending
fees, partially offset by the introduction of monthly account fees to our card holders, increased volume from our insurance
business and an increase in inter-segment revenues. Operating income was also impacted by an increase in the allowance for
doubtful finance loans receivable due to the increase in our lending book and higher risks associated with the transition to the
new social grant payment arrangements.
Operating income margin for the Financial inclusion and applied technologies segment for fiscal 2018 and 2017 was
25.0% and 24.5%, respectively, and was impacted by fewer low margin prepaid product sales, increased revenue from our
insurance business, the introduction of a monthly account fee and an increase in inter-segment revenues, partially offset by
annual salary increases granted to our South African employees and inflationary cost pressures.
Corporate/ Eliminations
Our corporate expenses have decreased primarily due to lower executive compensation, fewer transaction-related
expenditures and a $0.5 million profit related to the sale of XeoHealth, partially offset by a $4.6 million non-cash loss on re-
measurement of the previously held equity interest in DNI, higher stock-based compensation charges (net of reversals),
additional directors’ fees and a modest increase in U.S. dollar denominated goods and services purchased from third parties. Our
corporate expenses for fiscal 2017, included an $8.0 million separation payment made to our former chief executive officer and
a $1.9 million reversal of stock-based compensation charges.
Liquidity and Capital Resources
At June 30, 2019, our cash and cash equivalents were $46.1 million and comprised of KRW-denominated balances of
KRW 30.1 billion ($26.1 million), ZAR-denominated balances of ZAR 184.3 million ($13.1 million), U.S. dollar-denominated
balances of $2.4 million, and other currency deposits, primarily Botswana pula, of $4.5 million, all amounts translated at
exchange rates applicable as of June 30, 2019. The decrease in our unrestricted cash balances from June 30, 2018, was primarily
due to significantly weaker trading activities, scheduled debt repayments, dividend payments to non-controlling interests and
capital expenditures, which was partially offset by cash dividends received from DNI and a decrease in our South African
lending book.
We generally invest any surplus cash held by our South African operations in overnight call accounts that we maintain at
South African banking institutions, and any surplus cash held by our non-South African companies in U.S. dollar denominated
money market accounts. We have invested surplus cash in Korea in KRW-denominated short-term investment accounts at
Korean banking institutions.
Historically, we have financed most of our operations, research and development, working capital, and capital
expenditures, as well as acquisitions and strategic investments, through internally generated cash and our financing facilities.
When considering whether to borrow under our financing facilities, we consider the cost of capital, cost of financing,
opportunity cost of utilizing surplus cash and availability of tax efficient structures to moderate financing costs. Recently, we
have been required to utilize our short-term financing facilities to fund our daily cash requirements as we adapt to the expiration
of the SASSA contract in September 2018 and the transition of our business model. The board is actively managing our
liquidity in the light of the significant changes underway in our business.
Consideration of going concern
Accounting guidance requires our management to assess whether there are conditions or events, considered in the
aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after our audited
consolidated financial statements are issued. Our management has identified certain conditions or events, which, considered in
the aggregate, could raise substantial doubt about our ability to continue as a going concern including the risk that we will be
unable to:
• deliver all or a substantial part of the financial results forecast in our fiscal 2020 budget;
•
retain our existing borrowings and facilities, as described below and in Note 12 of our audited consolidated financial
statements, or obtain additional borrowings and facilities on commercially reasonable terms;
58
• arrive at a commercial settlement with SASSA, given the September 30, 2019, Supreme Court ruling regarding the
repayment of the additional implementation costs received back to SASSA (refer Note 13 of our audited consolidated
financial statements) and the ongoing dispute we have with SASSA over fees due for the six-month contract extension
period in accordance with National Treasury’s recommendation (refer Note 2—Revenue recognition—Significant
judgments and estimates of our audited consolidated financial statements);
• dispose of all or a portion of our remaining 30% interest in DNI. DNI’s operations are also significantly dependent on
Cell C because it is the largest distributor of Cell C starter packs in South Africa. Therefore, the inability of Cell C to
continue to operate through the next 12 months could also have an adverse impact on DNI’s operations; or
• dispose of investments in order to realize sufficient cash flows.
Our management has implemented a number of plans to alleviate the substantial doubt about our ability to continue as a
going concern. These plans include disposing of certain non-core assets (refer to Note 3 of our audited consolidated financial
statements for additional information regarding a call option granted to DNI), engaging FT Partners to advise on the KSNET
business, and extending our existing borrowings used to fund our ATMs through September 2020. In addition, our management
believes there are a number of mitigating actions it can pursue, including (i) limiting the expansion of our microlending finance
loans receivable book in South Africa; (ii) implementing further cost cutting measures; (iii) commencing additional asset
realizations; (iv) managing our capital expenditures; and (v) accessing alternative sources of capital (including through the
issuance of additional shares of our common stock), in order to generate additional liquidity. Our management believes that
these actions alleviate the substantial doubt referred to above and, therefore, has concluded that we remain a going concern.
Available short-term borrowings
We have a short-term South African credit facility with Nedbank of up to ZAR 450.0 million ($32.0 million), which is
comprised of an overdraft facility of (i) up to ZAR 300 million ($21.3 million), which is further split into (a) a ZAR 250.0
million ($17.8 million) overdraft facility which may only be used to fund ATMs used at pay points and (b) a ZAR 50 million
($3.6 million) general banking facility and (ii) indirect and derivative facilities of up to ZAR 150 million ($10.7 million), which
include letters of guarantee, letters of credit and forward exchange contracts. The ZAR 250.0 million component of the primary
amount may only be used to fund ATMs and therefore this component of the primary amount utilized and converted to cash to
fund our ATMs is considered restricted cash. As of June 30, 2019, the interest rate on the overdraft facility was 9.10%, and was
reduced to 8.85% on July 19, 2019, following a reduction in the South African repo rate. As of June 30, 2019, we had utilized
approximately ZAR 82.9 million ($5.9 million) of our ZAR 250 million overdraft facility to fund ATMs and utilized none of
our ZAR 50 million general banking facility. As of June 30, 2019, we had utilized approximately ZAR 93.6 million ($6.6
million) of the indirect and derivative facilities to support guarantees issued by Nedbank to various third parties on our behalf.
We also have a short-term South African credit facility with RMB of ZAR 1.2 billion ($85.2 million) which may only be
used to fund our ATMs in South Africa. As of June 30, 2019, the interest rate on the facility was 10.25% (South African prime)
and was reduced to 10.00% on July 19, 2019, following a reduction in the South African repo rate. As of June 30, 2019, we had
utilized approximately ZAR 1.0 billion ($69.6 million) of this facility.
We have a short-term U.S. dollar-denominated overdraft facility with Bank Frick of $20.0 million. As of June 30, 2019,
we had utilized approximately $9.5 million of this facility. The interest rate on the facility is 4.50% plus 3-month US dollar
LIBOR and interest is payable on a quarterly basis. The 3-month US dollar LIBOR rate was 2.31988% on June 30, 2019. The
facility has no fixed term, however, it may be terminated by either party with six weeks written notice.
We also have a one-year KRW 10 billion ($8.6 million) short-term overdraft facility from Hana Bank, a South Korean
bank. The interest rate on the facilities is 1.984% plus 3-month CD rate. The CD rate as of June 30, 2019 was 1.780%. The
facility expires in January 2020, however can be renewed. The facility is unsecured with no fixed repayment terms. As of June
30, 2019, we had not utilized this facility.
Available long-term borrowings
We have no available or outstanding long-term borrowings as of June 30, 2019.
Restricted cash
We have credit facilities with RMB and Nedbank in order to access cash to fund our ATMs in South Africa. Our cash,
cash equivalents and restricted cash presented in our audited statement of cash flows as of June 30, 2019, includes restricted
cash of approximately $75.4 million related to cash withdrawn from our various debt facilities to fund ATMs. This cash may
only be used to fund ATMs and is considered restricted as to use and therefore is classified as restricted cash on our audited
consolidated balance sheet.
59
Settlement assets and settlement liabilities
As a transaction processor we receive cash from:
• customers on whose behalf we process 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
Net cash used in operating activities during fiscal 2019 was $4.5 million (ZAR 63.6 million) compared to net cash
provided by operating activities of $132.3 million (ZAR 1.7 billion) for fiscal 2018. The decrease in cash provided is primarily
due to significantly weaker trading activity during fiscal 2019 compared to 2018. During fiscal 2019 and 2018, we paid interest
of $2.9 million related to our South African long-term borrowings.
Cash flows from operating activities for fiscal 2018 increased to $132.3 million (ZAR 1.7 billion) from $97.2 million
(ZAR 1.3 billion) for fiscal 2017. Excluding the impact of interest received, interest paid on our Korean and South Africa debt
and taxes presented in the table below, the increase relates primarily to the receipt of certain working capital loans outstanding,
offset partially by the expansion of our South African lending book and weaker trading activity during fiscal 2018 compared to
2017. During fiscal 2018, we paid interest of $7.2 million and $0.4 million, respectively, under our South African and South
Korean debt facilities.
During fiscal 2019, we made a first provisional tax payment of $6.4 million (ZAR 92.0 million) and a second provisional
tax payment of $0.8 million (ZAR 11.0 million) related to our 2019 tax year in South Africa. We also paid taxes totaling
$4.7 million in other tax jurisdictions, primarily South Korea.
During fiscal 2018, we made a first provisional tax payment of $17.7 million (ZAR 231.2 million) and a second
provisional tax payment of $17.0 million (ZAR 225.9 million) related to our 2018 tax year in South Africa. We also paid taxes
totaling $4.9 million in other tax jurisdictions, primarily South Korea.
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.
Taxes paid during fiscal 2019, 2018 and 2017 were as follows:
Table 13
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 ..........................
2019
$
‘000
6,453
752
1,426
(254)
8,377
4,733
13,110
2018
$
‘000
17,739
17,008
1,859
(430)
-
36,176
4,889
41,065
Year ended June 30,
2017
$
‘000
2019
ZAR
‘000
18,192
17,197
1,624
(1,414)
1,471
37,070
8,095
45,165
91,994
10,952
20,880
(3,864)
119,962
66,519
186,481
2018
ZAR
‘000
231,200
225,887
24,432
(5,480)
-
476,039
63,261
539,300
2017
ZAR
‘000
251,968
221,734
22,365
(19,481)
21,300
497,886
109,800
607,686
We expect to pay additional provisional payments in South Africa of approximately $0.8 million (ZAR 11.6 million
translated at exchange rates applicable as of June 30, 2019) related to our 2019 tax year in the first quarter of fiscal 2020.
60
Cash flows from investing activities
During fiscal 2019, we paid approximately $9.4 million (ZAR 134.5 million), related to capital expenditures, primarily
related to the acquisition of ATMs in South Africa and the expansion of our branch network. We also paid $2.5 million for a
50% interest in V2 Limited, acquired customer bases in DNI for $1.4 million, made a further equity contribution of $1.1 million
to MobiKwik and received $1.0 million from Finbond related to the settlement of a ZAR 15.0 million loan outstanding.
During fiscal 2018, we paid approximately $151.0 million (ZAR 2.0 billion) for a 15% interest in Cell C, $88.7 million
(ZAR 1.2 billion) for a 55% interest in DNI, $51.9 million for a 35% interest in Bank Frick, and $9.0 million for a 7.625%
interest in a listed note. Fiscal 2018 includes capital expenditure of $9.7 million (ZAR 124.7 million), primarily for the
acquisition of payment processing terminals in Korea and 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 OneFi and paid approximately $2.9 million and $1.7 million,
respectively, net of cash received, to acquire 100% of each of Ceevo FS and Pros Software’s ordinary shares. 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 prohibit the
provision of payment equipment to the majority of merchants.
Cash flows from financing activities
During fiscal 2019, we utilized approximately $822.8 million from our overdraft facilities, primarily to fund our ATMs,
and repaid $741.0 million of these facilities. We also utilized approximately $14.6 million of DNI’s revolving credit facility to
lend funds to Cell C to finance the acquisition and/or requisition of telecommunication towers and other specific uses pre-
approved by the lender. We also made scheduled South African debt facility payments of $31.8 million, repaid $4.9 million
under DNI’s revolving credit facility and paid non-refundable origination fees of approximately $0.4 million related to the credit
facilities. We also paid dividends of approximately $4.1 million to certain of our non-controlling interests, principally in DNI.
During fiscal 2018, we utilized approximately $113.2 million (ZAR 1.46 billion) of our South African facility to partially
fund our investments in Cell C and DNI and utilized approximately $0.3 million of our Korean facility to pay a portion of our
quarterly interest due. We made accumulated scheduled South African debt facility payments of $60.5 million (ZAR 776.3
million) and made a $16.6 million payment to settle our outstanding South Korean debt facility in full. We also utilized $44.9
million of our overdraft facilities and repaid $62.9 million of these facilities.
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 a guarantee issued by RMB and paid a dividend of approximately $2.1 million to certain of our non-controlling
interests.
61
Contractual Obligations
The following table sets forth our contractual obligations as of June 30, 2019:
Table 14
Payments due by Period, as of June 30, 2019 (in $ ’000s)
Total
1-3
years
3-5
years
More
than 5
years
Less
than 1
year
84,990
6,010
3,479
1,953
Short-term borrowings .............................................
Operating lease obligations ......................................
Purchase obligations .................................................
Capital commitments ...............................................
Other long-term obligations reflected on our
balance sheet (A)(B) ................................................
Total ...................................................................
(A) – Includes policyholder liabilities of $2.5 million related to our insurance business. All amounts are translated at
84,990
10,304
3,479
1,953
-
3,776
-
-
-
518
-
-
3,007
103,733
-
96,432
-
3,776
3,007
3,007
-
518
-
-
-
-
exchange rates applicable as of June 30, 2019.
(B) – We have excluded cross-guarantees in the aggregate amount of $6.6 million issued as of June 30, 2019, to Nedbank
to secure guarantees it has issued to third parties on our behalf as the amounts that will be settled in cash are not
known and the timing of any payments is uncertain. We have also excluded contractual commitments to invest
approximately $7.5 million in V2 Limited, subject to the achievement of certain contractual conditions, and any
obligations we may have under the DNI ZAR 200 million revolving credit facility.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
Capital expenditures for the years ended June 30, 2019, 2018 and 2017 were as follows:
Table 15
Operating Segment
South African transaction processing .................
International transaction processing ....................
Financial inclusion and applied technologies ......
Consolidated total.......................................
2019
$
’000
3,590
3,607
2,219
9,416
2018
$
’000
Year ended June 30,
2017
$
’000
2019
ZAR
’000
2018
ZAR
’000
2017
ZAR
’000
3,988
4,397
1,264
9,649
2,473
7,745
977
11,195
51,269
51,512
31,690
134,471
51,269
56,527
16,250
124,046
33,669
105,446
13,302
152,417
Our capital expenditures for fiscal 2019, 2018 and 2017, are discussed under “—Liquidity and Capital Resources—Cash
flows from investing activities.”
All of our capital expenditures for the past three fiscal years were funded through internally-generated funds. We had
outstanding capital commitments as of June 30, 2019, of $2.0 million related mainly to ATMs required to maintain and expand
our operations. We expect to fund these expenditures through internally-generated funds. In addition to these capital
expenditures, we expect that capital spending for fiscal 2020 will also primarily relate to expanding our operations in South
Africa.
62
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We seek to manage our exposure to currency exchange, translation, interest rate, customer concentration, credit, and equity
price and liquidity risks as discussed below.
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. We had
no outstanding foreign exchange contracts as of June 30, 2019 and 2018, respectively.
Translation Risk
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 lending activities, our operating results are exposed to fluctuations in interest
rates, which we manage primarily through our regular financing activities. We generally maintain limited investments 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. During
the year ended June 30, 2019, we repaid our long-term borrowings in full.
We have short-term borrowings which attract interest at rates that fluctuate based on changes in benchmark interest rates
such as the South Africa prime interest rate and LIBOR. The following table illustrates the effect on our annual expected
interest charge, translated at exchange rates applicable as of June 30, 2019, as a result of changes in the South African prime
interest rate, assuming hypothetical short-term borrowings of ZAR 1.0 billion as of June 30, 2019. The effect of a hypothetical
1% (i.e. 100 basis points) increase and a 1% decrease in the South African prime interest rate as of June 30, 2019, are shown.
The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
Table 16
As of June 30, 2019
Annual
expected
interest
charge
($ ’000)
Hypothetical
change in
South
African
interest rate
Estimated annual
expected interest
charge after
hypothetical change in
South African interest
rate
($ ’000)
Interest on South Africa short-term debt (South African
prime interest rate) ...................................................
7,278
1%
(1%)
7,988
6,568
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 “B” (or its equivalent) or better, as determined by credit
rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings.
Microlending credit risk
We are exposed to credit risk in our microlending activities, which provide unsecured short-term loans to qualifying
customers. We manage this risk by performing an affordability test for each prospective customer and assigning a
“creditworthiness score”, which takes into account a variety of factors such as other debts and total expenditures on normal
household and lifestyle expenses.
63
Equity Price 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. As of June 30, 2019, we did not
have any equity securities that were exchange-traded and held as available for sale. Historically, exchange-traded equity
securities held as available for sale were expected to be held for an extended period of time and we were 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 exchange-traded equity securities may fluctuate for a variety of reasons and, consequently, the
amount we may obtain in a subsequent sale of these securities may significantly differ from the reported market value.
Equity Liquidity Risk
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.
We have invested in approximately 29.0% of the issued share capital of Finbond which are exchange-traded equity
securities, however, from April 1, 2016, we have accounted for them using the equity method. The fair value of these securities
of $76.0 million as of June 30, 2019, represented approximately 11% of our total assets, including these securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited consolidated financial statements, together with the report of our independent registered public accounting
firm, appear on pages F-1 through F-84 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 our 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, as amended (the “Exchange Act”). Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of
June 30, 2019, due to the material weakness in internal control over financial reporting as described below.
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 audited consolidated financial statements.
64
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 our 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 criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation and as
described below, management concluded that our internal control over financial reporting was not effective as of June 30, 2019.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented
or detected on a timely basis
We identified a material weakness in our internal control over financial reporting where the control over the review of the
accounting for non-routine complex transactions did not operate effectively. As a result, the control did not operate effectively
in determining the correct classification in the statement of operations of the $34.0 million accrual for the implementation costs
to be refunded to SASSA following the September 30, 2019 Supreme Court ruling. Accordingly, the material weakness remains
unremediated as of June 30, 2019.
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, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Remediation Plan and Status
As previously disclosed, we have appointed a technical resource to review the accounting for non-routine complex
transactions, and established an in-house accounting technical committee, to assist in the review of the accounting for all non-
routine transactions, including assessing the appropriateness of the accounting treatment adopted. This technical committee also
assesses the need to consult external experts on the accounting of non-routine transactions.
We will test the ongoing operating effectiveness of the controls in future periods. The material weakness cannot be
considered completely remediated until the applicable controls have operated for a sufficient period of time and management
has concluded, through testing, that these controls are operating effectively.
While we believe the steps taken to date and those planned for implementation have improved the effectiveness of our
internal control over financial reporting, we have not completed all remediation efforts identified herein. Accordingly, as we
continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material
weakness described above, we have and will continue to perform additional procedures, including the use of manual mitigating
control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated
financial statements are fairly stated in all material respects.
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Net 1 UEPS Technologies, Inc.
Johannesburg, South Africa
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Net 1 UEPS Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the
material weakness identified below on the achievement of the control criteria, the Company has not maintained effective
internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated
Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended June 30, 2019, of the Company and our report
dated October 25, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph
regarding a going concern uncertainty.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weakness
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 the company’s annual or interim financial statements will not be
prevented or detected on a timely basis. The following material weakness has been identified and included in management's
assessment:
A material weakness in internal control over financial reporting results from the control over the accounting for non-routine
complex transactions that did not operate effectively.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the
consolidated financial statements as of and for the year ended June 30, 2019, of the Company, and this report does not affect our
report on such financial statements.
66
/s/ Deloitte & Touche
Deloitte & Touche
Registered Auditors
Johannesburg, South Africa
October 25, 2019
National Executive: *LL Bam Chief Executive Officer *TMM Jordan Deputy Chief Executive Officer; Clients & Industries
*MJ Jarvis Chief Operating Officer *AF Mackie Audit & Assurance *N Sing Risk Advisory DP Ndlovu Tax & Legal TP Pillay
Consulting *JK Mazzocco Talent & Transformation MG Dicks Risk Independence & Legal *KL Hodson Financial Advisory
*B Nyembe Responsible Business & Public Policy *TJ Brown Chairman of the Board
A full list of partners and directors is available on request *Partner and Registered Auditor
67
ITEM 9B. OTHER INFORMATION
None.
68
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 “Information about our Executive
Officers.” The other information required by this Item is incorporated by reference to the sections of our definitive proxy
statement for our 2019 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
2019 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
2019 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
2019 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
2019 annual meeting of shareholders entitled “Audit and Non-Audit Fees.”
69
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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-84.
Report of the Independent Registered Public Accounting Firm – Deloitte & Touche (South Africa)
Consolidated balance sheets as of June 30, 2019 and 2018 (as restated)
Consolidated statements of operations for the years ended June 30, 2019, 2018 (as restated) and 2017 (as restated)
Consolidated statements of comprehensive (loss) income for the years ended June 30, 2019, 2018 (as restated) and 2017
(as restated)
Consolidated statements of changes in equity for the years ended June 30, 2019, 2018 (as restated) and 2017 (as
restated)
Consolidated statements of cash flows for the years ended June 30, 2019, 2018 (as restated) and 2017 (as restated)
Notes to the consolidated financial statements
F-2
F-3
F-4
F-5
F-6
F-9
F-10
2. Financial Statement Schedules
Financial statement schedules have been omitted since they are either not required, not applicable, or the information is
otherwise included.
(b) Exhibits
Exhibit
No.
3.1
3.2
4.1
4.7
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
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
Amended and Restated By-Laws of Net 1 UEPS
Technologies, Inc.
Form of common stock certificate
Description of registrant’s securities
X
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
Amended and Restated 2015 Stock Incentive
Plan of Net 1 UEPS Technologies, Inc.
Service Agreement between KSNET, Inc. and
Phil-Hyun Oh dated October 27, 2017
Service Agreement between Net1 Applied
Technologies Korea and Phil-Hyun Oh dated
October 27, 2017
Contract of Employment, effective March 1,
2018, between Net1 Applied Technologies
South Africa Proprietary Limited and Alexander
Michael Ramsay Smith
Restrictive Covenants Agreement, effective
March 1, 2018, between Net1 Applied
Technologies South Africa Proprietary Limited
and Alexander Michael Ramsay Smith
70
8-K
S-1
3.2
4.1
November 5, 2009
June 20, 2005
10-K
10-K
10-K
10-K
10-K
10.13
10.14
10.15
10.32
10.5
August 23, 2012
August 23, 2012
August 23, 2012
August 25, 2016
August 24, 2017
14A
A
October 2, 2015
8-K
10.79
November 1, 2017
8-K
10.80
November 1, 2017
8-K
10.80
March 1, 2018
8-K
10.81
March 1, 2018
10.11*
10.12*
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Employment Agreement, effective March 1,
2018, between Net 1 UEPS Technologies, Inc.
and Alexander Michael Ramsay Smith
Restrictive Covenants Agreement, effective
March 1, 2018, between Net 1 UEPS
Technologies, Inc. and Alexander Michael
Ramsay Smith
Distribution Agreement, dated July 1, 2002,
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.
Technology License Agreement between Net 1
Investment Holdings (Proprietary) Limited and
Visa International Service Association
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
Assignment of Copyright and License of Patents
and Trade Marks between MetroLink
(Proprietary) Limited and Net 1 Products
(Proprietary) Limited
Agreement between Nedcor Bank Limited and
Net 1 Products (Proprietary) Limited
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
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
Proposed Agreement of Lease between Buzz
Trading 199 (Pty) Ltd and Net 1 Applied
Technologies South Africa Limited dated
October 12, 2017
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.
71
8-K
10.82
March 1, 2018
8-K
10.83
March 1, 2018
S-4
10.1
February 3, 2004
S-4
10.2
February 3, 2004
S-1
10.12
May 26, 2005
S-4/A
10.8
April 21, 2004
S-4/A
10.10
April 21, 2004
S-1
10.18
May 26, 2005
S-1/A
10.16
July 19, 2005
S-1
10.19
May 26, 2005
S-1/A
10.19
July 19, 2005
S-1/A
10.20
July 19, 2005
10-Q
10.25
May 9, 2013
10-Q
10-60
May 4, 2017
10-Q
10.79
February 8, 2018
8-K
10.25
December 10, 2013
10.27
10.28
10.29
10.30
10.31
10.33
10.34
10.35
10.36
10.37
10.38
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
Letter from Nedbank Limited to Net1 Applied
Technologies South Africa Proprietary Limited
and certain of its subsidiaries, dated December
7, 2016
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.
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.
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
Stock Purchase Agreement, dated October 6,
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 N2 Partners
Ltd.
Amendment No. 2 to Stock Purchase
Agreement, dated November 16, 2016, between
Net 1 UEPS Technologies, Inc. and N2 Partners
Ltd.
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.
72
8-K
10.27
December 19, 2013
8-K
10.50
December 9, 2016
10-Q
10.28
February 6, 2014
8-K
10.30
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
10.34
October 6, 2016
8-K
10.43
November 4, 2016
8-K
10.48
November 18, 2016
8-K
10.67
June 26, 2017
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
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
Memorandum of Incorporation DNI – 4PL
Contracts Proprietary Limited
Sale of shares agreement dated as of May 3,
2019, between FirstRand Bank Limited (acting
through its Rand Merchant Bank Division) and
Net1 Applied Technologies South Africa
Proprietary Limited and DNI-4PL Contracts
Proprietary Limited
Call option agreement dated as of May 3, 2019,
between Net1 Applied Technologies South
Africa Proprietary Limited and DNI-4PL
Contracts Proprietary Limited
73
8-K
10.68
June 26, 2017
8-K
10.69
June 26, 2017
10-K
10.66
August 24, 2017
10-K
10.67
August 24, 2017
10-K
10.68
August 24, 2017
10-K
10.69
August 24, 2017
10-K
10.70
August 24, 2017
8-K
10.99
May 8, 2019
8-K
10.100
May 8, 2019
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
Put and call option agreement dated as of May 3,
2019, between FirstRand Bank Limited (acting
through its Rand Merchant Bank Division),
DNI-4PL Contracts Proprietary Limited , DNI
Retail Proprietary Limited, The Starterpack
Company Proprietary Limited, Net1 Applied
Technologies South Africa Proprietary Limited,
JAA Holdings Proprietary Limited, Sabvest
Finance and Guarantee Corporation Proprietary
Limited, Sabvest
Investments Proprietary
Limited and PK Gain Investment Holdings
Proprietary Limited
Share Sale and Subscription Agreement dated
February 28, 2019, among JAA Holdings
Proprietary Limited and PK Gain Investment
Holdings Proprietary Limited and Net1 Applied
Technologies South Africa Proprietary Limited
and, in relation to and including as a party DNI –
4PL Contracts Proprietary Limited
Tranche I Subscription Agreement, dated March
8, 2018, among Net1 Applied Technologies
South Africa Proprietary Limited and DNI–4PL
Contracts Proprietary Limited.
Tranche II Subscription Agreement, dated
March 8, 2018, among Net1 Applied
Technologies South Africa Proprietary Limited
and DNI–4PL Contracts Proprietary Limited.
Subordination Agreement, dated July 21, 2017,
among Net1 Applied Technologies South Africa
Proprietary Limited, Net 1 UEPS Technologies,
Inc., the parties listed in Schedule 1 thereto, as
subordinated creditors, the parties listed in
Schedule 2 thereto, as intergroup debtors, the
parties listed in Schedule 3 thereto, as senior
creditors, and FirstRand Bank Limited (acting
through its Rand Merchant Bank division), as
agent.
Security Cession & Pledge, dated July 21, 2017,
by Net1 Applied Technologies South Africa
Proprietary Limited in favor of FirstRand Bank
Limited (acting through its Rand Merchant Bank
division), as a secured creditor, Nedbank
Limited (acting through its Corporate and
Investment Banking division), as a secured
creditor, and each of the other Secured Creditors
(as defined therein).
Letter, dated July 26, 2017, to Net1 Applied
Technologies South Africa Proprietary Limited
from FirstRand Bank Limited (acting through its
Rand Merchant Bank division), in its capacity as
arranger, original senior lender and facility
agent, and Nedbank Limited (acting through its
Corporate and Investment Banking division), in
its capacity as arranger and original senior
lender.
Master Implementation and Funds Flow
Agreement, dated July 25, 2017, among Net1
Applied Technologies South Africa Proprietary
Limited and the other parties listed in Schedule
1 thereto.
74
8-K
10.101
May 8, 2019
10-Q
10.102
May 9, 2019
8-K
10.86
March 9, 2018
8-K
10.87
March 9, 2018
8-K
10.74
July 26, 2017
8-K
10.75
July 26, 2017
8-K
10.76
July 29, 2017
8-K
10.77
July 31, 2017
10.56
10.57
10.58
10.59
10.60
10.61
10.62
Second Amendment and Restatement
Agreement, dated September 26, 2018, among
Net1 Applied Technologies South Africa
Proprietary Limited, Net 1 UEPS Technologies,
Inc., the parties listed in Part I of Schedule 1
thereto, as the original guarantors, FirstRand
Bank Limited (acting through its Rand Merchant
Bank division), as an arranger, Nedbank Limited
(acting through its Corporate and Investment
Banking division), as an arranger, the parties
listed in Part II of Schedule 1 thereto, as the
original lenders, and FirstRand Bank Limited
(acting through its Rand Merchant Bank
division), as agent.
Security Cession, dated September 26, 2018, by
Net1 Applied Technologies South Africa
Proprietary Limited in favor of FirstRand Bank
Limited (acting through its Rand Merchant Bank
division), as a secured creditor, and each of the
other Secured Creditors (as defined therein).
Pledge, dated September 26, 2018, by Net1
Applied Technologies South Africa Proprietary
Limited in favor of FirstRand Bank Limited
its Rand Merchant Bank
(acting
division), as a secured creditor, and each of the
other Secured Creditors (as defined therein).
through
Senior Facility E Agreement, dated September
26, 2018, among Net1 Applied Technologies
South Africa Proprietary Limited, FirstRand
Bank Limited (acting through its Rand Merchant
Bank division), as lender, and FirstRand Bank
Limited (acting through its Rand Merchant Bank
division), as agent.
Revolving Credit Facility Agreement, dated
June 28, 2018, among DNI-4PL Contracts
Proprietary Limited, as borrower, FirstRand
Bank Limited (acting through its Rand Merchant
Bank division), as lender and agent, and
K2018318388 (South Africa) (RF) Proprietary
Limited, as debt guarantor.
Subordination Agreement, dated June 28, 2018,
among the parties listed in Annexure A,
FirstRand Bank Limited (acting through its
Rand Merchant Bank division), as lender and
agent, and K2018318388 (South Africa) (RF)
Proprietary Limited, as debt guarantor.
Shareholder Guarantee, Cession and Pledge
Agreement, dated June 28, 2018, among AJD
Holdings Proprietary Limited, Richmark
Holdings Proprietary Limited, DNI-4PL
Contracts Proprietary Limited, as borrower,
K2018318388 (South Africa) (RF) Proprietary
Limited, as debt guarantor, and FirstRand Bank
Limited (acting through its Rand Merchant Bank
division), as agent.
75
8-K
10.95
October 2, 2018
8-K
10.97
October 2, 2018
8-K
10.98
October 2, 2018
8-K
10.96
October 2, 2018
8-K
10.89
July 5, 2018
8-K
10.90
July 5, 2018
8-K
10.91
July 5, 2018
8-K
10.92
July 5, 2018
8-K
10.93
July 5, 2018
8-K
10.94
July 5, 2018
10.63
10.64
10.65
14
21
23
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Guarantee, Cession and Pledge Agreement,
dated June 28, 2018, among the parties listed in
Annexure A, as original cedents, K2018318388
(South Africa) (RF) Proprietary Limited, as debt
guarantor, and FirstRand Bank Limited (acting
through its Rand Merchant Bank division), as
agent.
Debt Guarantor Management Agreement, dated
June 28, 2018, among K2018318388 (South
Africa) (RF) Proprietary Limited, as debt
guarantor, FirstRand Bank Limited (acting
through its Rand Merchant Bank division), as
agent, DNI-4PL Contracts Proprietary Limited,
as borrower, and TMF Corporate Services
(South Africa) Proprietary Limited, as
administrator.
Counter-indemnity Agreement, dated June 28,
2018, between DNI-4PL Contracts Proprietary
Limited, as borrower, and K2018318388 (South
Africa) (RF) Proprietary Limited, as debt
guarantor.
Amended and Restated Code of Ethics
Subsidiaries of Registrant
Consent of Independent Registered Public
Accounting Firm
Certification of Principal Executive Officer
pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as
amended
Certification of Principal Financial Officer
pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as
amended
Certification pursuant to 18 USC Section 1350
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation
Linkbase
XBRL Taxonomy Extension Definition
Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation
Linkbase
X
X
X
X
X
X
X
X
X
X
X
X
* Indicates a management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
76
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, 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 and Director
Date: October 25, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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
October 25, 2019
/s/ Herman G. Kotzé
Herman G. Kotzé
/s/ Alex M.R. Smith
Alex M.R. Smith
/s/ Paul Edwards
Paul Edwards
/s/ Alfred T. Mockett
Alfred T. Mockett
/s/ Alasdair J. K. Pein
Alasdair J. K. Pein
/s/ Ekta Singh-Bushell
Ekta Singh-Bushell
Chief Executive Officer and Director (Principal
Executive Officer)
October 25, 2019
Chief Financial Officer, Treasurer, Secretary and
Director (Principal Financial and Accounting Officer)
October 25, 2019
Director
Director
Director
Director
October 25, 2019
October 25, 2019
October 25, 2019
October 25, 2019
77
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, 2019 and 2018 (as restated)
Consolidated statements of operations for the years ended June 30, 2019, 2018 (as restated) and 2017 (as restated)
Consolidated statements of comprehensive (loss) income for the years ended June 30, 2019, 2018 (as restated) and
2017 (as restated)
Consolidated statements of changes in equity for the years ended June 30, 2019, 2018 (as restated) and 2017 (as
restated)
Consolidated statements of cash flows for the years ended June 30, 2019, 2018 (as restated) and 2017 (as restated)
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 shareholders and the Board of Directors of Net 1 UEPS Technologies, Inc.
Johannesburg, South Africa
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Net 1 UEPS Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss) income,
changes in equity, and cash flows, for each of the three years in the period ended June 30, 2019, and the related notes (collectively
referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 2019, 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)
(PCAOB), the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated October 25, 2019, expressed an adverse opinion on the Company's internal control over financial reporting
because of a material weakness.
Going concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company is experiencing difficulty in generating sufficient cash flow to meet
its obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche
Deloitte & Touche
Registered Auditors
Johannesburg, South Africa
October 25, 2019
We have served as the Company's auditor since 2004.
National Executive: *LL Bam Chief Executive Officer *TMM Jordan Deputy Chief Executive Officer; Clients & Industries *MJ
Jarvis Chief Operating Officer *AF Mackie Audit & Assurance *N Sing Risk Advisory DP Ndlovu Tax & Legal TP Pillay
Consulting *JK Mazzocco Talent & Transformation MG Dicks Risk Independence & Legal *KL Hodson Financial Advisory *B
Nyembe Responsible Business & Public Policy *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, 2019 and 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Restricted cash related to ATM funding (Note 12)
Pre-funded social welfare grants receivable (Note 4)
Accounts receivable, net and other receivables (Note 5)
Finance loans receivable, net (Note 5)
Inventory (Note 6)
Current assets of discontinued operation (Note 3)
Total current assets before settlement assets
Settlement assets (Note 2)
Total current assets
PROPERTY, PLANT AND EQUIPMENT, net (Note 8)
EQUITY-ACCOUNTED INVESTMENTS (Note 9)
GOODWILL (Note 10)
INTANGIBLE ASSETS, net (Note 10)
DEFERRED INCOME TAXES (Note 2 and Note 18)
OTHER LONG-TERM ASSETS (Note 9 and Note 11)
LONG-TERM ASSETS OF DISCONTINUED OPERATION (Note 3 and Note 9)
TOTAL ASSETS
CURRENT LIABILITIES
LIABILITIES
Short-term credit facilities for ATM funding (Note 12)
Short-term facilities (Note 12)
Accounts payable
Other payables (Note 13)
Current portion of long-term borrowings (Note 12)
Income taxes payable
Current liabilities of discontinued operation (Note 3)
Total current liabilities before settlement obligations
Settlement obligations (Note 2)
Total current liabilities
DEFERRED INCOME TAXES (Note 2 and Note 18)
LONG-TERM BORROWINGS (Note 14)
OTHER LONG-TERM LIABILITIES (Note 3 and Note 11)
LONG-TERM LIABILITIES OF DISCONTINUED OPERATION (Note 3)
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 22)
2019
2018
(As restated)A
(In thousands, except share data)
$
$
46,065
75,446
-
72,494
30,631
7,535
-
232,171
63,479
295,650
18,554
151,116
149,387
11,889
2,151
44,189
-
672,936
46,461
75,446
9,544
17,005
66,449
-
6,223
-
174,667
63,479
238,146
4,682
-
3,007
-
245,835
87,075
-
2,965
93,448
61,463
10,361
22,482
277,794
149,047
426,841
25,737
86,016
169,079
27,129
4,776
235,032
242,704
1,217,314
-
-
21,106
41,645
44,079
5,742
20,914
133,486
149,047
282,533
16,067
5,469
30,289
38,387
372,745
REDEEMABLE COMMON STOCK (Note 1 and Note 14)
107,672
107,672
COMMON STOCK (Note 14)
EQUITY
Authorized: 200,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury - 2019: 56,568,425; 2018: 56,685,925
80
80
PREFERRED STOCK
Authorized shares: 50,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury: 2019: -; 2018: -
ADDITIONAL PAID-IN CAPITAL
TREASURY SHARES, AT COST: 2019: 24,891,292; 2018: 24,891,292 (Note 15)
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 15)
RETAINED EARNINGS
TOTAL NET1 EQUITY
NON-CONTROLLING INTEREST
TOTAL EQUITY
-
276,997
(286,951)
(199,273)
528,576
319,429
-
319,429
-
276,201
(286,951)
(184,538)
836,194
640,986
95,911
736,897
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND
SHAREHOLDERS’ EQUITY
$
672,936
$
1,217,314
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1.
See accompanying notes to consolidated financial statements.
F-3
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 2019, 2018 and 2017
2019
2018
(As
restated)A
(In thousands, except per share data)
2017
(As
restated)A
REVENUE (Note 16)
Services rendered
Loan-based fees received
Sale of goods
Variation of price related to SASSA revenue (Note 13)
$
$
360,990
330,496
29,872
20,331
(19,709)
612,889
538,429
54,949
19,511
-
$ 610,066
533,279
53,894
22,893
-
EXPENSE
Cost of goods sold, IT processing, servicing and support
Selling, general and administration
Depreciation and amortization
Impairment Loss (Note 10)
OPERATING (LOSS) INCOME
CHANGE IN FAIR VALUE OF EQUITY SECURITIES (Note 7)
LOSS ON DISPOSAL OF DNI
INTEREST INCOME
INTEREST EXPENSE
IMPAIRMENT OF CEDAR CELLULAR NOTE (Note 9)
(LOSS) INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE (Note 18)
NET (LOSS) INCOME BEFORE EARNINGS FROM EQUITY-
ACCOUNTED INVESTMENTS
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
NET (LOSS) INCOME
Continuing
Discontinued
LESS (ADD): NET INCOME (LOSS) ATTRIBUTABLE TO NON-
CONTROLLING INTEREST
Continuing
Discontinued
215,348
202,056
37,349
19,745
(113,508)
(167,459)
5,771
7,229
10,724
12,793
(303,026)
3,725
(306,751)
1,482
(305,269)
(307,959)
2,690
2,349
(1,352)
3,701
NET (LOSS) INCOME ATTRIBUTABLE TO NET1
Continuing
Discontinued
(307,618)
(306,607)
(1,011)
$
$
Net (loss) income per share, in United States dollars: (Note 19)
Continuing
Discontinued
Basic (loss) earnings attributable to Net1 shareholders
Diluted (loss) earnings attributable to Net1 shareholders
(5.42)
(5.40)
(0.02)
(5.42)
(5.40)
(0.02)
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1.
See accompanying notes to consolidated financial statements.
Continuing
Discontinued
304,536
193,003
35,484
20,917
58,949
32,473
-
17,885
8,941
-
100,366
48,597
51,769
11,597
63,366
60,975
2,391
(880)
(880)
-
64,246
61,855
2,391
1.13
1.09
0.04
1.13
1.09
0.04
292,383
179,262
41,378
-
97,043
-
-
20,897
3,484
-
114,456
42,506
71,950
2,814
74,764
74,764
-
1,694
1,694
-
73,070
73,070
-
1.34
1.34
-
1.33
1.33
-
$
F-4
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
for the years ended June 30, 2019, 2018 and 2017
2019
2018
(As
restated)A
(in thousands)
2017
(As
restated)A
NET (LOSS) INCOME
$
(305,269)
$
63,366
$
74,764
OTHER COMPREHENSIVE (LOSS) INCOME:
Movement in foreign currency translation reserve
Release of foreign currency translation reserve related to disposal of
DNI (Note 3 and Note 15)
Movement in foreign currency translation reserve related to equity-
accounted investments
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME
COMPREHENSIVE (LOSS) INCOME
Add (Less) comprehensive income attributable to non-
controlling interest
COMPREHENSIVE (LOSS) INCOME
ATTRIBUTABLE TO NET1
(26,194)
(19,474)
30,291
2,452
-
-
4,251
(19,491)
(324,760)
(2,426)
(21,900)
(2,697)
27,594
41,466
102,358
2,407
978
(2,332)
$
(322,353)
$
42,444
$ 100,026
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1.
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, 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
75,755,886
$74
(20,483,932)
$(241,627)
55,271,954
$223,978
74
5
1
(20,483,932)
(241,627)
55,271,954
5,000,000
(4,407,360)
(45,324)
(4,407,360)
389,587
321,026
223,978
44,995
2,878
3,905
(205,470)
(205,470)
(1,923)
(189)
89
Balance – July 1, 2016 as reported
Correction of Finbond error (Note 1)
Balance – July 1, 2016 as restated
75,755,886
Sale of common stock (Note 14)
5,000,000
Repurchase of common stock (Note
14)
Restricted stock granted (Note 17)
Exercise of stock option (Note 17)
389,587
321,026
Stock-based compensation charge
(Note 17)
Reversal of stock compensation
charge (Note 17)
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 9)
Net income
Other comprehensive income
(Note 15)
Retained
Earnings
(as
restatedA)
$700,322
(1,444)
698,878
Accumulated
other
comprehensive
(loss) income
(as restatedA)
$(189,700)
8
(189,692)
Total
Net1
Equity
(as
restatedA)
$493,047
(1,436)
491,611
45,000
(45,324)
-
2,879
3,905
(1,923)
(189)
Non-
controlling
Interest
Total
(as
restatedA)
Redeemable
common
stock
$107,672
107,672
$2,501
2,501
$495,548
(1,436)
494,112
45,000
(45,324)
-
2,879
3,905
(1,923)
(189)
-
(2,067)
(2,067)
73,070
73,070
1,694
74,764
89
89
26,956
26,956
638
27,594
Balance – June 30, 2017
81,261,029
$80
(24,891,292)
$(286,951)
56,369,737
$273,733
$771,948
$(162,736)
$596,074
$2,766
$598,840
$107,672
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1.
F-6
NET 1 UEPS TECHNOLOGIES, INC.
Consolidated Statement of Changes in Equity for the year ended June 30, 2018 (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
(as
restatedA)
Accumulated
other
comprehensive
(loss) income
(as restatedA)
Total Net1
Equity
(as restatedA)
Non-
controlling
Interest
Total
(as
restatedA)
Redeemable
common
stock
Balance – July 1, 2017 (note 1)
81,261,029
$80
(24,891,292)
$(286,951)
56,369,737
$273,733
$771,948
$(162,736)
$596,074
$2,766
$598,840
$107,672
Restricted stock granted (Note 17)
618,411
618,411
Stock-based compensation charge
(Note 17)
Reversal of stock compensation
charge (Note 17)
(302,223)
Reversal of stock based-
compensation charge related to
equity-accounted investment
(Note 9)
Acquisition of DNI (Note 3)
Net income
Other comprehensive loss
(Note 15)
2,656
(302,223)
(49)
(139)
64,246
-
2,656
(49)
(139)
-
64,246
-
2,656
(49)
(139)
94,123
63,366
94,123
(880)
(21,802)
(21,802)
(98)
(21,900)
Balance – June 30, 2018
81,577,217
$80
(24,891,292)
$(286,951)
56,685,925
$276,201
$836,194
$(184,538)
$640,986
$95,911
$736,897
$107,672
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1.
F-7
NET 1 UEPS TECHNOLOGIES, INC.
Consolidated Statement of Changes in Equity for the year ended June 30, 2019 (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
(as
restatedA)
Accumulated
other
comprehensive
(loss) income
(as restatedA)
Total Net1
Equity
(as restatedA)
Non-
controlling
Interest
Total
(as
restatedA)
Redeemable
common
stock
Balance – July 1, 2018 (Note 1)
81,577,217
$80
(24,891,292)
$(286,951)
56,685,925
$276,201
$836,194
$(184,538)
$640,986
$95,911
$736,897
$107,672
Restricted stock granted (Note 17)
148,000
148,000
Stock-based compensation charge
(Note 17)
Reversal of stock compensation
charge (Note 17)
(265,500)
Stock based-compensation charge
related to equity-accounted
investment (Note 9)
Acquisition of non-controlling
interest
Dividends paid to non-controlling
interest
Deconsolidation of DNI (Note 3)
Net (loss) income
Other comprehensive loss
(Note 15)
2,319
(265,500)
(1,926)
117
286
-
-
2,319
(1,926)
117
286
-
-
-
2,319
(1,926)
117
752
466
(4,104)
(4,104)
(89,866)
(89,866)
(307,618)
(307,618)
2,349
(305,269)
(14,735)
(14,735)
(4,756)
(19,491)
Balance – June 30, 2019
81,459,717
$80
(24,891,292)
$(286,951)
56,568,425
$276,997
$528,576
$(199,273)
$319,429
$0
$319,429
$107,672
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1.
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, 2019, 2018 and 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Impairment loss (Note 10)
Allowance for doubtful accounts receivable charged
Earnings from equity-accounted investments (Note 9)
Interest on Cedar Cellular note (Note 9)
Impairment of Cedar Cellular note (Note 9)
Change in fair value of equity securities (Notes 7 and 9)
Implementation costs to be refunded to SASSA (Note 13)
Fair value adjustments and foreign currency re-measurements
Interest payable
Facility fee amortized
Loss (Profit) on disposal of business (Note 3)
Loss on fair value of DNI (Note 3)
(Profit) Loss on disposal of property, plant and equipment
Stock compensation charge, net of forfeitures (Note 17)
Dividends received from equity accounted investments
Decrease (Increase) in accounts and finance loans receivable, and pre-funded
grants receivable
Decrease (Increase) in inventory
(Decrease) Increase in accounts payable and other payables
Increase (Decrease) in taxes payable
(Decrease) Increase in deferred taxes
Net cash (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
Proceeds from disposal of property, plant and equipment
Acquisition of intangible assets
Investment in equity of equity-accounted investments (Note 9)
Disposal of DNI (Note 3)
Investment in MobiKwik (Note 9)
Repayment of loans by equity-accounted investments (Note 9)
Proceeds on return of investment (Note 9)
Investment in Cell C (Note 9)
Loans to equity-accounted investments (Note 9)
Acquisition of held to maturity investment (Note 9)
Acquisitions, net of cash acquired (Note 3)
Other investing activities, net
Net change in settlement assets (Note 2)
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank overdraft (Note 12)
Repayment of bank overdraft (Note 12)
Repayment of long-term borrowings (Note 12)
Long-term borrowings utilized (Note 12)
Dividends paid to non-controlling interest
Payment of guarantee fee (Note 12)
Acquisition of non-controlling interests
Proceeds from issue of common stock (Note 14 and Note 20)
Acquisition of treasury stock (Note 14)
Net change in settlement obligations (Note 2)
Net cash (used in) provided by financing activities
2019
2018
(as restatedA)
(In thousands)
2017
(as restatedA)
$
(305,269)
$
63,366
$
74,764
37,349
19,745
32,786
(1,482)
(2,397)
12,793
167,459
34,039
73
237
321
5,771
-
(486)
393
1,318
11,663
4,042
(14,538)
3,428
(11,705)
(4,460)
(9,416)
1,045
(1,384)
(2,989)
(2,114)
(1,056)
1,029
284
-
-
-
-
-
79,077
64,476
822,754
(740,969)
(37,357)
14,613
(4,104)
(394)
(180)
-
-
(79,077)
(24,714)
35,484
20,917
13,358
(11,597)
(1,395)
-
(32,473)
-
414
(146)
589
(463)
4,614
40
2,607
4,111
17,732
(2,521)
10,595
1,137
5,936
132,305
(9,649)
658
-
(133,335)
-
-
9,180
-
(151,003)
(10,635)
(9,000)
(6,202)
(61)
490,795
180,748
41,378
-
4,382
(2,814)
-
-
-
-
(300)
20
1,326
-
-
(639)
1,982
1,187
(20,149)
3,025
(6,461)
(354)
(186)
97,161
(11,195)
1,592
-
-
-
(25,835)
-
-
-
(12,044)
-
(4,651)
-
(61,938)
(114,071)
44,900
(62,925)
(77,062)
113,157
-
(754)
-
-
-
(490,795)
(473,479)
(7,977)
(168,403)
258,457
90,054
16,176
-
(37,318)
800
(2,067)
(1,145)
-
47,879
(45,794)
61,938
40,469
11,254
34,813
223,644
258,457
Effect of exchange rate changes on cash
Net increase (decrease) 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(1)
Cash, cash equivalents and restricted cash – end of year for the year ended June 30, 2018, includes $2,979 related to DNI (refer to Note 3).
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1.
See accompanying notes to consolidated financial statements.
(1) Cash, cash equivalents and restricted cash as of June 30, 2019, includes restricted cash of approximately $75.4 million related to cash withdrawn from the
Company’s various debt facilities to fund ATMs. This cash may only be used to fund ATMs and is considered restricted as to use and therefore is classified as
restricted cash. Refer to Note 12 for additional information regarding the Company’s facilities.
(3,845)
31,457
90,054
121,511
(18,514)
$
$
$
F-9
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(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 is a leading provider of financial technology, or fintech,
products and services to the unbanked and underbanked in a number of emerging and developed 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 and financial solutions. The
Company’s technology is widely used in South Africa today, where it 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 card issuing and acquiring capabilities in Hong Kong and Malta and provides value added
payment services to online retailers across Europe through its International Payments Group (“IPG”). The Company leverages its
strategic equity investments in Finbond Group Limited (“Finbond”) and Bank Frick & Co. AG (“Bank Frick”) (both regulated
banks), and Cell C Proprietary Limited (“Cell C”) to introduce products to new customers and geographies.
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”).
Consideration of going concern
Accounting guidance requires the Company’s management to assess whether there are conditions or events, considered in
the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after its
audited consolidated financial statements are issued. The Company’s management has identified certain conditions or events,
which, considered in the aggregate, could raise substantial doubt about the Company’s ability to continue as a going concern
including the risk that the Company will be unable to:
• deliver all or a substantial part of the financial results forecast in its fiscal 2020 budget;
•
retain its existing borrowings and facilities, as described in Note 12, or obtain additional borrowings and facilities on
commercially reasonable terms;
• arrive at a commercial settlement with SASSA, given the September 30, 2019, Supreme Court of Appeal ruling
regarding the repayment of the additional implementation costs received back to SASSA (refer Note 13) and the ongoing
dispute the Company has with SASSA over fees due for the six-month contract extension period in accordance with
National Treasury’s recommendation (refer Note 2—Revenue recognition—Significant judgments and estimates);
• dispose of all or a portion of its remaining 30% interest in DNI-4PL Contracts Proprietary Limited (“DNI”). DNI’s
operations are also significantly dependent on Cell C because it is the largest distributor of Cell C starter packs in South
Africa. Therefore, the inability of Cell C to continue to operate through the next 12 months could also have an adverse
impact on DNI’s operations; or
• dispose of investments in order to realize sufficient cash flows.
The Company’s management has implemented a number of plans to alleviate the substantial doubt about the Company’s
ability to continue as a going concern. These plans include disposing of certain non-core assets (refer to Note 3 for additional
information regarding a call option granted to DNI), engaging FT Partners to advise on the KSNET business, and extending its
existing borrowings used to fund its ATMs through September 2020. In addition, the Company’s management believes it has a
number of mitigating actions it can pursue, including (i) limiting the expansion of its microlending finance loans receivable book
in South Africa; (ii) implementing further cost cutting measures; (iii) commencing additional asset realizations; (iv) manage our
capital expenditures; and (v) accessing alternative sources of capital (including through the issuance of additional shares of its
common stock), in order to generate additional liquidity. The Company’s management believes that these actions alleviate the
substantial doubt referred to above and therefore have concluded that the Company remains a going concern.
F-10
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (continued)
Restatement of financial statements resulting from Finbond error
On May 31, 2019, Finbond released its year end February 2019 summarized annual results and announced that it had
identified an error in its previously issued audited financial statements and had restated those audited financial statements. The
Finbond restatement impacts the Company’s reported results and the Company has restated its 2018 and 2017 financial statements
to correct for the Finbond restatement. The error identified by Finbond relates to the misapplication of a valuation technique to
determine the fair value of a written-off portfolio of loans receivable that were designated at fair value through profit or loss.
The tables below present the impact of the restatement on each of the Company’s financial statements for the years ended
June 30, 2018:
Consolidated balance sheet
Equity-accounted investments ....................................................
Total assets ..................................................................................
Deferred tax liabilities ................................................................
Total liabilities ............................................................................
Accumulated other comprehensive loss ......................................
Retained earnings ........................................................................
Total equity .................................................................................
As of June 30, 2018
As
reported
$87,992
1,219,290
16,510
373,188
(184,436)
837,625
$738,430
Correction
(in thousands)
$(1,976)
(1,976)
(443)
(443)
(102)
(1,431)
$(1,533)
As
restated
$86,016
1,217,314
16,067
372,745
(184,538)
836,194
$736,897
Consolidated statement of operations
Year ended June 30, 2018
As
reported
Correction
(in thousands, except per share data)
As
restated
Income tax expense ......................................................................
Net income before earnings from equity-accounted investments
Earnings from equity-accounted investments ..............................
Net income ...................................................................................
Net income attributable to Net1 ...................................................
Net income per share, in United States dollars: ......................
Basic earnings attributable to Net1 shareholders .........................
Diluted earnings attributable to Net1 shareholders ......................
$48,627
51,739
11,730
63,469
$64,349
$1.13
$1.13
$(30)
30
(133)
(103)
$(103)
$(0.00)
$(0.00)
$48,597
51,769
11,597
63,366
$64,246
$1.13
$1.13
Year ended June 30, 2017
As
reported
Correction
(in thousands, except per share data)
As
restated
Income tax expense ......................................................................
Net income before earnings from equity-accounted investments
Earnings from equity-accounted investments ..............................
Net income ...................................................................................
Net income attributable to Net1 ...................................................
Net income per share, in United States dollars: ......................
Basic earnings attributable to Net1 shareholders .........................
Diluted earnings attributable to Net1 shareholders ......................
$42,472
71,984
2,664
74,648
$72,954
$1.34
$1.33
$34
(34)
150
116
$116
$0.00
$0.00
$42,506
71,950
2,814
74,764
$73,070
$1.34
$1.33
F-11
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (continued)
Restatement of financial statements resulting from Finbond error (continued)
Consolidated statement of comprehensive (loss) income
Net income ..................................................................................
Movement in foreign currency translation reserve .....................
Total other comprehensive (loss) income ...................................
Comprehensive income ...............................................................
Comprehensive income attributed to Net1 ..................................
Net income ..................................................................................
Movement in foreign currency translation reserve .....................
Total other comprehensive income (loss) ...................................
Comprehensive income ...............................................................
Comprehensive income attributed to Net1 ..................................
Year ended June 30, 2018
As
reported
$63,469
(19,539)
(21,965)
41,504
$42,482
Correction
(in thousands)
$(103)
65
65
(38)
$(38)
As
restated
$63,366
(19,474)
(21,900)
41,466
$42,444
Year ended June 30, 2017
As
reported
$74,648
30,466
27,769
102,417
$100,085
Correction
(in thousands)
$116
(175)
(175)
(59)
$(59)
As
restated
$74,764
30,291
27,594
102,358
$100,026
Consolidated statement of changes in equity
Retained
earnings
Accumulated
other
comprehensive
loss
(in thousands)
As reported – July 1, 2016 ..........................................................
Correction of misstatement .........................................................
As restated – July 1, 2016 ...........................................................
As reported – June 30, 2017 .......................................................
Correction of misstatement .........................................................
As restated – June 30, 2017 ........................................................
As reported – June 30, 2018 .......................................................
Correction of misstatement .........................................................
As restated – June 30, 2018 ........................................................
$700,322
(1,444)
$698,878
$773,276
(1,328)
$771,948
$837,625
(1,431)
$836,194
$(189,700)
8
$(189,692)
$(162,569)
(167)
$(162,736)
$(184,436)
(102)
$(184,538)
F-12
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (continued)
Restatement of financial statements resulting from Finbond error (continued)
Consolidated statement of cash flows
Net income ..................................................................................
Earnings from equity-accounted investment ...............................
Increase (Decrease) in deferred taxes .........................................
Net cash provided by operating activities ...................................
Net income ..................................................................................
Earnings from equity-accounted investment ...............................
Increase (Decrease) in deferred taxes .........................................
Net cash provided by operating activities ...................................
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
Year ended June 30, 2018
As
reported
$63,469
(11,730)
5,966
$132,305
Correction
(in thousands)
$(103)
133
(30)
$-
As
restated
$63,366
(11,597)
5,936
$132,305
Year ended June 30, 2017
As
reported
$74,648
(2,664)
(220)
$97,161
Correction
(in thousands)
$116
(150)
34
$-
As
restated
$74,764
(2,814)
(186)
$97,161
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 as a result of these
requirements during the years ended June 30, 2019, 2018 and 2017.
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-13
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES
Translation of foreign currencies
The primary functional currency of the consolidated entities 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.
Cash, cash equivalents and restricted cash
Cash and cash equivalents include cash on hand and funds deposited in bank accounts with financial institutions that are
liquid, unrestricted and readily available. Cash that is restricted as to use is classified as restricted cash and includes cash drawn
under the Company’s borrowings and used to fund its ATMs.
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 receivables and related fees when it is evident that reasonable recovery procedures, including
where deemed necessary, formal legal action, have 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 net realizable value. Cost is determined on a first-in, first-out basis and includes
transport and handling costs.
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.
F-14
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES
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
3 to 8 years
2 to 10 years
3 to 8 years
3 to 10 years
8 to 30 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.
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 company. Under the equity method, the Company initially records the investment at cost and
thereafter 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 is subsequently required to be accounted for utilizing 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. The Company has elected to
classify distributions received from equity method investees using the nature of the distribution approach. This election requires
the Company to evaluate each distribution received on the basis of the source of the payment and classify the distribution as either
operating cash inflows or investing cash inflows. The Company reviews its equity-accounted investments for impairment
whenever events or circumstances indicate that the carrying amount of the investment may not be recoverable.
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 goodwill is allocated to a reporting unit and the
carrying amount of the reporting unit exceeds the fair value of that reporting unit, 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.
F-15
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Debt and equity securities
Debt securities
The Company is required to classify all applicable debt securities as either trading securities, available-for-sale or held to
maturity upon investment in the security.
Trading
Debt securities acquired by the Company which it intends to sell in the short-term are classified as trading securities and are
initially measured at fair value. These debt securities are subsequently measured at fair value and realized and unrealized gains
and losses from these trading securities are included in the Company’s consolidated statement of operations. Classification of a
debt security as a trading security is not precluded simply because the Company does not intend to sell the security in the short
term. The Company had no debt securities that were classified as trading securities as of June 30, 2019 and 2018, respectively.
Available for sale
Debt securities acquired by the Company that have readily determinable fair values are classified as available for sale if the
Company has not classified them as trading securities or if it does not have the ability or positive intent to hold the debt security
until maturity. The Company is required to make an election to account for these debt securities as available for sale. These
available for sale debt securities are initially measured at fair value. These debt securities are subsequently measured at fair value
with unrealized gains and losses from available for sale investments in debt securities reported as a separate component of
accumulated other comprehensive income, net of deferred income taxes, in shareholders’ equity. The Company had no debt
securities that were classified as available for sale securities as of June 30, 2019 and 2018, respectively.
Held to maturity
Debt securities acquired by the Company which it has the ability and the positive intent to hold to maturity are classified as
held to maturity debt securities. The Company is required to make an election to classify these debt securities as held to maturity
and these securities are carried at amortized cost. The amortized cost of held to maturity debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Interest received from the held to maturity security together with
this amortization is included in interest income in the Company’s consolidated statement of operations. The Company had a held
to maturity security as of June 30, 2019 and 2018, respectively, refer to Note 9.
F-16
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Debt and equity securities (continued)
Impairment of debt securities
The Company’s available for sale and held to maturity debt securities with unrealized losses are reviewed quarterly to
identify other-than-temporary impairments in value.
With regard to available for sale and held to maturity debt securities, the Company considers (i) the ability and intent to hold
the debt security for a period of time to allow for recovery of value (ii) whether it is more likely than not that the Company will be
required to sell the debt security; and (iii) whether it expects to recover the entire amortized cost basis of the debt security. The
Company records an impairment loss in its consolidated statement of operations representing the difference between the debt
securities carrying value and the current fair value as of the date of the impairment if the Company determines that it intends to
sell the debt security or if that it is more likely than not that it will be required to sell the debt security before recovery of the
amortized cost basis. However, an impairment loss is considered to have occurred if the Company determines that it does not
intend to sell the debt security or that it is more likely than not that it will not be required to sell the debt security before the
recovery of the amortized cost basis. In this instance, the impairment loss is split between a credit loss and a non-credit loss. The
credit loss portion, which is measured as the difference between the debt security’s cost basis and the present value of expected
future cash flows, is recognized in the Company’s consolidated statement of operations. The non-credit loss portion, which is
measured as the difference between the debt security’s cost basis and its current fair value, is recognized in other comprehensive
income, net of applicable taxes.
Equity securities
Equity securities are measured at fair value. Changes in the fair value of equity securities are recorded in the Company’s
consolidated statement of operations within the caption titled “change in fair value of equity securities”. The Company may elect
to measure equity securities without readily determinable fair values at its cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (“cost
minus changes in observable prices equity securities”). There were no changes in the fair value of our cost minus changes in
observable prices equity securities during the year ended June 30, 2019. The Company performs a qualitative assessment on a
quarterly basis and recognizes an impairment loss if there are sufficient indicators that the fair value of the equity security is less
than its carrying value.
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 and total present value of disability claims-in-payment at the balance sheet date. This
model allows for best estimate assumptions based on experience (where sufficient) plus prescribed margins, as required in the
markets in which these products are offered, namely South Africa.
The best estimate assumptions include (i) mortality and morbidity assumptions reflecting the company’s most recent
experience and (ii) claim reporting delays reflecting Company specific and industry experience. Most of the disability claims-in-
payment reserve is reinsured and the reported values were based on the reserve held by the relevant reinsurer. The values of
matured guaranteed endowments are increased by late payment interest (net of the asset management fee and allowance for tax on
investment income).
F-17
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Policy reserves and liabilities (continued)
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 and other
receivables) 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 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.
Revenue recognition
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that
reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into
contracts that can include various combinations of products and services, which are generally capable of being distinct and
accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected
from customers, which are subsequently remitted to governmental authorities.
F-18
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Nature of products and services
Customers that have a bank account managed by the Company are issued cards that can be utilized to withdraw funds at an
ATM or to transact at a merchant point of sale device (“POS”). The Company earns processing fees from transactions processed
for these customers. The Company’s contracts specify a transaction price for each service provided (for instance, ATM
withdrawal, balance enquiry, etc.). Processing revenue fluctuates based on the type and volume of transactions performed by the
customer. Revenue is recognized on the completion of the processed transaction.
Account holder fees
The Company provides bank accounts to customers and this service is underwritten by a regulated banking institution
because the Company is not a bank. The Company charges its customers a fixed monthly bank account administration fee for all
active bank accounts regardless of whether the account holder has transacted or not. The Company recognizes account holder fees
on a monthly basis on all active bank accounts. Revenue from account holder’s fees fluctuates based on the number of active bank
accounts.
Lending revenue
The Company provides short-term loans to customers in South Africa and charges up-front initiation fees and monthly
service fees. Initiation fees are recognized using the effective interest rate method, which requires the utilization of the rate of
return implicit in the loan, that is, the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or
discount existing at the origination or acquisition of the loan. Monthly service fee revenue is recognized under the contractual
terms of the loan. The monthly service fee amount is fixed upon initiation and does not change over the term of the loan.
Technology products
The Company supplies hardware and licenses for its customers to use the Company’s technology. Hardware includes the
sale of POS devices, SIM cards and other consumables which can occur on an ad hoc basis. The Company recognizes revenue
from hardware at the transaction price specified in the contract as the hardware is delivered to the customer. Licenses include the
right to use certain technology developed by the Company and the associated revenue is recognized ratably over the license
period.
Insurance revenue
The Company writes life insurance contracts, and policy holders pay the Company a monthly insurance premium at the
beginning of each month. Premium revenue is recognized on a monthly basis net of policy lapses. Policy lapses are provided for
on the basis of expected non-payment of policy premiums.
Welfare benefit distribution fees
The Company provided a welfare benefits distribution service in South Africa to a customer under a contract which expired
on September 30, 2018. The Company was required to distribute social welfare grants to identified recipients using an internally
developed payment platform at designated distribution points (pay points) which enabled the recipients to access their grants. The
contract specified a fixed fee per account for one or more grants received by a recipient. The Company recognized revenue for
each grant recipient paid at the fixed fee.
F-19
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Nature of products and services (continued)
Telecom products and services
Through DNI, the Company entered into contracts with mobile networks in South Africa to distribute subscriber identity
modules (“SIM”) cards on their behalf. The Company was entitled to receive consideration based on the activation of each SIM as
well as from a percentage of the value loaded onto each SIM. The Company recognizes revenue from these services once the
criteria specified for activation had been met as well as when it was entitled to its consideration related to the value loaded onto
the SIM. Revenue from contracts with mobile networks fluctuates based on the number of SIMs activated as well as on the value
loaded onto the SIM. As described in Note 3, the Company disposed of its controlling interest in DNI on March 31, 2019.
The Company purchases airtime for resale to customers. The Company recognizes revenue as the airtime is delivered to the
customer. Revenue from the resale of airtime to customers fluctuates based on the volume of airtime sold.
Significant judgments and estimates
The Company was subject to a court process regarding the determination of the price to be charged for welfare benefit
distribution services provided from April 1, 2018 to September 30, 2018. In December 2018, the Constitutional Court of South
Africa clarified that it was not required to ratify the price and stated that the parties should reach an agreement on the price,
failing which they should approach the lower courts in South Africa. The Company has initiated discussions with SASSA, but the
parties had not reached an agreement as of June 30, 2019, regarding the pricing for services provided through September 30,
2018. Management determined, under previous revenue guidance, that there was no evidence of an arrangement at a fixed and
determinable price other than that noted in the court ordered extension provided in March 2018 and did not record any additional
revenue related to the services provided from April 1, 2018 to June 30, 2018, and recorded revenue at the rate specified in the
contract. Upon adoption of the new revenue guidance on July 1, 2018, the Company determined that it was unable to estimate the
amount of revenue that it is entitled to receive because no agreement with SASSA had been reached at that date. Accordingly, the
Company has not recorded any additional revenue during the year ended June 30, 2019, related to the price to be charged for
welfare benefit distribution services provided through September 30, 2018. The Company recorded revenue at the rate specified
in the contract. The Company expects to record any additional revenue once there is agreement between the Company and
SASSA on the fee.
Accounts Receivable, Contract Assets and Contract Liabilities
The Company recognizes accounts receivable when its right to consideration under its contracts with customers becomes
unconditional. The Company has no contract assets or contract liabilities.
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, 2019, 2018 and 2017, the Company incurred research and development expenditures of $2.6 million, $1.8 million and
$2.0 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.
F-20
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2019, 2018
and 2017, using the enacted statutory tax rate in South Africa of 28%.
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.
The Company has elected the period cost method and records U.S. inclusions in taxable income related to global intangible
low taxed income (“GILTI”) as a current-period expense when incurred.
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 taxation expense in the statement of operations.
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.
F-21
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Settlement assets and settlement obligations
Settlement assets comprise (1) cash received from credit card companies (as well as other types of payment services) which
have business relationships with merchants selling goods and services via the internet that are the Company’s customers and on
whose behalf it processes the transactions between various parties, (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, and (3) cash received from the South African government that the Company holds pending
disbursement to recipient cardholders of social welfare grants.
Settlement obligations comprise (1) amounts that the Company is obligated to disburse to merchants selling goods and
services via the internet that are the Company’s customers and on whose behalf it processes the transactions between various
parties and settles the funds from the credit card companies to the Company’s merchant customers, (2) amounts that the Company
is obligated to pay to customer employees, payroll-related payees and other payees designated by the customer, and amounts that
the Company is obligated to disburse to recipient cardholders of social welfare grants.
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 May 2014, the Financial Accounting Standards Board (“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 which the entity expects to receive in exchange for those goods or services. In
addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The guidance was originally set to be effective for the Company beginning July 1, 2017, however in
August 2015, the FASB issued guidance regarding Revenue from Contracts with Customers, Deferral of the Effective Date. This
guidance deferred the required implementation date specified in Revenue from Contracts with Customers to December 2017.
Public companies were permitted to adopt the standard along the original timeline.
The guidance became effective for the Company beginning July 1, 2018. The Company elected the modified retrospective
transition method upon adoption of this guidance. The adoption of this guidance did not have a material impact on the Company’s
financial statements, except for the additional footnote disclosures provided.
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. The guidance requires changes in the fair value of the
Company’s equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive
income. In addition, the guidance clarifies the valuation allowance assessment when recognizing deferred tax assets resulting
from unrealized losses on available-for-sale debt securities. This guidance became effective for the Company beginning July 1,
2018. The amendments are required to be applied by means of a cumulative-effect adjustment on the balance sheet as of the
beginning of the fiscal year of adoption. The adoption of this guidance did not have a material impact on the Company’s financial
statements.
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 became effective for the Company beginning July 1, 2018,
and must be applied retrospectively. The Company has elected to classify distributions received from equity method investees
using the nature of the distribution approach. This election requires the Company to evaluate each distribution received on the
basis of the source of the payment and classify the distribution as either operating cash inflows or investing cash inflows. The
adoption of this guidance did not have a material impact on the Company’s financial statements and the Company was not
required to make any retrospective adjustments.
F-22
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements adopted (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 became
effective for the Company beginning July 1, 2018. The adoption of this guidance did not have a material impact on the
Company’s financial statements.
In January 2017, the FASB issued guidance 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 has
elected to early adopt this guidance beginning July 1, 2018. The adoption of this guidance did not have a material impact on the
Company’s financial statements.
In May 2017, the FASB issued guidance 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 became effective for the Company beginning July 1, 2018. The adoption of this guidance did
not have a material impact on the Company’s financial statements.
In June 2018, the FASB issued guidance regarding Improvements to Non-employee Share-Based Payment Accounting. The
guidance simplifies the accounting for share-based payments granted to non-employees for goods and services and aligns the
guidance for these share-based payments with guidance applicable to accounting for share-based payments granted to employees.
The guidance is effective for the Company beginning July 1, 2019. Early adoption is permitted. The Company has elected to early
adopt this guidance beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s
financial statements.
Recent accounting pronouncements not yet adopted as of June 30, 2019
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. The Company expects to record a right-
of-use asset and lease liability of $7.0 million in its consolidated balance sheet on adoption based on its lease portfolio as of June
30, 2019.
The Company does not expect a material impact on its consolidated statement of operations and expects to make an election
to adopt the modified retrospective approach lease guidance on adoption and therefore prior periods will not be adjusted and the
Company will recognize, if required, a cumulative-effect adjustment to opening retained earnings as of July 1, 2019. The
Company also expects to apply the package of three practical expedients available, which include the following (i) an entity need
not reassess expired or existing contracts are or contain leases (ii) an entity need not reassess the lease classification for any
expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Company also
expects to make elections to not recognize right-of-use assets and lease liabilities for leases with a term of less than twelve months
and to account for all components in a lease arrangement as a single combined lease component.
F-23
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(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, 2019
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 and
related disclosures.
In August 2018, the FASB issued guidance regarding Disclosure Framework: Changes to the Disclosure Requirements for
Fair Value Measurement. The guidance modifies the disclosure requirements related to fair value measurement. This guidance is
effective for the Company beginning July 1, 2020. Early adoption is permitted. The Company is currently assessing the impact of
this guidance on its financial statements disclosure.
3.
ACQUISITIONS AND DISPOSITIONS
The Company did not make any acquisitions during the year ended June 30, 2019. The cash paid, net of cash received
related to the Company’s various acquisitions during the years ended June 30, 2018 and 2017 is summarized in the table below:
DNI(1) ..................................................................................................................................
Ceevo Financial Services (Malta) Limited (“Ceevo FS”) ...................................................
Pros Software Proprietary Limited (“Pros Software”) ........................................................
Total cash paid, net of cash received ................................................................................
2018
$6,202
-
-
$6,202
2017
$-
2,940
1,711
$4,651
(1) – represents the cash paid, net of cash acquired, to acquire a further 6% voting and economic interest, which resulted in the
Company obtaining a controlling stake in DNI. As described below, the acquisition of DNI occurred in stages and DNI was
accounted for using the equity method until June 30, 2018, being the point at which the Company obtained control over DNI. The
total cash paid, net of cash acquired, to obtain a 55% voting and economic interest in DNI was $85.7 million.
2019 acquisition
None.
F-24
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS AND DISPOSITIONS (continued)
2019 dispositions
2019 disposal of a controlling interest in DNI
On February 28, 2019, the Company through its wholly owned subsidiary, Net1 Applied Technologies South Africa
Proprietary Limited (“Net1 SA”), entered into a transaction with JAA Holdings Proprietary Limited, a limited liability private
company duly incorporated in the Republic of South Africa, and PK Gain Investment Holdings Proprietary Limited, a limited
liability private company duly incorporated in the Republic of South Africa, in terms of which Net1 SA reduced its shareholding
in DNI from 55% to 38%. The transaction closed on March 31, 2019. The parties used a cashless settlement process on closing,
refer to Note 20. Net1 SA used the proceeds from the sale of the DNI shares to settle its ZAR 400 million ($27.6 million,
translated at exchange rates applicable as of March 31, 2019) obligation to DNI to subscribe for an additional share as part of the
contingent consideration settlement process.
The Company no longer controls DNI and deconsolidated its investment in DNI effective March 31, 2019.
2019 further DNI disposition to reduce holding to 30%
In April 2019, the Company’s management approved and commenced a process to sell its retained interest in DNI.
On May 3, 2019, Net1 SA entered into a transaction with FirstRand Bank Limited, acting through its Rand Merchant Bank
division (“RMB”), in terms of which Net1 SA further reduced its shareholding in DNI from 38% to 30% through the sale of
7,605,235 ordinary “A” shares in DNI for a transaction consideration of ZAR 215.0 million ($15.0 million) (the “RMB
Disposal”). The parties used a cashless settlement process on closing. The transaction closed on May 3, 2019, and the Company
used the proceeds from the sale of these DNI shares and ZAR 15.0 million of its existing cash reserves to settle its outstanding
long-term borrowings of ZAR 230.0 million in full, refer to Note 12.
On May 3, 2019, Net1 SA entered into an agreement pursuant to which it granted a call option to DNI to acquire Net1 SA’s
remaining 30% interest in DNI. The option expires on December 31, 2019, but may be exercised at any time prior to expiration.
The option strike price is calculated as ZAR 2.827 billion ($200.8 million, translated at exchange rates applicable as of June 30,
2019) less any special distribution made by DNI multiplied by Net1 SA’s retained interest (i.e. assuming no special distribution,
the strike price for the 30% retained interest is ZAR 859.3 million, or $61.0 million, translated at exchange rates applicable as of
June 30, 2019). The call option may be split into smaller denominations, but Net1 SA cannot be left with less than 20% unless the
whole remaining interest is disposed of. DNI may nominate another party to exercise the call option in the place of DNI, provided
that the nominated party acquires call options representing at least 1.0% of DNI’s voting and participation interests.
As of June 30, 2019, the Company owned 30% of the voting and economic rights of DNI. The Company accounted for its
30% investment in DNI using the equity method, refer to Note 9.
F-25
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS AND DISPOSITIONS (continued)
2019 dispositions (continued)
Loss recorded on disposal of DNI
The table below presents the impact of the deconsolidation of DNI and the calculation of the net loss recognized on
deconsolidation:
Fair value of consideration received .....................................
Fair value of retained interest of 30% in DNI(1) ....................
Carrying value of non-controlling interest ............................
Subtotal ..............................................................................
Cash and cash equivalents ...............................................
Accounts receivable, net and other receivables ..................
Finance loans receivable, net ...........................................
Inventory .........................................................................
Property, plant and equipment, net ..................................
Equity-accounted investments (Note 9) ..........................
Goodwill (Note 10) .........................................................
Intangible assets, net .......................................................
Deferred income taxes .....................................................
Other long-term assets .....................................................
Accounts payable ............................................................
Other payables(2) ..............................................................
Income taxes payable ......................................................
Deferred income taxes .....................................................
Long-term debt (Note 12)................................................
Released from accumulated other comprehensive loss –
foreign currency translation reserve (Note 15) ................
Less: March 31, 2019, carrying value of DNI ....................
March 2019 loss recognized on disposal, before
tax, comprising .......................................................
Related to fair value adjustment of retained interest
in 38% of DNI ...........................................................
Related to sale of 17% of DNI ...................................
Taxes related to disposal(3) ........................................
Loss recognized on disposal, after tax, as of March
2019 = A .................................................................
Attributed
to non-
controlling
interest
$-
-
88,934
88,934
969
11,262
472
410
579
110
51,779
37,009
13
12,167
(2,376)
(7,553)
(1,137)
(10,119)
(4,651)
-
88,934
Equity method as of
June 30, 2019
8%
sold
$-
14,849
-
14,849
158
1,841
77
66
95
19
8,466
6,051
2
1,989
(389)
(1,235)
(186)
(1,654)
(760)
30%
retained
interest
$-
59,346
-
59,346
633
7,358
308
268
379
72
33,834
24,183
8
7,950
(1,553)
(4,936)
(743)
(6,612)
(3,039)
Total
$27,626
74,195
88,934
190,755
2,114
24,577
1,030
893
1,265
242
113,003
80,769
28
26,553
(5,186)
(16,484)
(2,482)
(22,083)
(10,150)
17%
sold
$27,626
-
-
27,626
354
4,116
173
149
212
41
18,924
13,526
5
4,447
(868)
(2,760)
(416)
(3,698)
(1,700)
1,806
195,895
1,806
34,311
-
14,540
-
58,110
(5,140)
(6,685)
309
1,236
1,545
(6,685)
-
-
(6,685)
505
309
-
(3,836)
1,236
-
3,331
$(5,140)
$(7,190)
$4,145
$(2,095)
May 3, 2019 fair value of consideration received ..............
Less: equity-method interest sold (Note 9) ........................
Less: released from accumulated other comprehensive
loss – foreign currency translation reserve (Note 15) ........
May 2019 loss recognized on disposal, before tax ..........
Taxes related to disposal(4) ..............................................
Loss recognized on disposal, after tax, as of May 3,
2019 = B ....................................................................
$15,011
(14,996)
$-
-
$15,011
(14,996)
(646)
(631)
-
(631)
-
-
-
-
(646)
(631)
-
(631)
$-
-
-
-
-
-
Loss on disposal of DNI (A + B) ............................
$(5,771)
$(7,190)
$3,514
$(2,095)
F-26
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS AND DISPOSITIONS (continued)
2019 dispositions (continued)
Loss recorded on disposal of DNI (continued)
(1) The fair value of the retained interest in 38% of DNI as of March 31, 2019, of $74.2 million ($14.9 million plus $59.3
million) has been calculated using the implied fair value of DNI pursuant to the RMB Disposal and has been calculated as
ZAR 215.0 million divided by 7.605235% multiplied by 38%, translated to dollars at the March 31, 2019, rate of exchange.
(2) Other payables include a short-term loan of ZAR 60.5 million ($4.3 million, translated at exchange rates applicable as of
June 30, 2019) due to the Company. The short-term loan is included in accounts receivable, net and other receivables on the
Company’s consolidated balance sheet as of June 30, 2019. The loan was repaid in full on July 31, 2019. Interest on the loan
was charged at the South African prime rate.
(3) Amounts presented are net of a valuation allowance provided. The disposal of DNI resulted in a capital loss for tax
purposes of approximately $1.5 million and the Company has provided a valuation allowance of $1.5 million against this
capital loss because it does not have any capital gains to offset against this amount. On an individual basis, the transaction to
dispose of 17% of DNI resulted in a capital gain of $0.5 million and the re-measurement of the retained 38% interest has
resulted in a capital loss of $2.0 million ($5.3 million (8% transaction) less $3.3 million (30% transaction)). The valuation
allowance of $1.5 million has been provided against the $5.3 million, for a net amount presented in the table above of $3.8
million ($5.3 million less $1.5 million).
(4) The disposal of the 8% interest in DNI resulted in a capital loss for tax purposes of approximately $23.9 million and the
Company has provided a valuation allowance of $23.9 million against this capital loss because it does not have any capital
gains to offset against this amount.
Discontinued operation
The Company has determined that the disposal of its controlling interest in DNI represents a discontinued operation because
it represents a strategic shift that will have a major effect on the Company’s operations and financial results as a result of the sale
of a significant portion of its investment in DNI. The facts and circumstances leading to the disposal of a controlling interest are
described above. The loss related to the disposal of a controlling interest in DNI is presented above. DNI was allocated to the
Company’s financial inclusion and applied technologies operating segment and the amortization of intangible assets identified
and recognized related to the DNI acquisition were allocated to corporate/eliminations. The impact of the disposal of a controlling
interest on the Company’s operating segments is presented in Note 21.
The Company retained a continuing involvement in DNI through its 38% interest in DNI (refer above and to Note 9)
following the March 31, 2019 transaction disclosed above. The Company expects to retain an interest in DNI for less than 12
months. As disclosed above, the Company sold an 8% interest in DNI in May 2019, and has entered into an agreement under
which it has provided a call option to DNI to repurchase the remaining 30% interest in DNI. The Company recorded earnings
under the equity method related to its retained investment in DNI during the three months ended June 30, 2019, refer to Note 9.
The table below presents revenues and expenses between the Company and DNI, after the DNI disposal transaction, during the
year ended June 30, 2019 (i.e. for the three months ended June 30, 2019):
Revenue generated from transactions with DNI ....................................................
Expenses incurred related to transactions with DNI..............................................
$-
$63
Refer to note 9 for the dividends received from DNI under the equity method following the sale of DNI in March 2019.
Year ended
June 30, 2019
F-27
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS AND DISPOSITIONS (continued)
2019 dispositions (continued)
Discontinued operation (continued)
The table below presents the impact of the deconsolidation of DNI on certain major captions to the Company’s consolidated
statement of operations and consolidated statement of cash flows for the year ended June 30, 2019, 2018 and 2017, that have not
been separately presented on those statements:
DNI
Year ended June 30,
2019
2018
2017
Consolidated statement of operations
Discontinued:
Revenue ...................................................................................................................
Cost of goods sold, IT processing, servicing and support .......................................
Selling, general and administration .........................................................................
Depreciation and amortization ................................................................................
Impairment loss .......................................................................................................
Operating income ....................................................................................................
Interest income ........................................................................................................
Interest expense .......................................................................................................
Net income before tax (includes loss on disposal of DNI of $5,771) ......................
Income tax expense .................................................................................................
Net income before earnings from equity-accounted investments ............................
DNI consolidated - Earnings from equity-accounted investments(1) .......................
DNI equity method investment - Earnings from equity-accounted investments (2) .
$56,337
27,667
4,295
8,026
5,305
11,044
707
812
5,168
3,124
2,675
15
$-
$-
-
-
-
-
-
-
-
-
-
-
-
$7,005
$-
-
-
-
-
-
-
-
-
-
-
-
$-
Consolidated statement of cash flows
Discontinued:
Total net cash (used in) provided by operating activities(3)(4) ..................................
Total net cash (used in) provided by investing activities ........................................
$-
$-
(1) Earnings from equity-accounted investments for the year ended June 30, 2019, include earnings attributed to an equity-
accounted investment owned by DNI of $0.2 million and are included in the Company’s results as a result of the consolidation of
DNI.
$6,635
$(516)
$1,765
$-
(2) Earnings from equity-accounted investments for the years ended June 30, 2018, represents DNI earnings (net of
amortization of acquired intangibles and related deferred tax) attributed to the Company as a result of the Company using the
equity method to account for its investment in DNI during the period (refer to Note 9).
(3) Total net cash (used in) provided by operating activities for the year ended June 30, 2019, includes dividends received of
$0.9 million (refer to Note 9) from DNI while it was accounted for using the equity method during the three months ended June
30, 2019.
(4) Total net cash (used in) provided by operating activities for the year ended June 30, 2018, represents dividends received
from DNI during the period.
2018 acquisition
DNI acquisition
The Company accounted for its interest in DNI using the equity method from August 1, 2017, until June 30, 2018, the date
upon which it acquired further voting and economic interest in DNI, taking its ownership to 55%. The transaction actually closed
on June 28, 2018, however, for practical purposes the Company has used June 30, 2018, as the date from which it accounted for a
controlling stake in DNI. Therefore the Company consolidated DNI from June 30, 2018. Refer to Note 9, for additional
information regarding DNI’s contribution to the Company’s reported results under the equity method.
F-28
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS AND DISPOSITIONS (continued)
2018 acquisition (continued)
DNI acquisition (continued)
On July 27, 2017, the Company subscribed for 44,999,999 ordinary A shares in DNI, representing a 45% voting and
economic interest in DNI, for a subscription price of ZAR 945.0 million ($72.0 million) in cash. On March 9, 2018, the Company
subscribed for an additional 4,000,000 ordinary A shares in DNI for a subscription price of ZAR 89.3 million ($7.5 million), in
cash, which increased its voting and economic interest in DNI to 49%, but did not give it control. On March 9, 2018, the
Company also agreed to subscribe for an additional 6,000,000 ordinary A shares in DNI for an aggregate subscription price of
ZAR 126.0 million ($9.2 million). The subscription was subject to certain suspensive conditions, including obtaining South
African Competition Commission approval which was eventually obtained on June 21, 2018. Accordingly, on June 28, 2018, all
conditions were met and the Company subscribed for 6,000,000 ordinary A shares in DNI for a subscription price of ZAR 126.0
million ($9.2 million) in cash, increasing its voting and economic interest in DNI to 55%. Under the terms of its subscription
agreements with DNI, the Company agreed to pay to DNI an additional amount of up to ZAR 400.0 million ($29.1 million,
translated at exchange rates applicable as of June 30, 2018), in cash, subject to the achievement of certain performance targets by
DNI. The Company expected to pay the additional amount during the first quarter of the year ended June 30, 2020, and recorded
an amount of ZAR 373.6 million ($27.2 million), in other long-term liabilities in its consolidated balance sheet as of June 30,
2018, which amount represented the present value of the ZAR 400 million ($29.1 million) to be paid (amounts translated at
exchange rates applicable as of June 30, 2018). The present value of ZAR 373.6 million ($27.2 million) was calculated using the
following assumptions (a) the maximum additional amount of ZAR 400 million will be paid on August 1, 2019 and (b) an interest
rate of 6.3 % (the rate used to calculate interest earned by the Company on its surplus South African funds) has been used to
discount the ZAR 400.0 million to its present value as of June 30, 2018. Utilization of different inputs, or changes to these inputs,
may result in significantly higher or lower fair value measurement. The ZAR 400 million was settled in full on March 31, 2019.
Refer to discussion above under “—2019 dispositions—2019 disposal of a controlling interest in DNI” and to Note 7.
As described in Note 9, on March 9, 2018, the Company obtained financing to partially fund the acquisition of the additional
ordinary A DNI shares and Net1 SA pledged, among other things, its entire equity interest in DNI as security for the South
African facilities described in Note 12.
On March 9, 2018, the Company provided DNI with an interest-free loan of ZAR 126.0 million ($10.6 million) which was
repayable at the earlier of June 30, 2018, or within twenty days of the 6,000,000 ordinary A share subscription agreement (i)
becoming unconditional, (ii) lapsing because the Competition Commission prohibits the subscription, or (iii) the agreement being
cancelled for any reason. As described in Note 9, on March 9, 2018, the Company obtained financing to provide the loan to DNI.
On June 28, 2018, DNI repaid the ZAR 126 million ($9.2 million) loan in full and the Company used the proceeds from the
repayment of the loan to fund the subscription for 6,000,000 ordinary A shares in DNI.
DNI purchase price allocation
During the third quarter of fiscal 2019, the Company determined that certain customer relationships of $7.0 million should
not have been separately identified and recorded as intangible assets because there were no separately identified cash flows
related to these customer relationships. These customer relationships, net of deferred taxes of $2 million, should have been
recorded as a component of goodwill. During the third quarter of fiscal 2019, the Company determined that DNI is a discontinued
operation.
F-29
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS AND DISPOSITIONS (continued)
2018 acquisition (continued)
DNI acquisition (continued)
DNI purchase price allocation (continued)
The table below presents the DNI balances included on the Company’s consolidated balance sheet as of June 30, 2018, as
well as the amended purchase price allocation (“PPA”) of the DNI acquisition, translated at the foreign exchange rates applicable
on the date of acquisition:
Current assets of discontinued operation: ............................................................
Cash and cash equivalents ..............................................................................
Accounts receivable (Note 5) .........................................................................
Finance loans receivable (Note 5) .....................................................................
Inventory (Note 6) ..........................................................................................
Long-term assets of discontinued operation: .......................................................
Property, plant and equipment ........................................................................
Equity-accounted investment (Note 9) ...........................................................
Goodwill (Note 10) ........................................................................................
Intangible assets (Note 10) .............................................................................
Deferred tax assets .........................................................................................
Other long-term assets (Note 9) .....................................................................
Current liabilities of discontinued operation: .......................................................
Accounts payables ..........................................................................................
Other payables ................................................................................................
Current portion of long-term borrowings (Note 12) .......................................
Long-term liabilities of discontinued operation: ..................................................
Other long-term liabilities(1) ...........................................................................
Deferred tax liabilities ....................................................................................
Fair value of assets and liabilities on acquisition ...........................................
Less: fair value attributable to controlling interests on acquisition date ........
Less: fair value of equity-accounted investment, comprising: .......................
Add: loss on re-measurement of previously held interest .........................
Less: Contingent payment recognized related to 49% interest acquired ..
Less: carrying value at the acquisition date (Note 9) ................................
Less: Contingent payment recognized related to 6% interest acquired
Total purchase price ......................................................................
DNI PPA – discontinued operation
as of June 30, 2018
Initial
$22,482
2,979
16,235
742
2,526
242,704
1,317
339
114,161
104,003
1,536
21,348
(20,914)
(13,949)
(6,349)
(616)
(38,387)
(8,291)
(30,096)
$205,885
$-
-
-
-
-
(1,951)
-
-
5,017
(6,968)
-
-
-
-
-
-
1,951
-
1,951
$-
Amendment Amended
$22,482
2,979
16,235
742
2,526
240,753
1,317
339
119,178
97,035
1,536
21,348
(20,914)
(13,949)
(6,349)
(616)
(36,436)
(8,291)
(28,145)
$205,885
(94,123)
(100,947)
4,614
(25,589)
(79,972)
(1,633)
$9,182
(1) – DNI concluded an acquisition in November 2017 and other long-term liabilities includes a contingent purchase
consideration of ZAR 113.8 million ($8.3 million) due to the sellers and other long-term assets includes an amount due from the
DNI shareholders, excluding the Company. DNI is obligated under the terms of this obligation to pay 50% of the purchase
consideration plus or (less) a contingent amount (refund) calculated on a multiple of excess (deficit) earnings over (less) an agreed
earnings amount. The other DNI shareholders have agreed to reimburse DNI the 50% consideration plus (less) the contingent
amount (refund) payable in full. Therefore, other long-term asset includes the amounts due from the DNI shareholder, excluding
the Company, and other long-term liabilities includes the contingent consideration due under the November 2017 acquisition. The
Company expects DNI to pay, and to be reimbursed, the additional amount during the first quarter of the year ended June 30,
2020, which amount represents the present value of the ZAR 129.0 million ($9.4 million) to be paid (amounts translated at
exchange rates applicable as of June 30, 2018). The present value of ZAR 113.8 million ($8.3 million) was calculated using the
following assumptions (a) the maximum additional amount of ZAR 129.0 million will be paid on August 1, 2019 and (b) an
interest rate of 10.0 % (the rate used to calculate interest earned by DNI on its surplus South African funds) has been used to
discount the ZAR 129.0 million to its present value as of June 30, 2018. Utilization of different inputs, or changes to these inputs,
may result in significantly higher or lower fair value measurement.
F-30
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS AND DISPOSITIONS (continued)
2018 acquisition (continued)
DNI acquisition (continued)
DNI purchase price allocation (continued)
The Company recorded intangible asset amortization, deferred taxes and non-controlling interest entries related to these
customer relationships that should have been included in goodwill during the six months ended December 31, 2018. The
Company reversed these entries during the nine months ended March 31, 2019. The table below presents the impact of the
reversal of these entries on the Company’s audited consolidated statement of operations for the year ended June 30, 2019 and the
caption in which the impact is included:
Reversal of intangible asset amortization - decrease depreciation and amortization .................................
Deferred tax impact related to reversal of intangible asset amortization - decrease income tax benefit ....
Increase in non-controlling interest ............................................................................................................
Pro forma results related to acquisition
Year ended
June 30,
2019
$506
142
$164
Pro forma results of operations have not been presented because the effect of the DNI acquisition was not material to the
Company. During the year ended June 30, 2018, the Company incurred acquisition-related expenditure of $0.5 million related to
this acquisition, which has been included in selling, general and administration expenses in the consolidated statement of
operations. The DNI acquisition closed on the last day of the Company’s fiscal year and therefore it has not contributed to
revenue and net income as a subsidiary for the year ended June 30, 2018. Refer to Note 9 for DNI’s contribution to net income
under the equity method.
2018 Fair value of intangible assets acquired
Summarized below is the fair value of the DNI intangible assets acquired and the weighted-average amortization period:
Fair value as of
acquisition date
Weighted-average
amortization period (in years)
Finite-lived intangible asset:
Acquired during the year ended June 30, 2018
DNI – customer relationships acquired ..............................
DNI – software and unpatented technology .......................
DNI – trademarks ...............................................................
$97,255
2,609
$4,139
5.00 – 15.00
5.00
5.00
On acquisition, the Company recognized deferred tax liabilities of approximately $29.1 million related to the acquisition of
intangible assets during the year ended June 30, 2018.
2019 intangible asset impairment loss
The Company identified and recognized certain customer relationships as part of its acquisition of DNI, which included
relationships related to an agreement with Cell C under which DNI shared in revenues earned by Cell C from other mobile
telecommunications networks renting (“tenant rentals”) certain Cell C infrastructure that was constructed utilizing funding
provided by DNI. Cell C expected to utilize the funding provided by DNI to construct 1,000 towers. Cell C recently entered into a
roaming arrangement with another South African mobile telecommunications network provider which will extend its network
coverage. Cell C utilized funding from DNI to construct approximately 22% of the towers that it had originally estimated to
complete, however, the conclusion of the roaming arrangement has resulted in Cell C halting the construction of further network
infrastructure.
F-31
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS AND DISPOSITIONS (continued)
2018 acquisition (continued)
DNI acquisition (continued)
2019 intangible asset impairment loss (continued)
The Company expects DNI to earn fewer tenant rentals than initially planned due to the lower number of towers constructed.
During the third quarter of fiscal 2019, the Company updated the discounted cash flow model used to calculate the fair value of
the customer relationships acquired on acquisition of DNI to assess the impact of the lower number of towers on its projected cash
flows from the tenant rentals customer relationship. The lower number of towers has significantly reduced the projected cash
flows earned from tenant rentals which resulted in a lower fair value attributed to the customer relationship. The Company
compared the updated fair value of the customer relationship to the carrying amount and determined that the customer
relationship is impaired. The Company recorded an impairment loss of $5.3 million in the impairment loss caption on its
consolidated statement of operations for the year ended June 30, 2019. The customer relationship was not allocated to an
operating segment and the impairment loss is included in corporate/eliminations. The economics of the tenant rentals arrangement
between DNI and Cell C was excluded from the performance targets agreed between DNI and the Company because the
arrangement was outside of DNI’s core business.
2017 acquisitions
Ceevo FS
In November 2016, the Company acquired a 100% interest in Ceevo FS, a licensed Malta Financial Services Authority-
supervised electronic money institution, for approximately €3.6 million ($3.9 million translated at the foreign exchange rates
applicable on the date of acquisition). Ceevo FS’ license was passported across all member states of the European Union which
allows Ceevo FS to operate in these territories.
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 acquisitions is provided in the table below:
Cash and cash equivalents .................................
Accounts receivable ...........................................
Property, plant and equipment ...........................
Intangible assets (Note 10).................................
Goodwill (Note 10) ............................................
Accounts payables and other payables ...............
Income taxes payable .........................................
Deferred tax liabilities .......................................
Total purchase price ................................
Ceevo 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 Ceevo 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 Ceevo FS and Pros Software acquisitions. Since the closing of the
Ceevo 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, for the year ended June 30, 2017. 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, for the year ended June 30, 2017.
F-32
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
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 Company’s contract with the South African Social Security Agency expired
on September 30, 2018, and therefore the Company no longer pre-funds social welfare grants. The July 2018 payment service
commenced on July 1, 2018 but the Company pre-funded certain merchants participating in the merchant acquiring systems on the
last day of June 2018.
5.
ACCOUNTS RECEIVABLE, net AND OTHER RECEIVABLES and FINANCE LOANS RECEIVABLE, net
Accounts receivable, net and other receivables
Accounts receivable, trade, net ................................................................................
Accounts receivable, trade, gross ..........................................................................
Allowance for doubtful accounts receivable, end of year .....................................
Beginning of year ............................................................................................
Reversed to statement of operations ................................................................
Charged to statement of operations .................................................................
Utilized ............................................................................................................
Deconsolidation ...............................................................................................
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 9) .....................................................
Loans provided to Finbond ......................................................................................
Loan provided to OneFi (Note 9) .............................................................................
Loan provided to DNI (Note 3) ...............................................................................
Other receivables .....................................................................................................
Total accounts receivable, net and other receivables ..........................................
2019
$25,136
26,377
1,241
1,101
(24)
3,296
(3,059)
(38)
(35)
15,543
25,107
9,564
-
3,000
4,260
24,555
$72,494
2018
$40,268
41,369
1,101
1,255
(47)
642
(776)
-
27
21,971
39,553
17,582
1,107
-
-
30,102
$93,448
Accounts receivable, trade, gross includes amounts due from customers from the provision of transaction processing
services, from the sale of hardware, software licenses and SIM cards and rentals from POS equipment. The Company did not
record any bad debt expense during the year ended June 30, 2019, and bad debts incurred were written off against the allowance
for doubtful accounts receivable. During the year ended June 30, 2018 and 2017, the Company recorded bad debt expense of $0.1
million and $0.1 million, respectively. The loan provided to Finbond was repaid in full in June 2019. The loan provided to DNI
was repaid in full in July 2019. Other receivables include prepayments, deposits and other receivables.
F-33
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(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
The Company’s finance loans receivable, net, as of June 30, 2019 and 2018, 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 ............................................................................................
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 .................................................................
Utilized ............................................................................................................
Foreign currency adjustment ...........................................................................
Total finance loans receivable, net ..........................................................
2019
$20,981
24,180
3,199
4,239
28,802
(29,721)
(121)
9,650
15,742
6,092
12,164
712
(6,777)
(7)
$30,631
2018
$57,504
61,743
4,239
3,717
4,348
(3,588)
(238)
3,959
3,959
16,123
12,164
3,752
8,415
-
(3)
$57,504
$61,463
Total finance loans receivable, net, comprises microlending finance loans receivable related to the Company’s microlending
operations in South Africa, its working capital finance receivable related to its working capital financing offering in Korea, net of
an allowance for doubtful finance receivables for certain amounts that the Company’s management has identified may be
unrecoverable. During the year ended June 30, 2019, the Company recorded an increase in its allowance for doubtful
microlending finance loans receivable of approximately $28.8 million. This high level of allowance related to the non-funding of
accounts for a portion of the EPE customer base as a result of the auto-migration of the customer base to the South Africa Post
Office account offering during the three months ended December 31, 2018. During the year ended June 30, 2019, the Company
utilized $29.7 million of this allowance for doubtful microlending finance loans receivable.
During the year ended June 30, 2018, the Company exited its working capital finance businesses in Europe and the United
States. The Company did not expense any unrecoverable microlending finance loans receivable during the year ended June 30,
2018, 2017 or 2016, respectively, because these loans were written off directly against the allowance for doubtful microlending
finance loans receivable. The Company created an allowance for doubtful working capital finance receivables related to
receivables due from customers based in the United States during the year ended June 30, 2018, and utilized approximately $6.8
million of this allowance during the year ended June 30, 2019.
6.
INVENTORY
The Company’s inventory as of June 30, 2019 and 2018, is presented in the table below:
Finished goods ..............................................................................
2019
$7,535
$7,535
2018
$10,361
$10,361
F-34
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
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 manages its exposure to currency exchange, translation, interest rate, customer concentration, credit and
equity price and liquidity risks as discussed below.
Currency exchange risk
The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other
currencies, primarily the euro and U.S. dollar. The Company has used forward contracts in order to limit its exposure in these
transactions to fluctuations in exchange rates between the South African rand, 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 lending activities, the Company’s operating results are exposed to fluctuations in
interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited
investments in cash equivalents and held to maturity investments and has occasionally invested in marketable securities.
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 “B” (or its equivalent) or better, as determined
by credit rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings.
Microlending credit risk
The Company is exposed to credit risk in its microlending activities, which provide unsecured short-term loans to qualifying
customers. The Company manages this risk by performing an affordability test for each prospective customer and assigning a
“creditworthiness score”, which takes into account a variety of factors such as other debts and total expenditures on normal
household and lifestyle expenses.
F-35
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(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)
Equity price 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. The market price of these securities may fluctuate for a variety of reasons and,
consequently, the amount that the Company may obtain in a subsequent sale of these securities may significantly differ from the
reported market value.
Equity liquidity risk
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.
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.
Asset measured at fair value using significant unobservable inputs – investment in Cell C
The Company’s Level 3 asset represents an investment of 75,000,000 class “A” shares in Cell C, a significant mobile
telecoms provider in South Africa. The Company used a discounted cash flow model developed by the Company to determine the
fair value of its investment in Cell C as of June 30, 2019, and valued Cell C at $0.0 (zero) at June 30, 2019. The Company
changed its valuation methodology from a Company developed adjusted EV/ EBITDA model to a discounted cash flow approach
due to anticipated changes in Cell C’s business model and the current challenges faced by the business, which would not have
been captured by the previous valuation approach. The Company believes the Cell C business plan is reasonable based on the
current performance and the expected changes in the business model.
F-36
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(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)
Asset measured at fair value using significant unobservable inputs – investment in Cell C (continued)
The Company utilized the latest business plan provided by Cell C management for the period ending December 31, 2024,
and following key valuation inputs were used:
Weighted Average Cost of Capital:
Long term growth rate:
Marketability discount:
Minority discount:
Net adjusted external debt(1):
Deferred tax (incl. assessed tax losses (1)):
(1) translated from ZAR to U.S. dollars at exchange rates applicable as of June 30, 2019.
Between 15% and 20% over the period of the forecast
4.5%
10.0%
15.0%
ZAR 13.9 billion ($648.9 million), includes R6.4 billion of leases liabilities
ZAR 2.9 billion ($20.6 million)
The primary inputs to the valuation model as of June 30, 2018, were Cell C’s annualized adjusted EBITDA for the 11
months ended June 30, 2018, of ZAR 3.9 billion ($284.8 million, translated at exchange rates applicable as of June 30, 2018), an
EBITDA multiple of 6.75, Cell C’s net external debt of ZAR 8.8 billion ($641.1 million, translated at exchange rates applicable as
of June 30, 2018) and a marketability discount of 10%. The EBITDA multiple was determined based on an analysis of Cell C’s
peer group, which comprises eight African and emerging market mobile telecommunications operators.
The fair value of Cell C utilizing the adjusted EV/EBITDA valuation model developed by the Company is sensitive to the
following inputs: (i) the Company’s determination of adjusted EBITDA; (ii) the EBITDA multiple used; and (iii) the
marketability discount used. Utilization of different inputs, or changes to these inputs, may result in significantly higher or lower
fair value measurement.
The fair value of Cell C as of June 30, 2019, utilizing the discounted cash flow valuation model developed by the Company
is sensitive to the following inputs: (i) the ability of Cell C to achieve the forecasts in their business case; (ii) the weighted
average cost of capital (“WACC”) rate used; and (iii) the minority and marketability discount used. Utilization of different inputs,
or changes to these inputs, may result in a significantly higher or lower fair value measurement.
The following table presents the impact on the carrying value of the Company’s Cell C investment of a 1% increase and 1%
decrease in the WACC rate and the EBITDA margins used in the Cell C valuation on the June 30, 2019, all amounts translated at
exchange rates applicable as of June 30, 2019:
Sensitivity for fair value of Cell C investment
1% increase
1% decrease
WACC rate
EBITDA margin
$-
$9,875
$9,632
$-
The fair value of the Cell C shares as of June 30, 2019, represented approximately 0% of the Company’s total assets,
including these shares. The Company expects to hold these shares for an extended period of time and that there will be short-term
equity price volatility with respect to these shares particularly given the current situation of Cell C’s business.
Liability measured at fair value using significant unobservable inputs – DNI contingent consideration
The salient terms of the Company’s investment in DNI is described in Note 3. Under the terms of its subscription
agreements with DNI, the Company agreed to pay to DNI an additional amount of up to ZAR 400.0 million ($27.6 million,
translated at exchange rates applicable as of June 30, 2019), in cash, subject to the achievement of certain performance targets by
DNI. The Company expected to pay the additional amount during the first quarter of the year ended June 30, 2020, and recorded
an amount of ZAR 373.6 million ($27.2 million), in long-term liabilities as of June 30, 2018, which amount represented the
present value of the ZAR 400.0 million to be paid (amounts translated at the exchange rate applicable as of June 30, 2018,
respectively). As described in Note 3 and Note 20, the Company settled the ZAR 400 million ($27.6 million) due to DNI as of
March 31, 2019. The Company recorded accreted interest during year ended June 30, 2019, of $1.8 million (ZAR 26.4 million,
translated at the applicable average exchange rates during the periods specified).
F-37
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(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)
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
“B” (or equivalent) or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair
value (Level 2). The Company has no derivatives that require fair value measurement under Level 1 or 3 of the fair value
hierarchy. The Company had no outstanding foreign exchange contracts as of June 30, 2019 and 2018.
The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2019, 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)
Assets
Investment in Cell C ......................................
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 ............................
$-
619
5,201
-
$5,820
$-
-
-
413
$413
$-
-
-
-
$-
Total
$-
619
5,201
413
$6,233
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30,
2018, 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
Investment in Cell C ......................................
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 ............................
Liabilities
DNI contingent consideration (Note 3) .......
Total liabilities at fair value .......................
$-
610
8,304
-
$8,914
$-
$-
$-
-
-
18
$18
$-
$-
$172,948
$172,948
-
610
-
-
$172,948
8,304
18
$181,880
$27,222
$27,222
$27,222
$27,222
There have been no transfers into or out of Level 3 during the years ended June 30, 2019, 2018 and 2017.
F-38
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Summarized below is the movement in the carrying value of assets and liabilities measured at fair value on a recurring basis,
and categorized within Level 3, during the year ended June 30, 2019:
Assets
Balance as at June 30, 2018 .................................................................................
Loss on fair value re-measurements ................................................................
Foreign currency adjustment(1) ........................................................................
Balance as of June 30, 2019 .......................................................................
Liabilities
Balance as at June 30, 2018 .................................................................................
Accretion of interest ........................................................................................
Settlement of contingent consideration (Note 3 and Note 20) .........................
Foreign currency adjustment(1) ........................................................................
Balance as of June 30, 2019 .......................................................................
Carrying value
$172,948
(167,459)
(5,489)
$-
$27,222
1,848
(27,626)
(1,444)
$-
(1) The foreign currency adjustment represents the effects of the fluctuations of the South African rand and the U.S. dollar
on the carrying value.
Summarized below is the movement in the carrying value of assets measured at fair value on a recurring basis, and
categorized within Level 3, during the year ended June 30, 2018:
Assets
Acquisition of investment in Cell C ......................................................................
Change in fair value of Cell C .........................................................................
Foreign currency adjustment ...........................................................................
Balance as of June 30, 2018 .......................................................................
$151,003
32,473
(10,528)
$172,948
Carrying value
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 approximates their carrying value due to their short-term
nature.
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 equity investments without readily determinable fair values at fair value on a nonrecurring basis.
The fair values of these investments are determined based on valuation techniques using the best information available, and may
include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when
the cost of the asset 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. The Company has no liabilities that are measured
at fair value on a nonrecurring basis.
F-39
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
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, 2019 and 2018:
Cost:
2019
2018
Land ............................................................................
Building and structures ...............................................
Computer equipment ...................................................
Furniture and office equipment ...................................
Motor vehicles.............................................................
Accumulated depreciation:
Land ............................................................................
Building and structures ...............................................
Computer equipment ...................................................
Furniture and office equipment ...................................
Motor vehicles.............................................................
Carrying amount:
Land ............................................................................
Building and structures ...............................................
Computer equipment ...................................................
Furniture and office equipment ...................................
Motor vehicles.............................................................
$849
419
109,217
9,788
16,147
136,420
-
158
94,988
7,738
14,982
117,866
849
261
14,229
2,050
1,165
$18,554
$880
483
124,160
8,886
17,354
151,763
-
193
103,297
6,933
15,603
126,026
880
290
20,863
1,953
1,751
$25,737
9.
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, 2019 and 2018, was as follows:
Bank Frick ...........................................................................................
DNI ......................................................................................................
Finbond ................................................................................................
OneFi Limited (“OneFi”) .....................................................................
SmartSwitch Namibia (Pty) Ltd (“SmartSwitch Namibia”) ................
V2 Limited (“V2”) ...............................................................................
Walletdoc Proprietary Limited (“Walletdoc”) .....................................
Bank Frick
2019
35%
30%
29%
25%
50%
50%
20%
2018
35%
n/a
29%
25%
50%
n/a
20%
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.
On October 2, 2017, the Company acquired a 30% interest in Bank Frick, a fully licensed bank based in Balzers,
Liechtenstein, from the Kuno Frick Family Foundation (“Frick Foundation”) for approximately CHF 39.8 million ($40.9 million)
in cash. On February 9, 2018, the Company purchased an additional 5% in Bank Frick from the Frick Foundation for CHF 10.4
million ($11.1 million) and the Frick Foundation contributed approximately CHF 3.8 million ($4.1 million) to Bank Frick to
facilitate the development of Bank Frick’s Fintech and blockchain businesses. The Company had an option, exercisable until
October 2, 2019, to acquire an additional 35% interest in Bank Frick.
F-40
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Equity-accounted investments (continued)
Bank Frick (continued)
On October 2, 2019, the Company exercised the option to acquire an additional 35% interest in Bank Frick from the Frick
Foundation. The Company will pay an amount, the “Option Price Consideration”, for the additional 35% interest in Bank Frick,
which represents the higher of CHF 46.4 million ($46.5 million at exchange rates on October 2, 2019) or 35% of 15 times the
average annual normalized net income of the Bank over the two years ended December 31, 2018. The shares will only transfer on
payment of the Option Price Consideration, which shall occur on the later of (i) 180 days after the date of exercise of the option;
(ii) in the event of any regulatory approvals being required, 10 days after receipt of approval (either unconditionally or on terms
acceptable to both parties); and (iii) 10 days after the date on which the Option Price Consideration is agreed or finally
determined.
DNI
The Company’s investment in DNI is described in Note 3. On July 27, 2017, the Company acquired a 45% voting and
economic interest in DNI and on March 9, 2018, it increased this interest to 49%. The Company obtained control of DNI on June
30, 2018, and ceased accounting for DNI using the equity method from that date. DNI owned 50% of the issued and outstanding
ordinary shares in Speckpack and it has been accounted for separately as an equity method investment from June 30, 2018.
The Company recognized a non-cash re-measurement loss of approximately $4.6 million during the year ended June 30,
2018, related to the re-measurement of its previously held interest in DNI, at 49%, upon acquisition on June 30, 2018 (refer to
Note 3). The re-measurement loss is included in selling, general and administration expenses in the consolidated statement of
operations for the year ended June 30, 2018.
The Company consolidated DNI up until March 31, 2019, as disclosed in Note 3. The Company retained a 38% interest in
DNI following the deconsolidation and used the equity method to account for its interest in DNI because it has the ability to exert
significant influence over the operations of DNI through its shareholding and board representation. The Company disposed of an
8% interest in DNI on May 3, 2019, leaving it with a 30% interest as of June 30, 2019.
Finbond
As of June 30, 2019, the Company owned 267,672,032 shares in Finbond representing approximately 29.0% of its issued
and outstanding ordinary shares. Finbond is listed on the Johannesburg Stock Exchange and its closing price on June 28, 2019, the
last trading day of the month, was ZAR 4.00 per share. The market value of the Company’s holding in Finbond on June 28, 2019,
was ZAR 1.1 billion ($76.0 million translated at exchange rates applicable as of June 30, 2019). On July 13, 2017, the Company
acquired an additional 3.6 million shares in Finbond for approximately ZAR 11.2 million ($0.8 million). On July 11, 2018, the
Company, pursuant to its election, received an additional 6,602,551 shares in Finbond as a capitalization share issue in lieu of a
dividend. On July 17, 2017, the Company, pursuant to its election, received an additional 4,361,532 shares in Finbond as a
capitalization share issue in lieu of a dividend. On August 2, 2019, the Company, pursuant to its election, received an additional
1,148,901 shares in Finbond as a capitalization share issue in lieu of a dividend.
On October 7, 2016, the Company provided a loan of ZAR 139.2 million ($10.0 million, translated at the foreign exchange
rates applicable on the date of the loan) to Finbond in order to partially finance Finbond’s expansion strategy in the United States.
Interest on the loan was payable quarterly in arrears and was based on the London Interbank Offered Rate (“LIBOR”) in effect
from time to time plus a margin of 12.00%. The loan was included in accounts receivable, net, as of June 30, 2017, on the
Company’s consolidated balance sheet. The loan was initially set to mature at the earlier of Finbond concluding a rights offer or
February 28, 2017, but the agreement was subsequently amended to extend the repayment date to on or before February 28, 2018,
or such later date as may be mutually agreed by the parties in writing. The Company had the right to elect for the loan to be repaid
in either Finbond ordinary shares, including through a rights offering, (in accordance with an agreed mechanism) or in cash. The
Company was required to make a repayment election within 180 days after the repayment date otherwise the repayment election
would automatically default to repayment in ordinary shares. Finbond undertook to perform all necessary steps reasonably
required to effect the issuance of shares to settle the repayment of the loan if that option was elected by the Company.
F-41
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Equity-accounted investments (continued)
Finbond (continued)
In March 2018, the parties amended the agreement to extend the repayment date from February 28, 2018 to August 31,
2018, and to finalize certain matters related to the rights offering mechanism and determining the maximum number of shares that
Finbond would issue to parties participating in a rights offering. On March 23, 2018, Finbond publicly announced that it had
commenced a rights offering process and that the proceeds of the offering would be used to settle certain loans, including the loan
due to the Company. The Company agreed to underwrite the Finbond rights offer up to an amount of 55,585,514 shares. The
rights offering closed on April 20, 2018, and Finbond issued 55,585,514 shares to the Company.
As a result of Finbond’s listing on the Johannesburg Stock Exchange it reports its six-month results during the Company’s
first quarter and its annual results during the Company’s fourth quarter and the Company includes the impact of Finbond’s results
in its consolidated financial statements during those quarters.
OneFi
The Company provided a credit facility of up to $10 million in the form of convertible debt to OneFi, of which $3 million
was drawn. Interest at 8% per annum is charged on the $3.0 million drawn. Repayment of the notes is due at the earlier of June
11, 2020, or the Company selling its interest in OneFi. The Company included the $3.0 million due in accounts receivable, net
and other receivables as of June 30, 2019. The notes may also be converted to ordinary shares subject to the occurrence of certain
contractually agreed events. The undrawn portion of the credit facility expired and the Company has no further obligations in this
regard.
V2 Limited
On October 4, 2018, the Company acquired a 50% voting and economic interest in V2 Limited (“V2”) for $2.5 million. The
Company has committed to provide V2 with a further equity contribution of $2.5 million and a working capital facility of $5.0
million, which are both subject to the achievement of certain pre-defined objectives.
Summarized below is the movement in equity-accounted investments during the years ended June 30, 2019 and 2018, which
includes the investment in equity and the investment in loans provided to equity-accounted investees:
DNI(1)
Bank
Frick
Finbond Other(2)
Total
Investment in equity:
Balance as of July 1, 2017 – as reported ............................
Correction of Finbond error (Note 1) ..........................
Balance as of July 1, 2017 – as restated ....................
Acquisition of shares ....................................................
Stock-based compensation............................................
Comprehensive income (loss):
Other comprehensive loss .......................................
Equity accounted earnings (loss) ............................
Share of net income (loss) .................................
Amortization - acquired intangible assets .........
Deferred taxes - acquired intangible assets .......
Dilution resulting from corporate transactions ..
Other ..................................................................
Dividends received .......................................................
Carrying value at the acquisition date (Note 3) ............
Foreign currency adjustment(3) .....................................
Balance as of June 30, 2018 .............................................
$-
$-
-
79,541
-
7,005
-
7,005
9,510
(3,480)
975
-
-
(1,765)
(79,972)
(4,809)
$-
-
51,949
-
(606)
-
(606)
201
(531)
128
-
(404)
(1,946)
-
(1,268)
$48,129
$18,961
(1,927)
17,034
13,043
(139)
2,768
(2,426)
5,194
5,450
-
-
(256)
-
(1,096)
-
(2,628)
$28,982
$6,742
6,742
-
-
4
-
4
4
-
-
-
-
(400)
339
(593)
$6,092
$25,703
(1,927)
23,776
144,533
(139)
9,171
(2,426)
11,597
15,165
(4,011)
1,103
(256)
(404)
(5,207)
(79,633)
(9,298)
$83,203
F-42
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Equity-accounted investments (continued)
Balance as of June 30, 2018 .............................................
Re-measurement of 8% of DNI (Note 3) ...................
Re-measurement of 30% of DNI (Note 3) .................
Acquisition of shares ....................................................
Stock-based compensation............................................
Comprehensive income (loss):
Other comprehensive income ..................................
Equity accounted earnings (loss) ............................
Share of net income (loss) .................................
Amortization - acquired intangible assets .........
Deferred taxes - acquired intangible assets .......
Accretion resulting from corporate transactions
Other ..................................................................
Dividends received .......................................................
Return on investment ....................................................
Deconsolidation of DNI (Note 3) .................................
Sale of 8% interest in DNI (Note 3) .............................
Foreign currency adjustment(3) .....................................
Balance as of June 30, 2019 .............................................
Investment in loans:
Balance as of July 1, 2017 ................................................
Loans granted ..............................................................
Transfer from accounts receivable, net and other
receivables ....................................................................
Transfer to investment in equity ...................................
Foreign currency adjustment(3) .....................................
Balance as of June 30, 2018 .............................................
Transfer to accounts receivable, net and other
receivables ....................................................................
Foreign currency adjustment(3) ....................................
Balance as of June 30, 2019 .............................................
Carrying amount as of:
June 30, 2018 .............................................................
Continuing ...........................................................
Discontinued (Note 3) ..........................................
June 30, 2019 .............................................................
DNI(1)
$-
14,849
59,346
-
-
865
-
865
1,380
(715)
200
-
-
(864)
-
-
(14,996)
1,830
$61,030
Bank
Frick
$48,129
-
-
-
-
(1,542)
-
(1,542)
1,109
(747)
180
-
(2,084)
-
-
-
-
653
$47,240
Finbond Other(2)
$6,092
$28,982
-
-
-
-
2,989
1,920
-
117
(669)
7,079
-
4,251
(669)
2,828
(669)
2,524
-
-
-
-
-
304
-
-
(454)
(1,920)
(284)
-
(242)
-
-
-
(878)
(34)
$35,300
Total
$83,203
14,849
59,346
4,909
117
5,733
4,251
1,482
4,344
(1,462)
380
304
(2,084)
(3,238)
(284)
(242)
(14,996)
1,571
$7,398 $150,968
$-
-
-
-
-
-
-
-
$-
$-
-
-
-
-
-
-
-
$-
$-
-
$2,159
1,000
$2,159
1,000
11,235
(11,102)
(133)
-
-
-
(7)
3,152
11,235
(11,102)
(140)
3,152
-
-
$-
(3,000)
(4)
$148
(3,000)
(4)
$148
Equity
Loans
Total
$83,203
$82,864
$339
$150,968
$3,152
$3,152
$-
$86,016
$339
$148 $151,116
(1) DNI was included as an equity-accounted investment from August 1, 2017 until June 30, 2018, the date upon which the
Company obtained control and commenced consolidation of DNI, and then again from March 31, 2019;
(2) Includes OneFi, SmartSwitch Namibia, V2 and Walletdoc;
(3) The foreign currency adjustment represents the effects of the fluctuations of the South African rand, Nigerian naira and
Namibian dollar, against the U.S. dollar on the carrying value.
F-43
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Summary financial information of equity-accounted investments
Summarized below is the financial information of equity-accounted investments (during the Company’s reporting periods in
which investments were carried using the equity-method, unless otherwise noted) as of the stated reporting period of the investee
and translated at the applicable closing or average foreign exchange rates (as applicable):
Balance sheet, as of ..........................................................
Current assets(4)
DNI
June 30
Bank Frick
June 30
Finbond
February 28(2)
Other(1)
Various(3)
2019 ......................................................................
2018 ......................................................................
$35,608
n/a
n/a
n/a
n/a
n/a
$17,781
11,433
Long-term assets
2019 ......................................................................
2018 ......................................................................
Current liabilities(4)
39,851
n/a
$1,013,677
1,418,160
$240,792
252,265
2019 ......................................................................
2018 ......................................................................
25,757
n/a
n/a
n/a
n/a
n/a
Long-term liabilities
2019 ......................................................................
2018 ......................................................................
7,324
n/a
915,050
1,323,470
125,704
175,539
Redeemable stock
2019 ......................................................................
2018 ......................................................................
Non-controlling interests
2019 ......................................................................
2018 ......................................................................
Statement of operations, for the period ended .................
Revenue
2019 ......................................................................
2018 ......................................................................
2017 ......................................................................
Operating income (loss)
2019 ......................................................................
2018 ......................................................................
2017 ......................................................................
Income (loss) from continuing operations
2019 ......................................................................
2018 ......................................................................
2017 ......................................................................
Net income (loss)
2019 ......................................................................
2018 ......................................................................
2017 ......................................................................
-
n/a
1,100
n/a
June 30(5)
June 30(6)
-
-
-
-
-
-
11,696
10,948
February 28(2)
15,898
n/a
n/a
5,814
n/a
n/a
4,306
n/a
n/a
$4,481
n/a
n/a
41,126
33,814
n/a
3,633
776
n/a
3,169
617
n/a
3,169
$617
n/a
174,177
161,915
97,431
21,592
33,989
19,551
10,152
18,651
9,700
10,152
18,651
$9,700
2,304
1,343
8,492
3,295
4,654
3,930
-
-
25
-
Various(7)
33,807
10,955
7,168
(753)
826
276
(915)
152
3
(1,029)
152
$3
(1) Includes OneFi, SmartSwitch Namibia, Walletdoc and V2, as appropriate;
(2) Finbond balances included were derived from its publically available information. The amounts as of February 28, 2018
and for the years ended February 28, 2018 and 2017, respectively, have been restated for the error described in Note 1;
(3) Balance sheet information for OneFi, SmartSwitch Namibia and V2 is as of June 30, 2019 and 2018, and Walletdoc as of
February 28, 2019 and 2018, respectively.
(4) Bank Frick and Finbond are banks and do not present current and long-term assets and liabilities. All assets and
liabilities of these two entities are included under the long-term caption.
(5) Statement of operations information for DNI is for the period from April 1, 2019 to June 30, 2019.
(6) Statement of operations information for 2018 for Bank Frick is for the period from October 1, 2017 to June 30, 2018.
(7) Statement of operations information for OneFi, SmartSwitch Namibia and V2 for the year ended June 30, and Walletdoc
for the year ended February 28.
F-44
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Other long-term assets
Summarized below is the breakdown of other long-term assets as of June 30, 2019, and June 30, 2018:
June 30,
2019
June 30,
2018
Total equity investments .............................................................................................................
Investment in 15% of Cell C, at fair value (Note 7) ...........................................................
Investment in MobiKwik(1) .................................................................................................
Total held to maturity investments..............................................................................................
Investment in 7.625% of Cedar Cellular Investment 1 (RF) (Pty) Ltd 8.625% notes .......
Long-term portion of payments to agents in South Korea amortized over the contract period ..
Policy holder assets under investment contracts (Note 11) .........................................................
Reinsurance assets under insurance contracts (Note 11) ............................................................
Other long-term assets ................................................................................................................
Total other long-term assets ...............................................................................................
$26,993
-
26,993
-
-
9,564
619
1,163
5,850
$44,189
$199,865
172,948
26,917
10,395
10,395
17,582
610
633
5,947
$235,032
(1) The Company has determined that MobiKwik does not have readily determinable fair value and has therefore elected to
record this investment at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly
transactions for the identical or a similar investment of the same issuer. The Company accounted for its investment in MobiKwik
at cost as of June 30, 2018.
Cell C
On August 2, 2017, the Company, through its subsidiary, Net1SA, purchased 75,000,000 class “A” shares of Cell C for an
aggregate purchase price of ZAR 2.0 billion ($151.0 million) in cash. The Company funded the transaction through a combination
of cash and the facilities described in Note 12. Net1 SA has pledged, among other things, its entire equity interest in Cell C as
security for the South African facilities described in Note 12 used to partially fund the acquisition of Cell C. The Company’s
investment in Cell is carried at fair value. Refer to Note 7 for additional information regarding changes in the fair value of Cell C.
MobiKwik
The Company signed a subscription agreement with MobiKwik, which is one of India’s largest independent mobile
payments networks, with over 80 million users and 2.5 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.
During the year ended June 30, 2019, the Company paid $1.1 million to subscribe for additional shares in MobiKwik. As of June
30, 2019 and 2018, respectively, the Company owned approximately 13% and 12% of MobiKwik’s issued share capital.
Cedar Cellular
In December 2017, the Company purchased, for cash, $9.0 million of notes, with a face value of $20.5 million, issued by
Cedar Cellular Investment 1 (RF) (Pty) Ltd (“Cedar Cellular”), a Cell C shareholder, representing 7.625% of the issuance. The
investment in the notes was made in connection with the Cell C investment discussed above. The notes are listed on The
International Stock Exchange. The Company has elected to treat the investment in the notes as held to maturity securities. The
investment in the notes is reviewed on a quarterly basis for indicators of other-than-temporary impairment. The notes bear interest
semi-annually at 8.625% per annum on the face value and interest is payable in cash or deferred, at Cedar Cellular’s election, for
payment on the maturity date. The notes mature on August 2, 2022. The notes are secured by all of Cedar Cellular’s investment in
Cell C, namely, 59,000,000 class “A” shares.
The Company recognized interest income of $2.4 million and $1.4 million, related to the Cedar Cellular notes during the
year ended June 30, 2019 and 2018, respectively. Interest on this investment will only be paid, at Cedar Cellular’s election, on
maturity in August 2022.
F-45
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Other long-term assets (continued)
Cedar Cellular (continued)
The Company does not expect to recover the amortized cost basis of the Cedar Cellular notes due to a reduction in the
amount of future cash flows expected to be collected from the debt security compared to previous expectations. The Company
does not expect to generate any cash flows from the debt security at maturity in August 2022 or prior to the maturity date due to
the current challenges facing the business and the uncertainties over the future value of the current equity in Cell C. Accordingly,
the Company believes it is unlikely that Cedar Cellular will generate sufficient cash inflows to settle any outstanding accumulated
interest and principal due to the note holders on maturity in August 2022.
The Company’s cannot calculate an effective interest rate on the Cedar Cellular note because the carrying value is currently
zero ($0.0 million) as of June 30, 2019. The Company therefore cannot calculate the present value of the expected cash flows to
be collected from the debt security by discounting these cash flows at the interest rate implicit in the security upon acquisition (at
a rate of 24.82%) because there are no future cash flows to discount. The present value of the expected cash flows of zero ($0.0
million) is less than the amortized cost basis recorded of $12.8 million (before the cumulative 2019 impairments for the year
ended June 30, 2019). Accordingly, the Company recorded an other-than-temporary impairment related to a credit loss of $12.8
million during the year ended June 30, 2019. The impairment of $12.8 million is included in the caption—Impairment of Cedar
Cellular note—in the consolidated statement of operations for the year ended June 30, 2019, respectively.
Summarized below are the components of the Company’s equity securities without readily determinable fair value and held
to maturity investments as of June 30, 2019:
Cost basis
Unrealized
holding gains
Unrealized
holding losses
Carrying
value
Equity securities:
Investment in MobiKwik ...............
$26,993
Held to maturity:
Investment in Cedar Cellular notes
Total ..........................................
-
$26,993
$-
-
$-
$-
-
$-
$26,993
-
$26,993
Summarized below are the components of the Company’s held to maturity investments as of June 30, 2018:
Cost
basis(1)
Unrealized
holding gains(1)
Unrealized
holding losses
Carrying
value
Held to maturity:
Investment in Cedar Cellular notes
Total ..........................................
$10,395
$10,395
$-
$-
$-
$-
$10,395
$10,395
(1) An amount of $1.4 million attributed to interest recognized under the Cedar Cellular note was incorrectly included in the
unrealized holding gains column as of June 30, 2018, and has been reclassified to the cost basis column.
F-46
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued)
Contractual maturities of held to maturity investments
Summarized below is the contractual maturity of the Company’s held to maturity investment as of June 30, 2019:
Due in one year or less .....................................................
Due in one year through five years(2) ...............................
Due in five years through ten years .................................
Due after ten years ...........................................................
Total ...........................................................................
Cost basis
$-
-
-
-
$-
Estimated fair value(1)
$-
-
-
-
$-
(1) The estimated fair value of the Cedar Cellular note has been calculated utilizing the Company’s portion of the security
provided to the Company by Cedar Cellular, namely, Cedar Cellular’s investment in Cell C.
(2) The cost basis is zero ($0.0 million).
10. GOODWILL AND INTANGIBLE ASSETS, net
Goodwill
Summarized below is the movement in the carrying value of goodwill for the years ended June 30, 2019, 2018 and 2017:
Carrying
Balance as of July 1, 2016 ........................................................................
Acquisition of Ceevo FS (Note 3) .........................................................
Foreign currency adjustment(1) ...............................................................
Balance as of June 30, 2017 ......................................................................
Impairment loss ......................................................................................
Foreign currency adjustment(1) ...............................................................
Balance as of June 30, 2018 ......................................................................
Impairment loss ...................................................................................
Foreign currency adjustment(1) ............................................................
Balance as of June 30, 2019 ......................................................................
value
$179,478
2,475
6,880
188,833
(20,917)
1,163
169,079
(14,440)
(5,252)
$149,387
(1) – the foreign currency adjustment represents the effects of the fluctuations between the South African rand, the Euro and the
Korean won, and the U.S. dollar on the carrying value.
Accumulated
impairment
$-
-
-
-
(20,917)
144
(20,773)
(14,440)
56
$(35,157)
Gross
value
$179,478
2,475
6,880
188,833
-
1,019
189,852
-
(5,308)
$184,544
Goodwill associated with the acquisition of Ceevo FS represents the excess of cost over the fair value of acquired net assets.
The Ceevo FS 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. Ceevo FS was allocated to the Company’s International transaction processing operating segment.
Impairment loss
The Company assesses the carrying value of goodwill for impairment annually, or more frequently, whenever events occur
and circumstances change indicating potential impairment. The Company performs its annual impairment test as at June 30 of
each year.
Year ended June 30, 2019
During the second quarter of fiscal 2019, the Company performed an impairment analysis and recognized an impairment
loss of approximately $8.2 million, of which approximately $7.0 million related to goodwill allocated to its IPG business within
its international transaction processing operating segment and $1.2 million related to goodwill within its South African transaction
processing operating segment. Given the consolidation and restructuring of IPG over the period to December 31, 2018, several
business lines were terminated or meaningfully reduced, resulting in lower than expected revenues, profits and cash flows. IPG’s
new business initiatives are still in their infancy, and it is expected to generate lower cash flows than initially forecast.
F-47
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
10. GOODWILL AND INTANGIBLE ASSETS, net (continued)
Goodwill (continued)
Impairment loss (continued)
Year ended June 30, 2019 (continued)
In order to determine the amount of the IPG goodwill impairment, the estimated fair value of the Company’s IPG business
assets and liabilities were compared to the carrying value of the IPG’s assets and liabilities. The Company used a discounted cash
flow model in order to determine the fair value of IPG. The allocation of the fair value of IPG required the Company to make a
number of assumptions and estimates about the fair value of assets and liabilities where the fair values were not readily available
or observable. Based on this analysis, the Company determined that the carrying value of IPG’s assets and liabilities exceeded
their fair value at the reporting date.
The Company also identified and recognized an impairment loss of $6.2 million related to goodwill allocated to its financial
inclusion and applied technologies operating segment as a result of its June 30, 2019, annual impairment test. The June 2019
impairment loss resulted from on-going losses incurred in the latter half of the fiscal year that were greater than, and were
incurred for a longer duration, than initially expected.
The estimated fair value of the business assets and liabilities were compared to the carrying value of the assets and liabilities
of the reporting unit within the financial inclusion and applied technologies operating segment in order to determine the $6.2
million goodwill impairment. The Company used an EV/EBITDA multiple valuation model to determine the fair value of the
reporting unit.
The allocation of the fair value of the reporting unit required the Company to make a number of assumptions and estimates
about the fair value of assets and liabilities where the fair values were not readily available or observable. Based on this analysis,
except for the impairments recognized, the Company determined that the carrying value of the reporting unit’s assets and
liabilities exceeded their fair value at the reporting date. In the event that there is deterioration in the Company’s operating
segments, or in any other of the Company’s businesses, this may lead to additional impairments in future periods.
Year ended June 30, 2018
During the third quarter of fiscal 2018, the Company recognized an impairment loss of approximately $19.9 million related
to goodwill allocated to the Masterpayment business within its international transaction processing operating segment as a result
of changes to the operating model of Masterpayment. During the second quarter of fiscal 2018, the Company re-evaluated the
operating performance and ongoing viability of Masterpayment’s working capital financing and supply chain solutions offering
and determined to exit this portion of its business. While the Company believed that it could scale this offering in the medium to
long-term by focusing on customers and industries outside Masterpayment’s initial target market, this standalone offering did not
fit the Company’s strategy of providing payment solutions and working capital to small and medium-sized merchants. In order to
focus on the Company’s stated international strategy, the Company decided to wind-down the traditional working capital finance
book issued to non-payment solutions customers. During the third quarter of fiscal 2018, the Company evaluated
Masterpayment’s business strategy and following the wind-down referred to above, it determined that Masterpayment was
unlikely to deliver the financial results or cash flows previously anticipated. The Company and two of Masterpayment’s senior
managers agreed, by mutual consent, that with effect from the end of March 2018, the managers terminated their employment
with Masterpayment in order to dedicate themselves to new professional tasks. The Company also impaired goodwill of
approximately $1.1 million during its June 2018 annual goodwill impairment assessment related to a business allocated to its
South African transaction processing operating segment, which ceased trading during the year.
In order to determine the amount of goodwill impairment, the estimated fair value of the Company’s Masterpayment
business was allocated to the individual fair value of the assets and liabilities of Masterpayment as if it had been acquired in a
business combination, which resulted in the implied fair value of the goodwill. The Company used a discounted cash flow model
in order to determine the fair value of Masterpayment. The allocation of the fair value of Masterpayment required the Company to
make a number of assumptions and estimates about the fair value of assets and liabilities where the fair values were not readily
available or observable.
F-48
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
10. GOODWILL AND INTANGIBLE ASSETS, net (continued)
Goodwill (continued)
Goodwill has been allocated to the Company’s reportable segments as follows:
Balance as of July 1, 2016 ......................
Acquisition of Ceevo FS (Note 3) ........
Foreign currency adjustment(1) .........
Balance as of June 30, 2017 ....................
Impairment loss .................................
Foreign currency adjustment(1) .........
Balance as of June 30, 2018 ....................
Impairment of goodwill .....................
Foreign currency adjustment(1) ..........
Balance as of June 30, 2019
South
African
transaction
processing
$20,425
-
2,706
23,131
(1,052)
(1,133)
20,946
(1,180)
(558)
$19,208
International
transaction
processing
Financial
inclusion and
applied
technologies
$136,185
2,475
1,910
140,570
(19,865)
3,243
123,948
(7,011)
(4,209)
$112,728
$22,868
-
2,264
25,132
-
(947)
24,185
(6,249)
(485)
$17,451
Carrying
value
$179,478
2,475
6,880
188,833
(20,917)
1,163
169,079
(14,440)
(5,252)
$149,387
(1) – the foreign currency adjustment represents the effects of the fluctuations between the South African rand, the Euro and the
Korean won, and the U.S. dollar on the carrying value.
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:
Acquired during the year ended June 30, 2017 .................................
Pros Software – customer relationships .......................................
Ceevo FS – customer relationships .............................................
Ceevo FS – software and unpatented technology ........................
$2,311
186
147
0.75
0.65
1.25
Indefinite-lived intangible asset:
Acquired during the year ended June 30, 2017 ...........................
Ceevo FS – Financial institution license .....................................
$745
n/a
On acquisition, the Company recognized deferred tax liabilities of approximately $0.7 million related to the acquisition of
intangible assets during the year ended June 30, 2017.
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. Except as discussed in Note 3, no
intangible assets have been impaired during the years ended June 30, 2019, 2018 and 2017, respectively.
F-49
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
10. GOODWILL AND INTANGIBLE ASSETS, net (continued)
Intangible assets, net (continued)
Summarized below is the carrying value and accumulated amortization of intangible assets as of June 30, 2019 and 2018:
As of June 30, 2019
As of June 30, 2018
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
$96,653
$(86,285)
$10,368
$100,421
$(76,237)
$24,184
32,071
2,721
-
6,772
(31,829)
(2,721)
-
(6,265)
242
-
-
507
33,121
2,792
4,506
6,962
(32,342)
(2,792)
(4,506)
(5,589)
779
-
-
1,373
138,217
(127,100)
11,117
147,802
(121,466)
26,336
772
-
772
793
-
793
Finite-lived intangible assets:
Customer relationships ...........
Software and unpatented
technology .............................
FTS patent ..............................
Exclusive licenses ..................
Trademarks ............................
Total finite-lived intangible
assets .................................
Indefinite-lived intangible assets:
Financial institution license ....
Total indefinite-lived
intangible assets ................
772
Total intangible assets....... $138,989
-
$(127,100)
772
$11,889
793
$148,595
-
$(121,466)
793
$27,129
Amortization expense charged for the years to June 30, 2019, 2018 and 2017 was $22.1 million, $11.8 million, and
$14.0 million, respectively.
Future estimated annual amortization expense for the next five fiscal years, assuming exchange rates prevailing on
June 30, 2019, is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a
result of acquisitions, changes in useful lives, exchange rate fluctuations and other relevant factors.
2020 .................................................................................
2021 .................................................................................
2022 .................................................................................
2023 .................................................................................
2024 .................................................................................
Thereafter .........................................................................
Total future estimated amortization expense ..............
$7,955
2,803
72
71
71
145
$11,117
F-50
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
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, 2019 and 2018:
Reinsurance
assets(1)
Insurance
contracts(2)
Balance as of July 1, 2017 ...................................................................
Increase in policy holder benefits under insurance contracts .........
Claims and policyholders’ benefits under insurance contracts .......
Foreign currency adjustment(3) .......................................................
Balance as of June 30, 2018 .................................................................
Increase in policy holder benefits under insurance contracts .........
Claims and policyholders’ benefits under insurance contracts .......
Foreign currency adjustment(3) .......................................................
Balance as of June 30, 2019 .................................................................
(1) Included in other long-term assets (refer to Note 9);
(2) Included in other long-term liabilities;
(3) Represents the effects of the fluctuations of the ZAR against the U.S. dollar.
$191
1,899
(1,449)
(8)
633
775
(228)
(17)
$1,163
$(1,611)
(9,714)
9,214
79
(2,032)
(8,137)
8,237
52
$(1,880)
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. The value of insurance contract
liabilities is based on the best estimate assumptions of future experience plus prescribed margins, as required in the markets in
which these products are offered, namely South Africa. The process of deriving the best estimates assumptions plus prescribed
margins includes assumptions related to claim reporting delays (based on average industry experience).
Reinsurance assets and policy holder liabilities under investment contracts
Summarized below is the movement in assets and policy holder liabilities under investment contracts during the years ended
June 30, 2019 and 2018:
Assets(1)
Investment
contracts(2)
Balance as of July 1, 2017 ...................................................................
Increase in policyholder benefits under insurance contracts ..........
Foreign currency adjustment(3) .......................................................
Balance as of June 30, 2018 .................................................................
Increase in policyholder benefits under insurance contracts ..........
Foreign currency adjustment(3) .......................................................
Balance as of June 30, 2019 .................................................................
(1) Included in other long-term assets (refer to Note 9);
(2) Included in other long-term liabilities;
(3) Represents the effects of the fluctuations of the ZAR against the U.S. dollar.
$627
13
(30)
610
24
(15)
$619
$(627)
(13)
30
(610)
(24)
15
$(619)
The Company does not offer any investment products with guarantees related to capital or returns.
F-51
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
12. BORROWINGS
South Africa
The amounts below have been translated at exchange rates applicable as of the dates specified.
July 2017 Facilities, as amended, comprising a short-term facility and long-term borrowings
Long-term borrowings – Facilities A, B, C and D
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 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 and March 2018 amendment
described below, 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. On March 8, 2018, the Company amended its South African long-term facility to include an additional term
loan, Facility D, of up to ZAR 210.0 million.
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, 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, and a Facility D term loan of up to ZAR 210 million. Net1 SA paid non-refundable deal origination
fees of approximately $0.6 million and $0.2 million in August 2017 and March 2018, respectively. Interest on the loans was
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 , 2.25% for the Facility C loan and 2.75% for the Facility D loan.
Interest expense incurred during the years ended June 30, 2019 and 2018, was $2.9 million and $7.2 million, respectively. During
the years ended June 30, 2019 and 2018, $0.3 million and $0.5 million, respectively, of prepaid facility fees were amortized. On
July 26, 2017, the Company utilized ZAR 1.25 billion (approximately $92.2 million) of its South African long-term facility to
partially fund the acquisition of 15% of Cell C. On March 9, 2018, the Company utilized ZAR 84.0 million (approximately $7.1
million) of its new ZAR 210 million South African long-term facility to partially fund the acquisition of a further 4.0% in DNI
and the balance of the facility to extend a ZAR 126.0 million (approximately $10.6 million) loan to DNI (refer to Note 3).
Principal repayments of the facilities were due in twelve quarterly installments commencing on September 29, 2017 and the
Company made repayments of ZAR 683.8 million ($46.9 million) and ZAR 776.3 million ($60.5 million) during the years ended
June 30, 2019 and 2018, respectively. A principal repayment of ZAR 151.3 million ($10.7 million, translated at exchange rates
applicable as of June 30, 2019) was scheduled to be paid on June 29, 2019, however the Company settled the outstanding amount
of ZAR 230.0 million ($16.0 million) in full on May 3, 2019, utilizing a combination of existing cash reserves and through the
sale of DNI shares as discussed in Note 3.
The loans were secured by a pledge by Net1 SA of, among other things, its entire equity interests in Cell C and DNI. 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, without the Lenders consent.
F-52
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
12. BORROWINGS (continued)
South Africa (continued)
July 2017 Facilities, as amended, comprising a short-term facility and long-term borrowings (continued)
Long-term borrowings – Facilities A, B, C and D (continued)
On September 4, 2019, Net1 SA further amended the July 2017 Facilities agreement, which included adding Main Street
1692 (RF) Proprietary Limited (“Debt Guarantor”), a South African company incorporated for the sole purpose of holding
collateral for the benefit of the Lenders and acting as debt guarantor. The covenants were also amended and now include
customary covenants that require Net1 SA to maintain a specified total asset cover 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. Net1 also agreed that in the event of any sale of KSNET, Inc., it would deposit a portion of the proceeds
in an amount of the USD equivalent of the Facility F loan and the Nedbank general banking facility commitment into a bank
account secured in favor of the Debt Guarantor. Net1 SA also entered into a pledge and cession agreement with the Debt
Guarantor pursuant to which, among other things, Net1 SA agreed to cede its shareholdings in Cell C, DNI and Net1 FIHRST
Holdings (Pty) Ltd to the Debt Guarantor.
Short-term facility - Facility E
On September 26, 2018, Net1 SA further amended its amended July 2017 Facilities agreement with RMB to include an
overdraft facility (“Facility E”) of up to ZAR 1.5 billion ($106.5 million, translated at exchange rates applicable as of June 30,
2019) to fund the Company’s ATMs. The available Facility E overdraft facility was subsequently reduced to ZAR 1.2 billion
($85.2 million) in September 2019. Interest on the overdraft facility is payable on the last day of each month and on the final
maturity date based on South African prime rate. The overdraft facility will be reviewed in September 2020. The overdraft facility
amount utilized must be repaid in full within one month of utilization and at least 90% of the amount utilized must be repaid with
25 days. The overdraft facility is secured by a pledge by Net1 SA of, among other things, cash and certain bank accounts utilized
in the Company’s ATM funding process, the cession of an insurance policy with Senate Transit Underwriters Managers
Proprietary Limited, and any rights and claims Net1 SA has against Grindrod Bank Limited. The Company paid a non-refundable
origination fee of approximately ZAR 3.8 million ($0.3 million) in October 2018. As at June 30, 2019, the Company had utilized
approximately ZAR 1.0 billion ($69.6 million) of this overdraft facility. This ZAR 1.2 billion overdraft facility may only be used
to fund ATMs and therefore the overdraft utilized and converted to cash to fund the Company’s ATMs is considered restricted
cash. The prime rate on June 30, 2019, was 10.25%, and reduced to 10.00% on July 19, 2019, following a reduction in the South
African repo rate.
Short-term facility - Facility F
On September 4, 2019, Net1 SA further amended its amended July 2017 Facilities agreement with RMB to include an
overdraft facility (“Facility F”) of up to ZAR 300.0 million ($21.3 million, translated at exchange rates applicable as of June 30,
2019) for the sole purposes of funding the acquisition of airtime from Cell C. Net1 SA may not dispose of the airtime acquired
from Cell C prior to April 1, 2020, without the prior consent of RMB, Absa Bank Limited and Investec Asset Management
Proprietary Limited. Facility F comprises (i) a first Senior Facility F loan of ZAR 220 million (ii) a second Senior Facility F loan
of ZAR 80 million, or such lesser amount as may be agreed by the facility agent. Facility F is required to be repaid in full nine
month following the first utilization of the facility. Net1 SA is required to prepay Facility F subject to customary prepayment
terms. Interest on Facility F is payable quarterly in arrears based JIBAR plus a margin of 5.50% per annum. The margin on the
Facility F will increase by 1% per annum if Net1 SA has not disposed of certain assets by October 31, 2019, and will increase by
a further 1% if Net1 SA has not disposed of its shareholding in DNI by January 31, 2020. Net1 SA paid a non-refundable
structuring fee of ZAR 2.2 million to the Lenders in September 2019.
F-53
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
12. BORROWINGS (continued)
South Africa (continued)
June 2018 Facility, a long-term borrowing (a DNI facility)
On June 28, 2018, DNI entered into a Revolving Credit Facility Agreement (“DNI Credit Facility Agreement”) with RMB
and K2018318388 (South Africa) (RF) Proprietary Limited (“Debt Guarantor”), a South African company incorporated for the
sole purpose of holding collateral for the benefit of RMB and acting as debt guarantor. DNI, RMB and the Debt Guarantor
concurrently entered into a Subordination Agreement; Shareholder Guarantee, Cession and Pledge Agreement; Guarantee Cession
and Pledge Agreement (collectively with the DNI Credit Facility Agreement, the “Revolving Credit Agreement Documents”),
with various other parties, including DNI’s subsidiaries and DNI’s shareholders (except Net1 SA), pursuant to which, among
other things, DNI obtained a ZAR 200.0 million revolving credit facility with a term of three years to June 2021 from RMB to
finance the acquisition and/ or requisition of telecommunication towers. The facility has been deconsolidated from the Company’s
consolidated balance sheet following the disposal of DNI on March 31, 2019, as described in Note 3.
Interest on the revolving credit facility is payable quarterly based on JIBAR in effect from time to time plus a margin of
2.75%. Interest expense incurred by the Company during the year ended June 30, 2019, was $0.6 million. DNI paid a non-
refundable deal origination fee of approximately ZAR 2.3 million ($0.2 million) in July 2018. DNI’s shareholders, excluding
Net1 SA, have agreed to pledge their entire equity interest in DNI to RMB, guarantee the obligations of DNI to RMB and
subordinate any claims they may have against DNI and certain of its subsidiaries to RMB’s claims against such persons. DNI has
agreed to ensure that Net1 SA will become bound by the terms and conditions applicable to the other DNI shareholders party to
the Shareholder Guarantee, Cession and Pledge Agreement once the DNI shares pledged as security for the July 2017 facilities
are released. The revolving credit facility is also secured by a pledge by DNI of, among other things, its entire equity interests in
its subsidiaries and it has also agreed to arrange for the registration of notarial bonds over its movable property. The Loan
Documents contain customary covenants that require DNI to maintain specified net senior debt to EBITDA and EBITDA to net
senior interest ratios and restrict the ability of DNI, 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, without the approval of RMB.
Nedbank facility, comprising short-term facilities
As of June 30, 2019, the aggregate amount of the Company’s short-term South African credit facility with Nedbank Limited
was ZAR 450.0 million ($32.0 million). The credit facility comprises an overdraft facility of (i) up to ZAR 300 million ($21.3
million), which is further split into (a) a ZAR 250.0 million ($17.8 million) overdraft facility which may only be used to fund
ATMs used at pay points and (b) a ZAR 50 million ($3.6 million) general banking facility and (ii) indirect and derivative facilities
of up to ZAR 150 million ($10.7 million), which include letters of guarantees, letters of credit and forward exchange contracts.
The ZAR 250.0 million component of the primary amount may only be used to fund ATMs and therefore this component of the
primary amount utilized and converted to cash to fund the Company’s ATMs is considered restricted cash.
The Company has ceded its investment in Cash Paymaster Services Proprietary Limited (“CPS”), a South African subsidiary,
as well as all of its rights, title and interest in an insurance policy issued by Fidelity Risk Proprietary Limited as security for its
repayment obligations under the facility. A commitment fee of 0.35% per annum is payable on the monthly unutilized amount of
the overdraft portion of the short-term facility. The Company is required to comply with customary non-financial covenants,
including, without limitation, covenants that restrict its ability to dispose of or encumber its assets, incur additional indebtedness
or engage in certain business combinations. The short-term facility provides Nedbank with the right to set off funds held in certain
identified Company bank accounts with Nedbank against any amounts owed to Nedbank under the facility. As of June 30, 2019,
the Company had total funds of $2.7 million in bank accounts with Nedbank which have been set off against $8.6 million drawn
under the Nedbank facility, for a net amount drawn under the facility of $5.9 million. As of June 30, 2019, the interest rate on the
overdraft facility was 9.10%, and reduced to 8.85% on July 19, 2019, following a reduction in the South African repo rate.
As of June 30, 2019, the Company has utilized approximately ZAR 82.8 million ($5.9 million) of its ZAR 250 million
overdraft facility to fund ATMs and utilized none of its ZAR 50 million general banking facility. As of June 30, 2019 and 2018,
the Company had utilized approximately ZAR 93.6 million ($6.6 million) and ZAR 108.0 million ($7.9 million), respectively, of
its indirect and derivative facilities of ZAR 150 million to enable the bank to issue guarantee, letters of credit and forward
exchange contracts, in order for the Company to honor its obligations to third parties requiring such guarantees (refer to Note 22).
F-54
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
12. BORROWINGS (continued)
South Africa (continued)
October 2016 long-term 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 with 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 ($1.1 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 2016 facilities obtained from RMB.
United States, a short-term facility
On September 14, 2018, the Company renewed its $10.0 million overdraft facility from Bank Frick and on February 4, 2019,
the Company increased the overdraft facility to $20.0 million. The interest rate on the facilities is 4.50% plus 3-month US dollar
LIBOR and interest is payable on a quarterly basis. The 3-month US dollar LIBOR rate was 2.31988% on June 30, 2019. The
facility has no fixed term, however, it may be terminated by either party with six weeks written notice. The facility is secured by a
pledge of the Company’s investment in Bank Frick. As of June 30, 2019, the Company had utilized approximately $9.5 million of
this facility.
South Korea
Short-term facility
The Company obtained a one year KRW 10 billion ($8.6 million) short-term overdraft facility from Hana Bank, a South
Korean bank, in January 2019. The interest rate on the facilities is 1.984% plus 3-month CD rate. The CD rate as of June 30,
2019, was 1.780%. The facility expires in January 2020, however it can be renewed. The facility is unsecured with no fixed
repayment terms. As of June 30, 2019, the Company had not utilized this facility.
Long-term borrowings
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. On October
20, 2017, the Company made an unscheduled repayment of $16.6 million and settled the full outstanding balance, including
interest, related to these borrowings and the Company was released from its security obligations created under the Facilities
Agreement. The Company made a scheduled repayment of its Facility A loan of KRW 10 billion ($8.8 million), unscheduled
voluntary principal repayments towards its Facility A loan of KRW 22.1 billion ($19.6 million) and a prepayment towards its
Facility C revolving credit facility of KRW 10.0 billion ($8.9 million) during the year ended June 30, 2017. The Company
utilized approximately KRW 0.3 billion ($0.3 million) and KRW 0.9 billion ($0.8 million), of its Facility C revolving credit
facility to pay interest due during the year ended June 30, 2018 and 2017, respectively.
Interest on the loans and revolving credit facility was payable quarterly and was 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. Total interest expense
related to the facilities during the years ended June 30, 2018 and 2017, was $0.4 million and $1.2 million, respectively. Prepaid
facility fees amortized during each of the years ended June 30, 2018 and 2017, was approximately $0.1 million, respectively.
F-55
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
12. BORROWINGS (continued)
Movement in short-term borrowings
Summarized below are the Company’s short-term facilities as of June 30, 2019, and the movement in the Company’s short-
term facilities from as of June 30, 2018 to as of June 30, 2019:
Short-term facilities as of June 30, 2019: ..........
Overdraft ......................................................
Overdraft restricted as to use for ATM
funding only .................................................
Indirect and derivative facilities ...................
Movement in utilized overdraft facilities: ..........
Balance as of June 30, 2018 .........................
Utilized ...................................................
Repaid .....................................................
Foreign currency adjustment(1) ...............
Balance as of June 30, 2019(2) ...........
Restricted as to use for
ATM funding only.......................
No restrictions as to use ...............
Movement in utilized indirect and
derivative facilities: ............................................
Balance as of June 30, 2018 .........................
Guarantees cancelled ..............................
Utilized ...................................................
Foreign currency adjustment(1) ...............
Balance as of June 30, 2019 ..............
South Africa
Amended
July 2017
$85,203
-
Nedbank
$31,951
3,550
85,203
-
17,751
10,650
-
722,375
(655,612)
2,803
69,566
69,566
-
-
-
-
-
$-
-
85,843
(80,365)
402
5,880
5,880
-
7,871
(1,075)
46
(199)
$6,643
United
States
Bank
Frick
$20,000
20,000
-
-
-
14,536
(4,992)
-
9,544
-
9,544
-
-
-
-
$-
South
Korea
Hana
Bank
$8,648
8,648
-
-
-
-
-
-
-
-
-
-
-
-
-
$-
Total
$145,802
32,198
102,954
10,650
-
822,754
(740,969)
3,205
84,990
75,446
9,544
7,871
(1,075)
46
(199)
$6,643
(1) Represents the effects of the fluctuations between the ZAR and the U.S. dollar.
(2) Nedbank as of June 30, 2019, of $5.9 million comprises the net of total overdraft facilities withdrawn of $8.6 million
offset against funds in bank accounts with Nedbank of $2.7 million.
F-56
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
12. BORROWINGS (continued)
Movement in long-term borrowings
Summarized below is the movement in the Company’s long term borrowing from as of June 30, 2017, to as of June 30,
2019:
South Korea
South Africa
Continuing
Discontinued
Net1 Korea
Amended
July 2017
June
2018
Facility
Other
(Note 3)
$-
Balance as of July 1, 2017, allocated to .......
Current portion of long-term borrowings ..
-
-
Long-term borrowings ...............................
-
Utilized ...................................................
-
Repaid .....................................................
616
DNI acquisition (Note 3) ........................
Foreign currency adjustment(1)................
-
616
Balance as of June 30, 2018, allocated to .....
616
Current portion of long-term borrowings ..
-
Long-term borrowings ...............................
-
Utilized ...................................................
(569)
Repaid .....................................................
-
Repaid from sale of DNI shares (Note 3)
-
Deconsolidated (Note 3) .........................
Foreign currency adjustment(1)................
(47)
Balance as of June 30, 2019 .........................
$-
(1) Represents the effects of the fluctuations between the ZAR and the Korean won, against the U.S. dollar.
$-
-
-
112,960
(60,470)
-
(2,942)
49,548
44,079
5,469
-
(31,844)
(15,011)
-
(2,693)
$-
$16,239
8,738
7,501
197
(16,592)
-
156
-
-
-
-
-
-
-
-
$-
$-
-
-
-
-
-
-
-
-
-
14,613
(4,944)
-
(10,435)
766
$-
Total
$16,239
8,738
7,501
113,157
(77,062)
616
(2,786)
50,164
44,695
5,469
14,613
(37,357)
(15,011)
(10,435)
(1,974)
$-
13. OTHER PAYABLES
Summarized below is the breakdown of other payables as of June 30, 2019 and 2018:
Accrual of implementation costs to be refunded to SASSA .....
Accruals ....................................................................................
Provisions .................................................................................
Other .........................................................................................
Value-added tax payable ...........................................................
Payroll-related payables ............................................................
Participating merchants settlement obligation ..........................
2019
2018
$34,039
10,620
6,074
10,814
3,234
1,113
555
$66,449
$-
16,148
8,211
9,690
5,478
1,533
585
$41,645
Other includes transactions-switching funds payable, deferred income, client deposits and other payables.
Accrual of implementation costs to be refunded to SASSA
As the Company previously disclosed, in June 2014, the Company received approximately ZAR 317.0 million, including
VAT, from SASSA, related to the recovery of additional implementation costs its subsidiary, CPS, incurred during the beneficiary
re-registration process in fiscal 2012 and 2013.
F-57
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
13. OTHER PAYABLES (continued)
Accrual of implementation costs to be refunded to SASSA (continued)
After the award of the tender, SASSA requested that CPS biometrically register all social grant beneficiaries (including child
grant beneficiaries) and collect additional information for each child grant recipient. CPS agreed to SASSA’s request and, as a
result, it performed approximately 11 million additional registrations beyond those that CPS tendered for in the quoted service
fee. Accordingly, CPS sought reimbursement from SASSA of the cost of this exercise, supported by a factual findings certificate
from an independent auditing firm. SASSA paid CPS ZAR 317.0 million, including VAT, as full settlement of the additional
costs CPS incurred.
In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced legal proceedings in
the Gauteng Division, Pretoria of the High Court of South Africa (“High Court”) seeking an order by the High Court to review
and set aside the decision of SASSA’s Chief Executive Officer to approve a payment to CPS of ZAR 317.0 million and directing
CPS to repay the aforesaid amount, plus interest. Corruption Watch claimed that there was no lawful basis to make the payment to
CPS, and that the decision was unreasonable and irrational and did not comply with South African legislation. CPS was named as
a respondent in this legal proceeding.
On February 22, 2018, the matter was heard by the High Court. On March 23, 2018, the High Court ordered that the June
15, 2012 variation agreement between SASSA and CPS be reviewed and set aside. CPS was ordered to refund ZAR 317.0 million
to SASSA, plus interest from June 2014 to date of payment. On April 4, 2018, CPS filed an application seeking leave to appeal
the whole order and judgment of the High Court with the High Court because it believed that the High Court erred in its
application of the law and/or in fact in its findings. On April 25, 2018, the High Court refused the application seeking leave to
appeal. In September 2018, CPS received notification from the Supreme Court that its petition seeking leave to appeal had been
granted. The matter was heard on September 10, 2019.
On September 30, 2019, the Supreme Court delivered its ruling in the matter, declining CPS’ appeal and awarding costs
against CPS. CPS is liable to repay SASSA ZAR 317.0 million, plus interest from June 2014 to date of payment. As a result, CPS
recorded the liability at June 30, 2019, of $34.0 million (ZAR 479.4 million, translated at exchange rates applicable as of June 30,
2019, comprising a revenue refund of $19.7 million (ZAR 277.6 million), accrued interest of $11.4 million (ZAR 161.0 million),
unclaimed indirect taxes of $2.8 million (ZAR 39.4 million) and estimated costs of $0.1 million (ZAR 1.4 million)). The
Company has reduced revenue by $19.7 million during the year ended June 30, 2019, because it has interpreted the Supreme
Court ruling as a price variation and not a nonreciprocal transaction.
F-58
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
14. 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 17 “— Amended and Restated Stock Incentive Plan—Restricted Stock—General Terms of Awards”.
The following table presents a 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, 2019, 2018 and 2017:
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 17) ................................................................................
Number of shares, net of treasury excluding non-vested
equity shares that have not vested ............................................
56,568,425
56,685,925
56,369,737
583,908
765,411
505,473
55,984,517
55,920,514
55,864,264
2019
2018
2017
Redeemable common stock issued pursuant to transaction with the IFC Investors
Holders of redeemable common stock have all the rights 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-59
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
14. COMMON STOCK (continued)
Redeemable common stock issued pursuant to transaction with the IFC Investors (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.
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 to 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.
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.
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.
F-60
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
14. 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.
In June 2016, the Company adopted a 10b-5 in connection with its $100 million authorization. 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.
Other repurchases
The Company did not repurchase any of its shares during the years ended June 30, 2019 and 2018, respectively, outside of
the authorization. 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”). 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 under the Separation Agreement.
15. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The table below presents the change in accumulated other comprehensive (loss) income per component during the years
ended June 30, 2019, 2018 and 2017:
Balance as of July 1, 2016 .........................................................................................
Movement in foreign currency translation reserve related to equity accounted
investment ............................................................................................................
Movement in foreign currency translation reserve ...............................................
Balance as of June 30, 2017 .......................................................................................
Movement in foreign currency translation reserve related to equity accounted
investment ............................................................................................................
Movement in foreign currency translation reserve ...............................................
Balance as of June 30, 2018 .......................................................................................
Release of foreign currency translation reserve related to DNI disposal (Note 3)
Release of foreign currency translation reserve related to disposal of DNI
interest as an equity method investment (Note 3) ...............................................
Movement in foreign currency translation reserve related to equity accounted
investment ............................................................................................................
Movement in foreign currency translation reserve ...............................................
Balance as of June 30, 2019 .......................................................................................
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1.
Accumulated
Foreign
currency
translation
reserve
(as restatedA)
$(189,692)
(2,697)
29,653
(162,736)
(2,426)
(19,376)
(184,538)
1,806
Total
(as restatedA)
$(189,692)
(2,697)
29,653
(162,736)
(2,426)
(19,376)
(184,538)
1,806
646
646
4,251
(21,438)
$(199,273)
4,251
(21,438)
$(199,273)
F-61
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (continued)
During the year ended June 30, 2019, the Company reclassified $1.8 million from accumulated other comprehensive loss
(accumulated foreign currency translation reserve) to net (loss) income related to the DNI disposal (refer to Note 3) and
reclassified $0.6 million from accumulated other comprehensive loss (accumulated foreign currency translation reserve) to net
(loss) income related to the disposal of the DNI interest as an equity method investment (refer to Note 3).There were no
reclassifications from accumulated other comprehensive loss to comprehensive (loss) income during the year ended June 30, 2018
and 2017, respectively.
16. REVENUE
The Company is a leading provider of transaction processing services, financial inclusion products and services and secure
payment technology. The Company operates market-leading payment processors in South Africa and internationally. The
Company offers debit, credit and prepaid processing and issuing services for all major payment networks. In South Africa, The
Company provides innovative low-cost financial inclusion products, including banking, lending and insurance, and, through DNI,
was a leading distributor of mobile subscriber starter packs for Cell C, a South African mobile network operator.
The following table represents our revenue disaggregated by major revenue streams, including reconciliation to operating
segments for the year ended June 30, 2019:
South
Africa
Korea
$79,379
3,086
6,583
89,048
$-
-
-
-
-
-
-
132,731
5,695
138,426
58,209
17,428
27,512
20,706
5,862
13,666
143,383
(19,709)
$212,722
-
-
-
-
-
-
-
Rest of
the
world
$-
-
-
-
9,303
539
9,842
-
-
-
-
-
-
-
$138,426
$9,842
Total
$79,379
3,086
6,583
89,048
142,034
6,234
148,268
58,209
17,428
27,512
20,706
5,862
13,666
143,383
(19,709)
$360,990
South African transaction processing ................
Processing fees .............................................
Welfare benefit distribution fees ..................
Other .............................................................
Sub-total .................................................
International transaction processing ...................
Processing fees .............................................
Other .............................................................
Sub-total .................................................
Financial inclusion and applied technologies ....
Telecom products and services .....................
Account holder fees ......................................
Lending revenue ......................................
Technology products ....................................
Insurance revenue .........................................
Other .............................................................
Sub-total .................................................
Corporate/Eliminations – revenue refund (Note 13)
17.
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.
F-62
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
17.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
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.
Valuation Assumptions
The table below presents the range of assumptions used to value options granted during the year ended June 30, 2019:
Expected volatility ................................................
Expected dividends ...............................................
Expected life (in years) ........................................
Risk-free rate .........................................................
2019
44%
0%
3
2.75%
No stock options were awarded during the years ended June 30, 2018 and 2017, respectively.
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 19) 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.
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 restricted stock that are not then vested and nonforfeitable will be
immediately forfeited and transferred to the Company for no consideration. Forfeited shares of restricted stock are available for
future issuances by the Remuneration Committee.
F-63
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
17.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
General Terms of Awards (continued)
The Company issues new shares to satisfy restricted stock awards.
Valuation Assumptions
The fair value of restricted stock is generally based on the closing price of the Company’s stock quoted on The Nasdaq
Global Select Market on the date of grant.
Vesting of all non-employee director shares issued prior to June 30, 2017
Grants of restricted stock to non-employee directors made during fiscal 2017, as well as those grants made in prior years,
originally vested over a three-year period. After the end of fiscal 2017, the Company’s board consulted with Pay Governance, an
independent compensation consultant, and determined that one-year vesting of restricted stock grants is a more common
compensation practice for independent directors and therefore, amended the terms of outstanding awards to vest one-year after
grant. As a result of this amendment, 56,250 shares of restricted stock held by the non-employee directors as of June 30, 2017,
were fully-vested during the year ended June 30, 2018.
Forfeiture of restricted stock awarded in August and November 2014 that did not achieve targeted market conditions
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 were scheduled to vest in full only on the date, if any, the
following conditions were 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 filed its Annual Report on Form 10-K for the fiscal year ended 2017 and
ending on December 31, 2017 and (2) the recipient was employed by the Company on a full-time basis when the condition in (1)
was met. The $19.41 price target represented 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. These shares of restricted stock were forfeited during the year ended
June 30, 2018, because the target market conditions were not achieved. The stock-based compensation charge related to these
awards was not reversed upon forfeiture because these awards contained market conditions.
The 127,626 and 71,530 shares of restricted stock were 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.
F-64
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
17.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
Forfeiture of restricted stock with Performance Conditions awarded 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 were subject to time-based and performance-based vesting
conditions. In order for any of the shares to have vested, the recipient had to remain employed by the Company on a full-time
basis on the date that it filed its Annual Report on Form 10-K for the fiscal year ended June 30, 2018. If that condition was
satisfied, then the shares would vest based on the level of Fundamental EPS the Company achieved 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.
At levels of 2018 Fundamental EPS greater than $2.88 and less than $3.76, the number of shares that would have vested
would be determined by linear interpolation relative to 2018 Fundamental EPS of $3.30. 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.
Any shares that did not vest in accordance with the above-described conditions would be forfeited. During the year ended
June 30, 2017, the Company reversed the stock-based compensation charge recognized to date related to the 301,537 shares of
restricted stock because it believed that it was unlikely that the 2018 Fundamental EPS target would be achieved due to the
dilutive impact on the fundamental EPS calculation as a result of the issuance of approximately 10 million shares to the IFC in
May 2016. The Company has not achieved the 2018 Fundamental EPS target and the 173,262 remaining shares that had not been
forfeited as a result of terminations were forfeited during the year ended June 30, 2018.
Forfeiture of 150,000 shares of restricted stock with Performance Conditions awarded in August 2016
In August 2016, the Remuneration Committee approved an award of 350,000 shares of restricted stock to executive officers.
In May 2017, the Company determined to accelerate the vesting of all (200,000) of the shares of restricted stock awarded to its
former CEO. The shares of restricted stock awarded to executive officers in August 2016 were subject to time-based and
performance-based vesting conditions. In order for any of the shares to vest, the recipient was required to 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. 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.
Any shares that did not vest in accordance with the above-described conditions would be forfeited. During the year ended
June 30, 2019, the Company reversed the stock-based compensation charge recognized related to 150,000 shares of restricted
stock because the Company did not achieve the 2019 Fundamental EPS target. The 150,000 shares of restricted stock were
forfeited.
F-65
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
17.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
Market Conditions - Restricted Stock Granted in August 2017
In August 2017, the Remuneration Committee approved an award of 210,000 shares of restricted stock to executive officers.
The shares of restricted stock awarded to executive officers in August 2017 are subject to a time-based vesting condition and a
market condition and vest in full only on the date, if any, that the following conditions are satisfied: (1) the price of the
Company’s common stock must equal or exceed certain agreed VWAP levels (as described below) during a measurement period
commencing on the date that it files its Annual Report on Form 10-K for the fiscal year ended 2020 and ending on December 31,
2020 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these
conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited. The $23.00 price target
represents an approximate 35% increase, compounded annually, in the price of the Company’s common stock on Nasdaq over the
$9.38 closing price on August 23, 2017. The VWAP levels and vesting percentages related to such levels are as follows:
• Below $15.00 (threshold)—0%
• At or above $15.00 and below $19.00—33%
• At or above $19.00 and below $23.00—66%
• At or above $23.00—100%
These 210,000 shares of restricted stock are effectively forward starting knock-in barrier options with multi-strike prices of
zero. The fair value of these shares of restricted stock was calculated utilizing a Monte Carlo simulation model which was
developed for the purpose of the valuation of these shares. For each simulated share price path, the market share price condition
was evaluated to determine whether or not the shares would vest under that simulation. A standard Geometric Brownian motion
process was used in the forecasting of the share price instead of a “jump diffusion” model, as the share price volatility was more
stable compared to the highly volatile regime of previous years. Therefore, the simulated share price paths capture the
idiosyncrasies of the observed Company share price movements.
In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the
final vested value on maturity is the share price on vesting date. The value of the grant is the average of the discounted vested
values. The Company used an expected volatility of 44.0%, an expected life of approximately three years, a risk-free rate ranging
between 1.275% to 1.657% and no future dividends in its calculation of the fair value of the restricted stock. The estimated
expected volatility was calculated based on the Company’s 30 day VWAP share price using the exponentially weighted moving
average of returns.
Market Conditions - Restricted Stock Granted in September 2018
In September 2018, the Remuneration Committee approved an award of 148,000 shares of restricted stock to executive
officers. The 148,000 shares of restricted stock awarded to executive officers in September 2018 are subject to a time-based
vesting condition and a market condition and vest in full only on the date, if any, that the following conditions are satisfied: (1)
the price of the Company’s common stock must equal or exceed certain agreed VWAP levels (as described below) during a
measurement period commencing on the date that it files its Annual Report on Form 10-K for the fiscal year ended 2021 and
ending on December 31, 2021 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is
met. If either of these conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited.
The $23.00 price target represents an approximate 55% increase, compounded annually, in the price of the Company’s common
stock on Nasdaq over the $6.20 closing price on September 7, 2018. The VWAP levels and vesting percentages related to such
levels are as follows:
• Below $15.00 (threshold)—0%
• At or above $15.00 and below $19.00—33%
• At or above $19.00 and below $23.00—66%
• At or above $23.00—100%
F-66
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
17.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
Market Conditions - Restricted Stock Granted in September 2018 (continued)
The fair value of these shares of restricted stock was calculated using a Monte Carlo simulation of a stochastic volatility
process. The choice of a stochastic volatility process as an extension to the standard Black Scholes process was driven by both
observations of larger than expected moves in the daily time series for the Company’s VWAP price, but also the observation of
the strike structure of volatility (i.e. skew and smile) for out-of-the money calls and out-of-the money puts versus at-the-money
options for both the Company’s stock and NASDAQ futures.
In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the
final vested value on maturity is the share price on vesting date. In its calculation of the fair value of the restricted stock, the
Company used an average volatility of 37.4% for the VWAP price, a discounting based on USD overnight indexed swap rates for
the grant date, and no future dividends. The average volatility was extracted from the time series for VWAP prices as the standard
deviation of log prices for the three years preceding the grant date. The mean reversion of volatility and the volatility of volatility
parameters of the stochastic volatility process were extracted by regressing log differences against log levels of volatility from the
time series for at-the-money options 30 day volatility quotes, which were available from January 2, 2018 onwards.
Stock Appreciation Rights
The Remuneration Committee may also 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.
Stock option and restricted stock activity
Options
The following table summarizes stock option activity for the years ended June 30, 2019, 2018 and 2017:
Outstanding – July 1, 2016................
Exercised..............................................
Expired unexercised .............................
Forfeitures ............................................
Outstanding – June 30, 2017 .............
Forfeitures ............................................
Outstanding – June 30, 2018 .............
Granted – September 2018...................
Expired unexercised .............................
Forfeitures ............................................
Outstanding – June 30, 2019 .............
Number of
shares
2,077,524
(321,026)
(474,443)
(435,448)
846,607
(37,333)
809,274
600,000
(370,000)
(174,695)
864,579
Weighted
Average
Remaining
Contractual
Term
(in years)
3.65
3.80
2.67
10.00
7.05
Weighted
average
exercise
price ($)
15.92
8.97
22.51
17.88
13.87
11.23
13.99
6.20
19.27
6.65
7.81
Aggregate
Intrinsic
Value
($’000)
926
3,607
-
-
486
-
370
1,212
-
-
-
Weighted
Average
Grant
Date Fair
Value ($)
4.15
2.58
3.98
5.34
4.21
4.55
4.20
2.02
5.00
2.00
2.62
These options have an exercise price range of $6.20 to $11.23.
F-67
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
17.
STOCK-BASED COMPENSATION (continued)
Stock option and restricted stock activity (continued)
Options (continued)
The following table presents stock options vested and expected to vest as of June 30, 2019:
Vested and expected to vest – June 30, 2019 ..........
Weighted
average
exercise
price
($)
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
($’000)
7.81
7.05
-
Number of
shares
864,579
These options have an exercise price range of $6.20 to $11.23.
The following table presents stock options that are exercisable as of June 30, 2019:
Number of
shares
Weighted
average
exercise
price ($)
Exercisable – June 30, 2019 .................
353,579
10.15
Weighted
Average
Remaining
Contractual
Term
(in years)
3.84
Aggregate
Intrinsic
Value
($’000)
-
No stock options became exercisable during the year ended June 30, 2019. During the year ended June 30, 2018 and 2017,
105,982 and 154,803 stock options became exercisable, respectively. No stock options were exercised during the year ended June
30, 2019 and 2018, respectively. During the year ended June 30, 2017, the Company received approximately $2.9 million from
the exercise of 321,026 stock options. During the year ended June 30, 2019, 2018 and 2017, employees forfeited 174,695, 37,333
and 435,448 stock options, respectively. During the year ended June 30, 2019, 200,000 stock options awarded in August 2008 and
170,000 stock options awarded in May 2009 expired unexercised. During the year ended June 30, 2017, 474,443 stock options
awarded in August 2006 expired unexercised. The Company issues new shares to satisfy stock option exercises.
F-68
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
17.
STOCK-BASED COMPENSATION (continued)
Stock option and restricted stock activity (continued)
Restricted stock
The following table summarizes restricted stock activity for the years ended June 30, 2019, 2018 and 2017:
Number of
Shares of
Restricted
Stock
Weighted
Average Grant
Date Fair Value
($’000)
Non-vested – July 1, 2016...........................................................................
Total granted ......................................................................................................
Granted – August 2016 ...................................................................................
Granted – May 2017 .......................................................................................
Total vested ........................................................................................................
Vested – August 2016 .....................................................................................
Vested – June 2017 .........................................................................................
Forfeitures ..........................................................................................................
Non-vested – June 30, 2017 ........................................................................
Total granted ......................................................................................................
Granted – August 2017 ...................................................................................
Granted – March 2018 ....................................................................................
Granted – May 2018 .......................................................................................
Vested – August 2017 ........................................................................................
Total forfeitures .................................................................................................
Forfeitures – employee terminations ...............................................................
Forfeitures – August and November 2014 awards with market conditions ....
Forfeitures – August 2015 awards with performance conditions ....................
Non-vested – June 30, 2018 ........................................................................
Granted – September 2018.................................................................................
Total vested ........................................................................................................
Vested – August 2018 .....................................................................................
Vested – March 2019 ......................................................................................
Total forfeitures .................................................................................................
Forfeitures – employee terminations ...............................................................
Forfeitures – August 2016 awards with performance conditions ....................
Non-vested – June 30, 2019 ........................................................................
589,447
389,587
387,000
2,587
(268,091)
(68,091)
(200,000)
(205,470)
505,473
618,411
588,594
22,817
7,000
(56,250)
(302,223)
(33,635)
(95,326)
(173,262)
765,411
148,000
(64,003)
(52,594)
(11,409)
(265,500)
(115,500)
(150,000)
583,908
7,622
4,172
4,145
27
2,590
694
1,896
2,219
11,173
4,581
4,288
234
59
527
3,222
516
1,133
1,573
6,162
114
503
459
44
1,060
460
600
3,410
The September 2018 grants comprise 148,000 shares of restricted stock awarded to executive officers that are subject to
market and time-based vesting.
The August 2017 grants comprise (i) 326,000 shares of restricted stock awarded to executive officers and employees that are
subject to time-based vesting, (ii) 210,000 shares of restricted stock awarded to executive officers that are subject to market and
time-based vesting as described above, and (iii) 52,594 shares of restricted stock awarded to non-employee directors. The March
2018 grant relates to an award made to the Company’s new Chief Financial Officer. The May 2018 grant comprises 7,000 shares
of restricted stock awarded to employees on the same terms as the 326,000 awards made. The 326,000 and 7,000 shares of
restricted stock will only vest if the recipient is employed by the Company on a full-time basis on August 23, 2020. The 52,594
shares of restricted stock awarded to non-employee directors only vested if the recipient was a director on August 23, 2018. The
22,817 shares of restricted stock vest in two tranches, 11,409 vested on March 1, 2019, and 11,408 will vest on March 1, 2020,
subject to the Chief Financial Officer’s continued employment.
The August 2016 grants comprise (i) 350,000 shares of restricted stock awarded to executive officers that are subject to
performance and time-based vesting as described above and (ii) 37,000 shares of restricted stock awarded to non-employee
directors.
F-69
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
17.
STOCK-BASED COMPENSATION (continued)
Stock option and restricted stock activity (continued)
Restricted stock (continued)
The fair value of restricted stock vested during the years ended June 30, 2019, 2018 and 2017, was $0.5 million, $0.5 million
and $2.6 million, respectively. During the year ended June 30, 2019, 52,594 shares of restricted stock held by the non-employee
directors and 11,409 shares of restricted stock held by the Company’s Chief Financial Officer vested. During the year ended June
30, 2018, the Company determined that 56,250 shares of restricted stock held by the non-employee directors as of June 30, 2017,
were fully-vested. During the year ended June 30, 2017, 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 2016 pursuant to the Separation Agreement
signed in May 2017.
During the year ended June 30, 2019, employees forfeited 115,500 shares of restricted stock upon termination which had
either time-based or market conditions. In addition, an executive officer forfeited 150,000 shares of restricted stock as the
performance conditions were not achieved. During the year ended June 30, 2018, employees forfeited (i) 3,000 shares of
restricted stock upon termination which did not have performance or market conditions attached and (ii) 30,635 shares of
restricted stock upon termination which had either market or performance conditions. In addition, executive officers and
employees forfeited 95,326 shares of restricted stock as the market conditions were not achieved and forfeited 173,262 shares of
restricted stock as the performance conditions were not achieved. During the year ended June 30, 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.
Stock-based compensation charge and unrecognized compensation cost
The Company has recorded a net stock compensation charge of $0.4 million, $2.6 million and $2.0 million for the years
ended June 30, 2019, 2018 and 2017, 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, 2019
Stock-based compensation charge ................................................
Reversal of stock compensation charge related to stock options
and restricted stock forfeited .........................................................
Total – year ended June 30, 2019 ...............................................
Year ended June 30, 2018
Stock-based compensation charge ................................................
Reversal of stock compensation charge related to restricted stock
forfeited
Total – year ended June 30, 2018 ...............................................
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 ...............................................
$2,319
(1,926)
$393
$2,656
(49)
$2,607
$3,905
(1,923)
$1,982
$-
-
$-
$-
-
$-
$-
-
$-
$2,319
(1,926)
$393
$2,656
(49)
$2,607
$3,905
(1,923)
$1,982
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 relevant employees.
F-70
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
17.
STOCK-BASED COMPENSATION (continued)
Stock-based compensation charge and unrecognized compensation cost (continued)
As of June 30, 2019, the total unrecognized compensation cost related to stock options was approximately $0.8 million,
which the Company expects to recognize over approximately three years. As of June 30, 2019, the total unrecognized
compensation cost related to restricted stock awards was approximately $1.4 million, which the Company expects to recognize
over approximately two years.
Tax consequences
The Company has recorded a deferred tax asset of approximately $0.2 million and $0.8 million, respectively, for the years
ended June 30, 2019 and 2018. As of June 30, 2019 and 2018, the Company has a valuation allowance of approximately $0.2
million and $0.8 million, respectively, related to the deferred tax asset because it does not believe that the stock-based
compensation deduction would be utilized as it does not anticipate generating sufficient taxable income in the United States. The
Company deducts the difference between the market value on date of exercise by the option recipient and the exercise price from
income subject to taxation in the United States.
18.
INCOME TAXES
Impact of Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”), was enacted into law, significantly modifying U.S. federal
tax laws. The TCJA reduced the federal statutory tax rate for corporations from 35% to 21% effective from January 1, 2018,
eliminates alternative minimum tax for corporations, limits net operating loss carryforwards (and eliminates carrybacks), repeals
indirect foreign tax credits carry-forward rules, limits the deductibility of interest expense and transitions the system of U.S.
international taxation of corporations from a worldwide tax system to a territorial tax system.
During the year ended June 30, 2019, the Company was not significantly impacted by the transition to a territorial tax
system and it does not expect a significant impact on its future consolidated effective tax rate as it generates the majority of its
taxable income in tax jurisdictions with tax rates that are higher than the new federal statutory tax rate of 21% (mainly South
Africa, where its income is taxed at 28%, and Korea, where its income is taxed at 22%).
Deemed repatriation of foreign earnings liability
The TCJA also requires a U.S. shareholder of a specified foreign corporation to include a deemed repatriation of foreign
earnings (“Transition Tax”) as part of the transition to a territorial tax system. However, the Company did not incur a net
Transition Tax liability because it generated sufficient foreign tax credits to offset any potential repatriation transition tax liability.
The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of the
Company’s foreign subsidiaries. In order to determine the amount of any Transition Tax liability, the Company was required to
determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-
U.S. income taxes paid on such earnings. During the year ended June 30, 2018, the Company made a reasonable estimate of its
Transition Tax liability as of June 30, 2018, and recorded a provisional Transition Tax, before the application of any foreign tax
credits, of $55.8 million, and had no liability after the application of generated foreign tax credits. In fact, the Company generated
excess foreign tax credits. During the year ended June 30, 2019, the Company finalized its Transition Tax liability as of June 30,
2018, and incurred a Transition Tax, before the application of any foreign tax credits, of $56.9 million, and has no liability after
the application of generated foreign tax credits.
Global intangible low taxed income
The TCJA creates a new requirement that certain income earned by controlled foreign corporations (“CFCs”) must be
included in the gross income of the CFCs’ U.S. shareholder. Global intangible low taxed income (“GILTI”) is the excess of the
shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1)
10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with
respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of
net CFC-tested income.
F-71
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
INCOME TAXES (continued)
Impact of Tax Cuts and Jobs Act (continued)
Global intangible low taxed income (continued)
It is the Company’s current interpretation of the U.S. tax legislation that GILTI is only applicable for the tax year
commencing July 1, 2018 (i.e. its June 2019 tax year). The Company has not incurred a GILTI tax during the year ended June 30,
2019, because it primarily operates in tax jurisdictions (such as South Africa and South Korea) which have higher corporate
income tax rates than the United States and certain of its South Africa subsidiaries have incurred operating losses.
Income tax provision
The table below presents the components of income before income taxes for the years ended June 30, 2019, 2018 and 2017:
South Africa ...................................................................
United States ..................................................................
Other ..............................................................................
(Loss) Income before income taxes ............................
$(267,637)
(23,479)
(11,910)
$(303,026)
$131,366
(15,329)
(15,671)
$100,366
$129,786
(20,902)
5,572
$114,456
2019
2018
2017
Presented below is the provision for income taxes by location of the taxing jurisdiction for the years ended June 30, 2019,
2018 and 2017:
Current income tax
South Africa ................................................................
Continuing ................................................................
Discontinued ............................................................
United States ...............................................................
Other ...........................................................................
Deferred taxation (benefit) charge .................................
South Africa ................................................................
Continuing ................................................................
Discontinued ............................................................
United States ...............................................................
Other ...........................................................................
Foreign tax credits generated – United States ................
Change in tax rate – United States .................................
Income tax provision ...................................................
2019
$17,163
10,076
3,689
6,387
1,100
5,987
(12,494)
(11,117)
(7,854)
(3,263)
4
(1,381)
(944)
-
$3,725
2018
(As
restatedA)
$95,529
35,745
35,745
-
55,788
3,996
8,537
9,772
9,772
-
477
(1,712)
(55,778)
309
$48,597
2017
(As
restatedA)
$45,857
35,986
35,986
-
4,686
5,185
(6)
(439)
(439)
-
1,123
(690)
(3,345)
-
$42,506
(A) Deferred taxation (benefit) charge – South Africa for 2018 and 2017 have been restated to correct the misstatement
discussed in Note 1.
There were no changes to the enacted tax rate in the years ended June 30, 2019, 2018 and 2017. However, during the year
ended June 30, 2018, there were changes to the U.S. tax code which, among other things, changed the Federal tax rate. The
Company has a June year end and used a blended rate of 28.10% for its tax year ending June 30, 2018, in the U.S. Certain of the
Company’s deferred tax assets and liabilities which it expected would be utilized/ reversed during the period ended June 30, 2018,
were re-measured at the blended rate and those deferred taxes that the Company believed would only be utilized/ reversed in
subsequent tax years, were re-measured at 21%. The net impact of the change in the tax rate on the Company’s deferred taxes
included in income tax expense during the year ended June 30, 2018, was $0.3 million. The Company also provided an additional
valuation allowance of approximately $0.6 million during the year ended June 30, 2018, related to net operating loss
carryforwards that it believed would not be utilized as a result of the enactment of the TCJA.
F-72
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
INCOME TAXES (continued)
Income tax provision (continued)
The Company calculated its Transition Tax liability as of June 30, 2018, and incurred a Transition Tax, before the
application of any foreign tax credits, of $55.8 million, and has no liability after the application of generated foreign tax credits.
During the year ended June 30, 2019, the Company recorded the difference of $1.1 million between the Transition Tax liability of
$56.9 million and the provisional Transition Tax liability of $55.8 million in current income tax, United States. During the year
ended June 30, 2019, the Company also included the additional foreign tax credits utilized of $1.1 million against this Transition
Tax in foreign tax credits generated – United States. During the year ended June 30, 2018, the Company included a provisional
Transition Tax of $55.8 million in current income tax, United States. Foreign tax credits of $65.3 million were generated and
included in the computation of provisional Transition Tax of which $55.8 million were utilized against the Transition Tax in that
year. The foreign tax credits utilized are included in Foreign tax credits generated – United States for the year ended June 30,
2018.
During the year ended June 30, 2019, the Company incurred significant net operating losses through certain of it its South
African wholly-owned subsidiaries and recorded a deferred taxation benefit related to these losses. However, the Company has
created a valuation allowance for these net operating losses which reduced the deferred taxation benefit recorded. The movement
in the valuation allowance for the year ended June 30, 2018, is primarily attributable to the creation of the valuation allowance
related to excess tax credits recognized from the preliminary Transition Tax calculation and the creation of a valuation allowance
related to net operating losses generated during the year ended June 30, 2018, that the Company does not believe it will be able to
utilize in the foreseeable future. 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.
As discussed above, the Company has generated excess foreign tax credits related to the Transition Tax and any distribution
received from Net1’s subsidiaries will first be applied against the deemed distributions recognized as a result of the Transition
Tax as so called “previously taxed income, or PTI,”. Therefore distributions actually made during the year ended June 30, 2018,
were treated as PTI and did not generate any additional foreign tax credits because the quantum of the actual distributions were
lower than the deemed distributions calculated as a result of the Transition Tax. Net1 included actual and deemed dividends
received from one of its South African subsidiaries in its year ended June 30, 2017, taxation computation. Net1 applied net
operating losses against this income during the year ended June 30, 2017, and did not generate any indirect foreign tax credits.
Net1 has applied certain of these foreign tax credits against its current income tax provision for the years ended June 30, 2017.
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, 2019, 2018 and 2017, is as follows:
Income taxes at fully-distributed South African tax rates .....
Movement in valuation allowance .....................................
Non-deductible items .........................................................
Capital gains differential ....................................................
Taxation on deemed dividends in the United States ..........
Foreign tax rate differential ................................................
Prior year adjustments ........................................................
Transition Tax ....................................................................
Foreign tax credits ..............................................................
Change in tax laws – United States ....................................
Income tax provision .......................................................
2019
28.00%
(24.23%)
(4.75%)
(1.54%)
1.53%
0.38%
(0.63%)
(0.36%)
0.37%
-
(1.23%)
2018
(As
restatedA)
28.00%
5.99%
15.19%
(1.81%)
1.92%
(0.65%)
(0.02%)
55.38%
(55.58%)
-%
48.42%
2017
(As
restatedA)
28.00%
0.07%
1.05%
-%
8.00%
-%
0.07%
-%
(0.05%)
-%
37.14%
(A) Non-deductible items for 2018 and 2017 have been restated to correct the misstatement discussed in Note 1.
F-73
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
INCOME TAXES (continued)
Income tax provision (continued)
Percentages included in the 2019 column in the reconciliation of income taxes presented above are impacted by the loss
incurred by the Company during the year ended June 30, 2019. For instance, the income tax provision of $3.7 million represents
(1.39%) multiplied by the net loss before tax of $(268,987). Non-deductible items for the year ended June 30, 2019, includes the
impairment losses recognized related to goodwill impaired. Movement in the valuation allowance for the year ended June 30,
2019, includes allowances created related to net operating losses incurred during the year and a valuation allowance created for a
deferred tax asset recorded related to the DNI disposal capital losses generated (refer to Note 3) and the Cell C capital loss
following the fair value adjustment (refer to Note 7). Non-deductible items for the year ended June 30, 2018, includes the
impairment loss recognized related to goodwill impaired, non-deductible interest on borrowings and the accretion of interest. The
impact on foreign tax during the year ended June 30, 2018, was primarily due to the impact of the Transition Tax.
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.
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:
Total deferred tax assets
Capital losses related to investments(B) ...................................................
Net operating loss carryforwards ............................................................
Foreign tax credits ...................................................................................
Provisions and accruals ...........................................................................
FTS patent ...............................................................................................
Intangible assets ......................................................................................
Other .......................................................................................................
Total deferred tax assets before valuation allowance ......................
Valuation allowances ........................................................................
Total deferred tax assets, net of valuation allowance ................
Total deferred tax liabilities:
2019
$43,569
35,873
32,799
13,230
277
-
2,394
128,142
(125,887)
2,255
Intangible assets ......................................................................................
Investments .............................................................................................
Other .......................................................................................................
Total deferred tax liabilities ..............................................................
2,676
1,621
489
4,786
Reported as
Long-term deferred tax assets .................................................................
Long-term deferred tax liabilities ............................................................
Net deferred income tax liabilities ....................................................
2,151
4,682
$2,531
2018
(As
restatedA)
$3,226
10,242
32,644
5,975
367
687
4,523
57,664
(48,691)
8,973
6,420
5,886
7,515
19,821
4,776
16,067
$11,291
(A) Total deferred tax liabilities: Investments and long-term deferred tax liabilities have been restated to correct the misstatement
discussed in Note 1.
(B) Capital losses as of June 30, 2018, were previously included in Other and have been reclassified to Capital losses related to
investments.
F-74
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
INCOME TAXES (continued)
Deferred tax assets and liabilities (continued)
Decrease in total net deferred income tax liabilities
Capital losses related to investments
Capital losses related to investments increased primarily due to the capital loss arising from the difference between
the amount paid for Cell C in August 2017 and the its fair value as of June 30, 2019 of $0.0 million and the capital losses incurred
related to the DNI disposals (refer to Note 3).
Net operating loss carryforwards
Net operating loss carryforwards have increased primarily as a result of the losses incurred by certain of the
Company’s wholly-owned South African subsidiaries.
Intangible assets
Deferred tax liabilities – intangible assets have decreased during the year ended June 30, 2019, as a result of the disposition
of DNI (refer to Note 3), and amortization of KSNET, Masterpayment and Transact24 intangible assets.
Investments
Deferred tax liabilities – investments has decreased during the year ended June 30, 2019, as a result of the fair value
adjustment to reduce the carrying value of the investment in Cell C to below its initial cost.
Increase in valuation allowance
At June 30, 2019, the Company had deferred tax assets of $2.3 million (2018: $9.0 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, 2019, the Company had a valuation allowance of $125.9 million (2018: $48.7 million) to reduce its deferred tax
assets to estimated realizable value. The movement in the valuation allowance for the years ended June 30, 2019 and 2018, is
presented below:
July 1, 2017 .................................
Charged to statement of operations ...
Utilized .............................................
Change in tax laws ............................
Foreign currency adjustment .............
June 30, 2018 ..............................
Reversed to statement of operations .
Charged to statement of operations ...
Utilized .............................................
Foreign currency adjustment .............
June 30, 2019 ..............................
Capital losses
related to
investments(A)
$997
2,229
-
-
-
3,226
-
40,159
-
184
$43,569
Total
$38,967
9,582
60
(894)
976
48,691
(881)
79,029
(1,730)
778
$125,887
Net
operating
loss carry-
forwardsA
$3,699
4,573
-
(263)
1,038
9,047
(198)
26,570
(10)
452
$35,861
Foreign
tax
credits
$32,574
10
60
-
-
32,644
-
155
-
-
$32,799
FTS
patent Other(A)(B)
$1,577
2,770
-
(631)
1
3,717
(626)
12,145
(1,720)
142
$13,658
$120
-
-
-
(63)
57
(57)
-
-
-
$-
(A) Capital losses related to investments for the prior year have been reclassified from Other.
(B) Net operating loss carry-forwards of $3,602 as of June 30, 2018, that were previously included in the other caption have been
reclassified to the net operating loss carry-forwards caption.
F-75
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
INCOME TAXES (continued)
Deferred tax assets and liabilities (continued)
Net operating loss carryforwards and foreign tax credits
United States
The TCJA amends the rules regarding net operating loss carryforwards for Federal income tax purposes effective from July
1, 2018. The new rules prohibit net operating loss carrybacks, allow indefinite net operating loss carryforwards and limit the
amount of the net operating loss carryforwards generated after July 1, 2018, that may be used against future taxable income, to
80% of taxable income before the net operating loss deduction. These new rules did not impact the Company’s net operating loss
carryforwards generated during the year ended June 30, 2018 and in prior periods.
As of June 30, 2019, Net1 had net operating loss carryforwards that will expire, if unused, as follows:
Year of expiration
2024 ........................................................................................................
2028 ........................................................................................................
U.S. net operating
loss carry
forwards
$1,874
$4,423
During the year ended June 30, 2019 and 2018, Net1 generated additional direct foreign tax credits related to dividends
received from a foreign investment. Net1 had no net unused foreign tax credits that are more likely than not to be realized as of
June 30, 2019 and 2018, respectively.
Uncertain tax positions
As of June 30, 2019 and 2018, the Company has unrecognized tax benefits of $1.2 million and $0.8 million, respectively, all
of which would impact the Company’s effective tax rate. The Company files income tax returns mainly in South Africa, South
Korea, Germany, Hong Kong, India, Malta, the United Kingdom, Botswana and in the U.S. federal jurisdiction. As of June 30,
2019, the Company’s South African subsidiaries are no longer subject to income tax examination by the South African Revenue
Service for periods before June 30, 2016. 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, 2019, 2018
and 2017:
Unrecognized tax benefits - opening balance .........................................
Gross increases - tax positions in prior periods ....................................
Gross decreases - tax positions in prior periods ...................................
Gross increases - tax positions in current period ..................................
Gross decreases - tax positions in current period .................................
Lapse of statute limitations ..................................................................
Foreign currency adjustment ................................................................
Unrecognized tax benefits - closing balance .....................................
2019
$838
107
-
307
-
-
(38)
$1,214
2018
$475
196
-
311
(150)
-
6
$838
2017
$1,930
-
(2,109)
440
-
-
214
$475
As of each of June 30, 2019 and 2018, the Company had accrued interest related to uncertain tax positions of
approximately $0.1 million, respectively, on its consolidated balance sheet. As of each of June 30, 2019 and 2018, the Company
had accrued penalties related to uncertain tax positions of approximately $0.2 million, respectively, on its consolidated balance
sheet.
F-76
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
19.
(LOSS) EARNINGS PER SHARE
The Company has issued redeemable common stock (refer to Note 14) 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, 2019, 2018
or 2017. Accordingly, the two-class method presented below does not include the impact of any redemption.
Basic (loss) earnings per share include shares of restricted stock that meet the definition of a participating security because
these shares are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Basic (loss) earnings
per share have been calculated using the two-class method and basic earnings per share for the years ended June 30, 2019, 2018
and 2017, reflects only undistributed earnings. The computation below of basic (loss) earnings per share excludes the net (loss)
income attributable to shares of unvested restricted stock (participating non-vested restricted stock) from the numerator and
excludes the dilutive impact of these unvested shares of restricted stock from the denominator.
Diluted (loss) earnings per share 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 (loss) earnings per share includes the
dilutive effect of a portion of the restricted stock granted to employees in August and November 2014, August 2015, August
2016, August 2017, March 2018 and September 2018 as these shares of restricted stock are considered contingently returnable
shares for the purposes of the diluted earnings per share calculation and the vesting conditions in respect of a portion of the
restricted stock had been satisfied. The vesting conditions are discussed in Note 17.
The following table presents net (loss) income attributable to Net1 and the share data used in the basic and diluted (loss)
earnings per share computations using the two-class method for the years ended June 30, 2019, 2018 and 2017:
2019
2017
2018
(As
(As
restatedA)
restatedA)
(in thousands except percent and per share data)
Numerator:
Net (loss) income attributable to Net1 .........................................................
Undistributed earnings .....................................................................................
Continuing ....................................................................................................
Discontinued ................................................................................................
Percent allocated to common shareholders (Calculation 1) ....................
Numerator for (loss) earnings per share: basic and diluted .....................
Continuing ....................................................................................................
Discontinued ................................................................................................
$(307,618)
(307,618)
(306,607)
$(1,011)
99%
$(303,299)
(302,302)
$(997)
$64,246
64,246
61,855
$2,391
98%
$63,175
60,824
$2,351
$73,070
73,070
73,070
$-
99%
$72,302
72,302
$-
Denominator:
Denominator for basic (loss) earnings per share: weighted-average
common shares outstanding ............................................................................
Effect of dilutive securities: ............................................................................
Stock options ...............................................................................................
Denominator for diluted (loss) earnings per share: adjusted
weighted average common shares outstanding and assumed
conversion ..............................................................................................
55,963
55,860
53,966
18
51
109
55,981
55,911
54,075
F-77
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
19.
(LOSS) EARNINGS PER SHARE (continued)
2019
2017
2018
(As
(As
restatedA)
restatedA)
(in thousands except percent and per share data)
(Loss) Earnings per share:
Basic ....................................................................................................
Continuing ....................................................................................................
Discontinued ................................................................................................
Diluted .................................................................................................
Continuing ....................................................................................................
Discontinued ................................................................................................
$(5.42)
($5.40)
($0.02)
$(5.42)
($5.40)
($0.02)
$1.13
$1.09
$0.04
$1.13
$1.09
$0.04
$1.34
$1.34
$0.00
$1.33
$1.33
$0.00
(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)...........................
56,760
99%
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1.
55,963
55,860
53,966
56,807
98%
54,539
99%
Options to purchase 864,579 shares of the Company’s common stock at prices ranging from $6.20 to $11.23 per share were
outstanding during the year ended June 30, 2019, but were not included in the computation of diluted earnings per share because
the options’ exercise prices were greater than the average market price of the Company’s common shares. The options, which
expire at various dates through September 7, 2028, were still outstanding as of June 30, 2019.
20.
SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents the supplemental cash flow disclosures for the years ended June 30, 2019, 2018 and 2017:
Cash received from interest ...........................................................................
2019
$5,595
Cash paid for interest .....................................................................................
$10,636
2018
$16,835
$8,645
2017
$21,130
$3,713
Cash paid for income taxes ............................................................................
$13,110
$41,065
$45,165
Investing activities
The transaction referred to in Note 3 under which the Company reduced its shareholding in DNI from 55% to 38% and used
the proceeds, of $27.6 million, from the sale to settle its obligation, of $27.6 million, to subscribe for additional shares in DNI was
closed using a cashless settlement process. Therefore, the proceeds from sale and the settlement of the obligation to subscribe for
additional shares in DNI were not included in net cash (used in) provided by investing activities in the Company’s audited
consolidated statement of cash flows for the year ended June 30, 2019.
The transaction referred to in Note 3 and Note 12 under which the Company reduced its shareholding in DNI from 38% to
30% and used the proceeds from the sale to settle a portion of its long-term borrowings, of $15.0 million, was closed using a
cashless settlement process. Therefore, the proceeds from sale was not included in net cash provided by (used in) investing
activities in the Company’s consolidated statement of cash flows for the year ended June 30, 2019.
As disclosed in Note 9, during the year ended June 30, 2018, the Company agreed to underwrite the Finbond rights offer up
to an amount of 55,585,514 shares and utilized a $10.0 million loan due by Finbond to the Company to acquire the 55,585,514
Finbond shares. Therefore, as this transaction was net settled in 2018 and there was no transfer of cash between the parties, the
repayment of the loan by Finbond and the acquisition of 55,585,514 Finbond shares are not included within net cash provided by
(utilized) in investing activities in the Company’s consolidated statement of cash flows for the year ended June 30, 2018.
F-78
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
20.
SUPPLEMENTAL CASH FLOW INFORMATION (continued)
Financing activities
The transaction referred to in Note 3 and Note 12 under which the Company reduced its shareholding in DNI from 38% to
30% and used the proceeds from the sale to settle a portion of its long-term borrowings, of $15.0 million was closed using a
cashless settlement process. Therefore, the part settlement of the long-term borrowings was not included in net cash (used in)
provided by financing activities in the Company’s consolidated statement of cash flows for the year ended June 30, 2019.
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.
21. 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 while 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 an ATM infrastructure deployed in South
Africa, transaction processing for retailers, utilities, and banks, and a welfare benefit distribution service provided to the South
African government through to September 30, 2018. The welfare benefit distribution services ceased following the SASSA
contract expiration on September 30, 2018. Fee income is 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. Fee income was
also earned based on the number of recipient cardholders paid through to September 30, 2018. There were no individually
significant customers providing more than 10% of total revenue during the year ended June 30, 2019. This segment had an
individually significant customer that accounted for more than 10% of the total revenue of the Company during the years ended
June 30, 2018 (19%) and 2017 (22%). During the years ended June 30, 2019 and 2018, the operating segment incurred goodwill
impairment losses of $1.2 million and $1.1 million, respectively (refer to Note 10).
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. 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. During the year ended June 30, 2019 and 2018, the operating
segment incurred a goodwill impairment loss of $7.0 million and $19.9 million, respectively (refer to Note 10).
The Financial inclusion and applied technologies segment derives revenue from the provision of short-term loans as a
principal and the provision of bank accounts, as a fixed monthly fee per account 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. DNI was acquired on
June 30, 2018, and has been allocated to the Financial inclusion and applied technologies segment. DNI contributed to segment
performance for the first nine months of the year ended June 30, 2019. DNI did not contribute to segment performance during the
last three months of the year ended June 30, 2019 and during the year ended June 30, 2018.
F-79
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
21. OPERATING SEGMENTS (continued)
Operating segments (continued)
DNI primarily derives revenue from fees generated through the distribution of starter packs and, to a less extent, from interest
income earned through the provision of financing to Cell C in order for it to expand components of Cell C’s telecommunications
infrastructure in South Africa. During the year ended June 30, 2019, the operating segment incurred a goodwill impairment loss of
$6.2 million (refer to Note 10).
Corporate/eliminations includes the Company’s head office cost center and the amortization of acquisition-related intangible
assets. The $5.3 million impairment loss related to the impairment of DNI intangible assets (refer to Note 3) during the year ended
June 30, 2019, has been allocated to corporate/ elimination. 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 reconciliation of the reportable segments revenue to revenue from external customers for the years ended June 30, 2019,
2018 and 2017, respectively, is as follows:
Revenue
Reportable
Segment
Corporate/
Eliminations
(Note 13)
Inter-
segment
From
external
customers
South African transaction processing ..............
International transaction processing ................
Financial inclusion and applied technologies ..
Reportable segments .....................................
Corporate/Eliminations – revenue refund .....
Total for the year ended June 30, 2019 ........
South African transaction processing ..............
International transaction processing ................
Financial inclusion and applied technologies ..
Total for the year ended June 30, 2018 ........
South African transaction processing ..............
International transaction processing ................
Financial inclusion and applied technologies ..
Total for the year ended June 30, 2017 ........
$96,038
148,268
146,184
390,490
-
$390,490
$268,047
180,027
221,906
$669,980
$249,144
176,729
235,901
$661,774
$-
-
-
-
(19,709)
($19,709)
$-
-
-
$-
$-
-
-
$-
$6,990
-
2,801
9,791
-
$9,791
$29,949
-
27,142
$57,091
$24,518
-
27,190
$51,708
$89,048
148,268
143,383
380,699
(19,709)
$360,990
$238,098
180,027
194,764
$612,889
$224,626
176,729
208,711
$610,066
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 expenses allocated to
Corporate/Eliminations, all under GAAP. The reconciliation of the reportable segments measure of profit or loss to (loss) income
before income taxes for the years ended June 30, 2019, 2018 and 2017, respectively, is as follows:
For the years ended June 30,
2018
2019(1)
2017
Reportable segments measure of profit or loss .................................
Operating loss: Corporate/Eliminations ........................................
Change in fair value of equity securities .......................................
Loss on disposal of DNI ...............................................
Interest income .............................................................
Interest expense .............................................................................
Impairment of Cedar Cellular note ................................................
(Loss) Income before income taxes ............................................
$(42,692)
(70,816)
(167,459)
(5,771)
7,229
(10,724)
(12,793)
$(303,026)
$85,690
(26,741)
32,473
-
17,885
(8,941)
-
$100,366
$130,799
(33,756)
-
-
20,897
(3,484)
-
$114,456
(1) - Operating loss: Corporate/Eliminations includes $34.0 million related to the accrual referred to in Note 13.
F-80
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
21. OPERATING SEGMENTS (continued)
The following tables summarize segment information for the years ended June 30, 2019, 2018 and 2017:
For the years ended June 30,
2018
2019
2017
Revenues
South African transaction processing ..............................
International transaction processing ................................
Financial inclusion and applied technologies ..................
Continuing .................................................................
Discontinued ..............................................................
Total .................................................................
Continuing ......................................................
Discontinued ...................................................
Operating income (loss)
South African transaction processing(1) ...........................
International transaction processing ................................
Financial inclusion and applied technologies(1) ...............
Continuing(1) ..............................................................
Discontinued ..............................................................
Subtotal: Operating segments ..............................
Corporate/Eliminations ........................................
Continuing ......................................................
Discontinued ...................................................
Total(1) .........................................................
Continuing(1) .............................................
Discontinued .............................................
Depreciation and amortization
South African transaction processing ..............................
International transaction processing ................................
Financial inclusion and applied technologies ..................
Continuing .................................................................
Discontinued ..............................................................
Subtotal: Operating segments .......................................
Corporate/Eliminations .............................................
Continuing ...........................................................
Discontinued ........................................................
Total ...............................................................
Continuing ................................................
Discontinued .............................................
Expenditures for long-lived assets
South African transaction processing ..............................
International transaction processing ................................
Financial inclusion and applied technologies ..................
Continuing .................................................................
Discontinued ..............................................................
Subtotal: Operating segments .......................................
Corporate/Eliminations .............................................
Total ...............................................................
Continuing ................................................
Discontinued .............................................
F-81
$96,038
148,268
146,184
89,847
56,337
390,490
334,153
56,337
(30,771)
2,837
(14,758)
(39,158)
24,400
(42,692)
(70,816)
(58,097)
(12,719)
(113,508)
(125,189)
11,681
3,612
9,962
1,968
1,355
613
15,542
21,807
14,394
7,413
37,349
29,323
8,026
3,590
3,607
2,219
1,488
731
9,416
-
9,416
8,685
$731
$268,047
180,027
221,906
221,906
-
669,980
669,980
-
42,796
(12,478)
55,372
55,372
-
85,690
(26,741)
(22,127)
(4,614)
58,949
63,563
(4,614)
4,625
17,627
1,441
1,441
-
23,693
11,791
11,791
-
35,484
35,484
-
3,988
4,397
1,264
1,264
-
9,649
-
9,649
9,649
$-
$249,144
176,729
235,901
235,901
-
661,774
661,774
-
59,309
13,705
57,785
57,785
-
130,799
(33,756)
(33,756)
-
97,043
97,043
-
4,614
21,366
1,422
1,422
-
27,402
13,976
13,976
-
41,378
41,378
-
2,473
7,745
977
977
-
11,195
-
11,195
11,195
$-
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
21. OPERATING SEGMENTS (continued)
(1) South African transaction processing and Financial inclusion and applies technologies include retrenchment costs for the
year ended June 30, 2019, of: $4,665 and $1,604, respectively, for total retrenchment costs for the year ended June 30, 2019, of
$6,269. The retrenchment costs are included in selling, general and administration expense on the consolidated statement of
operations for the year ended June 30, 2019.
The segment information as reviewed by the chief operating decision maker does not include a measure of 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.
Geographic Information
Long-lived assets based on the geographic location for the years ended June 30, 2019, 2018 and 2017, are presented in the
table below:
2019
Long-lived assets
2018
(as
restatedA)
South Africa ........................................................................
South Korea ........................................................................
Rest of world ......................................................................
Total ................................................................................
$143,924
149,390
83,972
$377,286
$496,442
177,388
116,643
$790,473
2017
(as
restatedB)
$72,443
192,473
77,723
$342,639
(A) The South Africa and total amounts have been restated by $1,976 to correct the misstatement discussed in Note 1.
(B) The South Africa and total amounts have been restated by $1,927 to correct the misstatement discussed in Note 1.
22. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company leases certain premises. At June 30, 2019, 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 ..................................
$6,010
$2,654
$1,122
$518
$-
Operating lease payments related to premises and equipment were $12.1 million, $10.7 million and $9.8 million,
respectively, for the years ended June 2019, 2018 and 2017, respectively.
Capital commitments
As of June 30, 2019 and 2018, the Company had outstanding capital commitments of approximately $2.0 million and $1.1
million, respectively.
F-82
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
22. COMMITMENTS AND CONTINGENCIES (continued)
Purchase obligations
As of June 30, 2019 and 2018, the Company had purchase obligations totaling $3.5 million and $5.6 million, respectively.
The purchase obligations as of June 30, 2019, primarily include inventory that will be delivered to the Company and sold to
customers in the second half of calendar 2019.
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 93.6 million ($6.6 million, translated at exchange
rates applicable as of June 30, 2019) and thereby utilizing part of the Company’s short-term facility. The Company in turn has
provided nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 93.6 million ($6.6 million, translated at exchange rates
applicable as of June 30, 2019). The Company pays commission of between 0.4% per annum to 1.94% per annum of the face
value of these guarantees and does not recover any of the commission from third parties.
The Company has not recognized any obligation related to these counter-guarantees in its consolidated balance sheet as of
June 30, 2019. The maximum potential amount that the Company could pay under these guarantees is ZAR 93.6 million ($6.6
million, translated at exchange rates applicable as of June 30, 2019). The guarantees have reduced the amount available for
borrowings under the Company’s indirect short-term credit facility described in Note 12.
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 other matters, individually or in the aggregate, will not have
a material adverse impact on the Company’s financial position, results of operations or cash flows.
23. RELATED PARTY TRANSACTIONS
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 during the year ended June 30, 2016. 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 $0.4 million, $4.4 million and $4.2 million related to this relationship
during the years ended June 30, 2019, 2018 and 2017, respectively. 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, $0.3 million and $1.6
million during the years ended June 30, 2019, 2018 and 2017, respectively. No amounts were due to the Company as of June 30,
2019. The Company was due $0.2 million, as of June 30, 2018, related to the service provided by Transact24 and these amounts
are included in accounts receivable, net and other receivables as of June 30, 2018.
DNI leased a building that was owned by a company in which Mr. A.J. Dunn, DNI’s Chief Executive Officer, has a direct
shareholding of 16%. The property was sold in November 2018. During the nine months ended March 31, 2019, DNI paid rental
of approximately $1.0 million. On April 2, 2019, the Company’s board of directors determined that Mr. A.J. Dunn no longer
performs a policy-making function by virtue of the change in his position within the Net1 group and is, therefore, no longer an
executive officer.
F-83
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2019, 2018 and 2017
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
24. UNAUDITED QUARTERLY RESULTS
The following tables contain selected unaudited consolidated statements of operations information for each quarter of
fiscal 2019 and 2018:
Three months ended
Revenue .....................................................................
Continuing (Q4 includes $19,709 refund) ............
Discontinued ........................................................
Operating income .......................................................
Continuing ............................................................
Discontinued ........................................................
Net income attributable to Net1 .................................
Continuing ............................................................
Discontinued ........................................................
Net income per share, in United States dollars .........
Basic earnings attributable to Net1 shareholders ....
Continuing .........................................................
Discontinued ......................................................
Diluted earnings attributable to Net1 shareholders .
Continuing .........................................................
Discontinued ......................................................
Jun 30,
2019
$51,472
51,472
-
(49,646)
(49,646)
-
(183,694)
(183,694)
$-
($3.23)
($3.23)
$0.00
($3.23)
($3.23)
$0.00
Jun 30,
2018
(as
restatedA)
Mar 31,
2019
Dec 31,
2018
(In thousands except per share data)
Sep 30,
2018
$86,484
68,642
17,842
(21,683)
(22,356)
673
(54,784)
(50,299)
$(4,485)
($0.96)
($0.88)
($0.08)
($0.96)
($0.88)
($0.08)
$97,150
77,442
19,708
(43,075)
(48,901)
5,826
(63,941)
(65,469)
$1,528
($1.13)
($1.16)
$0.03
($1.12)
($1.15)
$0.03
$125,884
107,097
18,787
896
(4,286)
5,182
(5,199)
(7,145)
$1,946
($0.09)
($0.12)
$0.03
($0.09)
($0.13)
$0.03
Year ended
June 30,
2019
$360,990
304,653
56,337
(113,508)
(125,189)
11,681
(307,618)
(306,607)
$(1,011)
($5.42)
($5.40)
($0.02)
($5.42)
($5.40)
($0.02)
Three months ended
Dec 31,
2017
Mar 31,
2018
Sep 30,
2017
Year ended
June 30,
2018
(as restatedA)
(In thousands except per share data)
Revenue .....................................................................
Continuing ............................................................
Discontinued ........................................................
Operating income .......................................................
Continuing ............................................................
Discontinued ........................................................
Net income attributable to Net1 .................................
Continuing ............................................................
Discontinued ........................................................
Net income per share, in United States dollars .........
Basic earnings attributable to Net1 shareholders ....
Continuing .........................................................
Discontinued ......................................................
Diluted earnings attributable to Net1 shareholders .
Continuing .........................................................
Discontinued ......................................................
$149,194 $162,721 $148,416
148,416
162,721
-
-
16,307
7,564
16,307
7,564
-
-
9,622
32,375
8,576
29,084
$1,046
$3,291
149,194
-
10,072
14,686
(4,614)
2,766
5,577
$(2,811)
$152,558
152,558
-
25,006
25,006
-
19,483
18,618
$865
$0.05
$0.10
$(0.05)
$0.05
$0.10
$(0.05)
$0.57
$0.51
$0.06
$0.57
$0.51
$0.06
$0.17
$0.15
$0.02
$0.17
$0.15
$0.02
$0.34
$0.32
$0.02
$0.34
$0.32
$0.02
$612,889
612,889
-
58,949
63,563
(4,614)
64,246
61,855
$2,391
$1.13
$1.09
$0.04
$1.13
$1.09
$0.04
(A) Certain amounts have been restated to correct the misstatement discussed in Note 1. The impact of the restatement for
the year ended June 30, 2018, has been recorded during the three months ended June 30, 2018.
*********************
F-84