UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from |
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Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction |
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of incorporation or organization) |
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| Identification No.) |
(Address of principal executive offices, including zip code) |
Registrant’s telephone number, including area code:
Not Applicable |
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ 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 such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
☐ | Large accelerated filer | ☒ | |
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☐ | Non-accelerated filer | Smaller reporting company | |
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| Emerging growth company | |
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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
As of February 7, 2022 (the latest practicable date),
| Form 10-Q NET 1 UEPS TECHNOLOGIES, INC Table of Contents |
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PART I. FINANCIAL INFORMATION |
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| Unaudited Condensed Consolidated Balance Sheets as of December 31, 2021 and June 30, 2021 | |
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| Notes to Unaudited Condensed Consolidated Financial Statements | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
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EXHIBIT 10.44 |
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1
Part I. Financial information
Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Balance Sheets
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| ASSETS |
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CURRENT ASSETS |
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| Accounts receivable, net and other receivables (Note 2) |
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| Finance loans receivable, net (Note 2) |
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| Inventory (Note 3) |
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| Total current assets before settlement assets |
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| Settlement assets |
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PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of - December: $ |
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OPERATING LEASE RIGHT-OF-USE (Note 16) |
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EQUITY-ACCOUNTED INVESTMENTS (Note 5) |
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GOODWILL (Note 6) |
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INTANGIBLE ASSETS, NET (Note 6) |
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DEFERRED INCOME TAXES |
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OTHER LONG-TERM ASSETS, including reinsurance assets (Note 5 and 7) |
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TOTAL ASSETS |
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| LIABILITIES |
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CURRENT LIABILITIES |
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| Other payables (Note 9) |
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| Operating lease liability - current (Note 16) |
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| Income taxes payable |
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| Total current liabilities before settlement obligations |
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DEFERRED INCOME TAXES |
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OPERATING LEASE LIABILITY - LONG TERM (Note 16) |
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OTHER LONG-TERM LIABILITIES, including insurance policy liabilities (Note 7) |
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TOTAL LIABILITIES |
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REDEEMABLE COMMON STOCK |
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| EQUITY |
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COMMON STOCK (Note 10) |
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| Issued and outstanding shares, net of treasury - December: |
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PREFERRED STOCK |
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ADDITIONAL PAID-IN-CAPITAL |
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TREASURY SHARES, AT COST: December: |
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ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 11) |
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RETAINED EARNINGS |
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TOTAL NET1 EQUITY |
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NON-CONTROLLING INTEREST |
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TOTAL EQUITY |
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TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS’ EQUITY | $ |
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| See Notes to Unaudited Condensed Consolidated Financial Statements | |||||||||
2
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
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REVENUE (Note 15) |
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EXPENSE |
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| Cost of goods sold, IT processing, servicing and support |
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| Selling, general and administration |
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| Depreciation and amortization |
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| Transaction costs related to Connect Group acquisition |
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OPERATING LOSS |
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CHANGE IN FAIR VALUE OF EQUITY SECURITIES (Note 4 and 5) |
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UNREALIZED LOSS RELATED TO FAIR VALUE ADJUSTMENT TO CURRENCY OPTIONS (Note 4) |
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LOSS ON DISPOSAL OF EQUITY-ACCOUNTED INVESTMENT (Note 5) |
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INTEREST INCOME |
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INTEREST EXPENSE |
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LOSS BEFORE INCOME TAX EXPENSE |
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INCOME TAX EXPENSE (Note 18) |
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NET LOSS BEFORE LOSS FROM EQUITY-ACCOUNTED INVESTMENTS |
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LOSS FROM EQUITY-ACCOUNTED INVESTMENTS (Note 5) |
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NET LOSS ATTRIBUTABLE TO NET1 |
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Net loss per share, in United States dollars (Note 13): |
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Basic loss attributable to Net1 shareholders |
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Diluted loss attributable to Net1 shareholders |
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See Notes to Unaudited Condensed Consolidated Financial Statements | ||||||||||||||||||
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income
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| December 31, |
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Net loss | $ | ( |
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Other comprehensive (loss) income, net of taxes |
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| Movement in foreign currency translation reserve |
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| Movement in foreign currency translation reserve related to equity-accounted investments |
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| Comprehensive (loss) income |
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| Comprehensive (loss) income attributable to Net1 | $ | ( |
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See Notes to Unaudited Condensed Consolidated Financial Statements |
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4
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Changes in Equity
| Net 1 UEPS Technologies, Inc. Shareholders |
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| Number of Shares |
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| Number of Treasury Shares |
| Treasury Shares |
| Number of shares, net of treasury |
| Additional Paid-In Capital |
| Retained Earnings |
| Accumulated other comprehensive loss |
| Total Net1 Equity |
| Non-controlling Interest |
| Total |
| Redeemable common stock |
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| Balance – October 1, 2020 | $ |
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| $ | $ | $ | ( | $ | $ | $ | $ | |||||||||
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| Stock-based compensation charge (Note 12) |
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| Other comprehensive income (Note 11) |
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| Balance – December 31, 2020 | $ |
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| Balance – July 1, 2020 | $ |
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| Stock-based compensation charge related to equity-accounted investment |
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| Proceeds from disgorgement of shareholders' short-swing profits |
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| Other comprehensive income (Note 11) |
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| Balance – December 31, 2020 | $ |
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| See Notes to Unaudited Condensed Consolidated Financial Statements | |||||||||||||||||||||||
5
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Changes in Equity
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| Net 1 UEPS Technologies, Inc. Shareholders |
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| Number of Shares |
| Amount |
| Number of Treasury Shares |
| Treasury Shares |
| Number of shares, net of treasury |
| Additional Paid-In Capital |
| Retained Earnings |
| Accumulated other comprehensive loss |
| Total Net1 Equity |
| Non-controlling Interest |
| Total |
| Redeemable common stock |
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| For the three months ended December 31, 2021 (dollar amounts in thousands) | ||||||||||||||||||||||
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| Balance – October 1, 2021 | $ |
| ( | $ | ( |
| $ | $ | $ | ( | $ | $ | $ | $ | |||||||||
|
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| Restricted stock granted (Note 12) |
|
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|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
| ||
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|
|
|
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| Exercise of stock option (Note 12) |
| - |
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| |||||
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| Stock-based compensation charge (Note 12) |
|
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| |||
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|
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| Reversal of stock-based compensation charge (Note 12) | ( |
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| ( |
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| |||
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| Net loss |
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| ( |
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| ( |
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| ( |
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| |
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| Other comprehensive loss (Note 11) |
|
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|
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| ( |
| ( |
|
| ( |
|
| |
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|
|
|
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|
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|
|
|
| Balance – December 31, 2021 | $ |
| ( | $ | ( |
| $ | $ | $ | ( | $ | $ | $ | $ | |||||||||
|
| For the six months ended December 31, 2021 (dollar amounts in thousands) | ||||||||||||||||||||||
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|
|
|
| Balance – July 1, 2021 | $ |
| ( | $ | ( |
| $ | $ | $ | ( | $ | $ | $ | $ | |||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Restricted stock granted |
|
|
|
|
|
|
|
| - |
|
|
|
|
| - |
|
|
| - |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise of stock option (Note 12) |
|
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| ||||||
|
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|
|
|
|
|
|
|
|
|
|
| Stock-based compensation charge (Note 12) |
|
|
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|
|
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|
| |||
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|
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|
|
| Reversal of stock-based compensation charge (Note 12) | ( |
|
|
|
|
|
|
| ( |
| ( |
|
|
|
|
| ( |
|
|
| ( |
|
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|
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| Stock-based compensation charge related to equity accounted investment (Note 5) |
|
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| |||
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|
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| Net loss |
|
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|
|
|
|
|
|
|
|
| ( |
|
|
| ( |
|
| ( |
|
| |
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|
|
|
|
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|
|
| Other comprehensive loss (Note 11) |
|
|
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|
|
|
|
|
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|
|
| ( |
| ( |
|
| ( |
|
| |
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|
|
|
| Balance – December 31, 2021 | $ |
| ( | $ | ( |
| $ | $ | $ | ( | $ | $ | $ | $ | |||||||||
|
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|
| See Notes to Unaudited Condensed Consolidated Financial Statements | |||||||||||||||||||||||
6
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
|
|
| Three months ended |
|
| Six months ended | |||||||
|
|
|
| December 31, |
|
| December 31, | ||||||
|
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
|
|
|
| (In thousands) |
|
| (In thousands) | ||||||
|
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|
|
|
|
|
Cash flows from operating activities |
|
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|
|
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|
|
| ||
| Net loss | $ | ( |
| $ | ( |
| $ | ( |
| $ | ( | |
| Depreciation and amortization |
|
|
|
|
|
|
| |||||
| Impairment loss (Note 6) |
|
|
|
|
|
|
| |||||
| Movement in allowance for doubtful accounts receivable |
|
|
|
|
|
|
| |||||
| Loss from equity-accounted investments (Note 5) |
|
|
|
|
|
|
| |||||
| Movement in allowance for doubtful loans to equity-accounted investments |
|
|
|
|
|
|
| |||||
| Change in fair value of equity securities (Note 4 and 5) |
|
|
| ( |
|
|
|
| ( | |||
| Fair value adjustment related to financial liabilities |
| ( |
|
|
|
| ( |
|
| |||
| Unrealized loss related to fair value adjustment to currency options (Note 4) |
|
|
|
|
|
|
| |||||
| Interest payable |
| ( |
|
|
|
| ( |
|
| ( | ||
| Loss on disposal of equity-accounted investment (Note 5) |
|
|
|
|
|
|
| |||||
| (Profit) Loss on disposal of property, plant and equipment |
| ( |
|
|
|
| ( |
|
| |||
| Stock-based compensation charge (Note 12) |
|
|
|
|
|
|
| |||||
| Dividends received from equity accounted investments |
|
|
|
|
|
|
| |||||
| (Increase) Decrease in accounts receivable and finance loans receivable |
| ( |
|
|
|
| ( |
|
| ( | ||
| (Increase) Decrease in inventory |
| ( |
|
| ( |
|
|
|
| |||
| Increase (Decrease) in accounts payable and other payables |
|
|
| ( |
|
|
|
| ( | |||
| (Decrease) Increase in taxes payable |
| ( |
|
| ( |
|
|
|
| ( | ||
| Increase (Decrease) in deferred taxes |
|
|
|
|
| ( |
|
| ( | |||
|
| Net cash used in operating activities |
| ( |
|
| ( |
|
| ( |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
| ||
Capital expenditures |
| ( |
|
| ( |
|
| ( |
|
| ( | ||
Proceeds from disposal of property, plant and equipment |
|
|
|
|
|
|
| ||||||
Proceeds from disposal of equity-accounted investment - Bank Frick, net of expenses (Note 5) |
|
|
|
|
|
|
| ||||||
Proceeds from disposal of Net1 Korea, net of cash disposed |
|
|
|
|
|
|
| ||||||
Proceeds from disposal of DNI as equity-accounted investment |
|
|
|
|
|
|
| ||||||
Loan to equity-accounted investment (Note 5) |
|
|
| ( |
|
|
|
| ( | ||||
Repayment of loans by equity-accounted investments |
|
|
|
|
|
|
| ||||||
Net change in settlement assets |
|
|
|
|
|
|
| ||||||
| Net cash provided by investing activities |
|
|
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|
| |||||
|
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|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
| ||
Proceeds from exercise of stock options |
|
|
|
|
|
|
| ||||||
Proceeds from bank overdraft (Note 8) |
|
|
|
|
|
|
| ||||||
Repayment of bank overdraft (Note 8) |
| ( |
|
| ( |
|
| ( |
|
| ( | ||
Proceeds from disgorgement of shareholders' short-swing profits |
|
|
|
|
|
|
| ||||||
Net change in settlement obligations |
| ( |
|
| ( |
|
| ( |
|
| ( | ||
| Net cash provided by financing activities |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
| ( |
|
|
|
| ( |
|
| ||||
Net (decrease) increase in cash, cash equivalents and restricted cash |
| ( |
|
|
|
|
|
| |||||
Cash, cash equivalents and restricted cash – beginning of period |
|
|
|
|
|
|
| ||||||
Cash, cash equivalents and restricted cash – end of period (Note 14) | $ |
| $ |
| $ |
| $ | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements | |||||||||||||
7
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
for the three and six months ended December 31, 2021 and 2020
(All amounts in tables stated in thousands or thousands of U.S. dollars, unless otherwise stated)
1. Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements include all majority-owned subsidiaries over which the Company exercises control and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission for Quarterly Reports on Form 10-Q and include all of the information and disclosures required for interim financial reporting. The results of operations for the three and six months ended December 31, 2021 and 2020, are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.
These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented.
References to “Net1” are references solely to Net 1 UEPS Technologies, Inc. References to the “Company” refer to Net1 and its consolidated subsidiaries, collectively, unless the context otherwise requires.
Impact of COVID-19 on the Company’s business
The Company’s business has been, and continues to be, impacted by government restrictions and quarantines related to COVID-19. South Africa operates with a five-level COVID-19 alert system, with Level 1 being the least restrictive and Level 5 being the most restrictive. South Africa is currently at adjusted Level 1, which has a limited impact on the Company’s businesses. The South African government commenced its vaccination program in early calendar 2021, and the latest statistics indicate that around 40% of the population is fully vaccinated. During the recent fourth wave, which started in December 2021, South Africa remained on adjusted level 1.
The broader implications of COVID-19 on the Company’s results of operations and overall financial performance continue to remain uncertain. While the Company has not incurred significant disruptions thus far from the COVID-19 outbreak, apart from the two months in April and May 2020 when loan origination was curtailed, the Company is unable to accurately predict the impact that COVID-19 will have due to numerous uncertainties, including the severity and duration of the outbreak, actions that may be taken by governmental authorities, the impact on the Company’s customers and other factors. The Company will continue to evaluate the nature and extent of the impact on its business, consolidated results of operations, and financial condition.
July 2021 civil unrest in South Africa
Two of South Africa’s nine provinces experienced significant civil unrest in July 2021 resulting in mass looting, loss of life, disruption of transport and supply routes, and widespread destruction of property. In total 337 South Africans lost their lives in the unrest - fortunately none of the Company’s employees were injured or harmed. There was widespread damage to bank and ATM infrastructure in the affected provinces. In total approximately 1,800 ATMs and 300 branches were damaged, and the Banking Association of South Africa (“BASA”), estimates that total damage to banking infrastructure amounted to ZAR 1.6 billion. The South African Special Risks Insurance Association (“SASRIA”), a public enterprise and a non-life insurance company that provides coverage for damage caused by special risks such as politically motivated malicious acts, riots, strikes, terrorism and public disorders, estimates that the total damage to property across South Africa will be in the order of between ZAR 19.0 and ZAR 20.0 billion.
The Company suffered damage at
The Company estimates that it will cost approximately ZAR
As a result of the disruption to ATM coverage and availability, BASA and South Africa’s banks agreed that the fee which customers pay to utilize other banks’ ATMs would be waived for August and September 2021. The Company lost transaction fee revenue of approximately ZAR
8
1. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Recent accounting pronouncements adopted
In August 2018, the Financial Accounting Standards Board (“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. The guidance became effective for the Company beginning July 1, 2021. The adoption of this guidance did not have a material impact on the Company’s financial statements or its footnote disclosures.
In January 2020, the FASB issued guidance regarding Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815. The guidance clarifies that an entity should consider observable transactions that require an entity to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with U.S GAAP guidance immediately before applying or upon discontinuing the equity method. The guidance also clarifies that, when determining the accounting for certain forward contracts and purchased options an entity should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance became effective for the Company beginning July 1, 2021. The adoption of this guidance did not have a material impact on the Company’s financial statements or its footnote disclosures.
Recent accounting pronouncements not yet adopted as of December 31, 2021
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, 2023. The Company is currently assessing the impact of this guidance on its financial statements and related disclosures, but does not expect the impact on its financial results to be material.
In November 2019, the FASB issued guidance regarding Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging(Topic 815), and Leases (Topic 842). The guidance provides a framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities, including Smaller Reporting Companies. The Company is a Smaller Reporting Company. Specifically, the guidance changes some effective dates for certain new standards on the following topics in the FASB Codification, namely Derivatives and Hedging (ASC 815); Leases (ASC 842); Financial Instruments — Credit Losses (ASC 326); and Intangibles — Goodwill and Other (ASC 350). The guidance defers the adoption date of guidance regarding Measurement of Credit Losses on Financial Instruments by the Company from July 1, 2020 to July 1, 2023. The Company is currently assessing the impact of this guidance on its financial statements and related disclosures, but does not expect the impact on its financial results to be material.
9
2. Accounts receivable, net and other receivables and finance loans receivable, net
Accounts receivable, net and other receivables
The Company’s accounts receivable, net, and other receivables as of December 31, 2021, and June 30, 2021, are presented in the table below:
|
|
|
|
| December 31, |
| June 30, |
| |||||
|
|
|
|
| 2021 |
|
| 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable, trade, net | $ |
|
|
| $ |
|
| |||||
| Accounts receivable, trade, gross |
|
|
|
|
|
|
| |||||
| Allowance for doubtful accounts receivable, end of period |
|
|
|
|
|
|
| |||||
|
| Beginning of period |
|
|
|
|
|
|
| ||||
|
| Reversed to statement of operations |
|
| ( |
|
|
|
| ( |
| ||
|
| Charged to statement of operations |
|
|
|
|
|
|
| ||||
|
| Utilized |
|
| ( |
|
|
|
| ( |
| ||
|
| Foreign currency adjustment |
|
| ( |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current portion of amount outstanding related to sale of interest in Bank Frick |
|
|
|
|
|
|
| |||||
| Loans provided to Carbon |
|
|
|
|
|
|
| |||||
| Current portion of total held to maturity investments |
|
|
|
|
|
|
| |||||
|
| Investment in |
|
|
|
|
|
|
| ||||
| Other receivables |
|
|
|
|
|
|
| |||||
|
| Total accounts receivable, net and other receivables | $ |
|
|
| $ |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of amount outstanding related to sale of interest in Bank Frick represents the amount due from the purchaser related to the sale of Bank Frick. The Company received the first scheduled repayment of $
The loan of $
Investment in
Other receivables include prepayments, deposits and other receivables.
Contractual maturities of held to maturity investments
Summarized below is the contractual maturity of the Company’s held to maturity investment as of December 31, 2021:
|
|
|
|
|
|
|
|
| Cost basis |
|
| Estimated fair value(1) |
|
| 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 | $ |
| $ |
| ||||||
(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 ($
10
2. Accounts receivable, net and other receivables and finance loans receivable, net (continued)
Finance loans receivable, net
The Company’s finance loans receivable, net, as of December 31, 2021, and June 30, 2021, is presented in the table below:
|
|
|
|
| December 31, |
| June 30, |
| |||||
|
|
|
|
| 2021 |
| 2021 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Microlending finance loans receivable, net | $ |
|
|
| $ |
|
| |||||
| Microlending finance loans receivable, gross |
|
|
|
|
|
|
| |||||
| Allowance for doubtful finance loans receivable, end of period |
|
|
|
|
|
|
| |||||
|
| Beginning of period |
|
|
|
|
|
|
| ||||
|
| Reversed to statement of operations |
|
|
|
|
|
| ( |
| |||
|
| Charged to statement of operations |
|
|
|
|
|
|
| ||||
|
| Utilized |
|
| ( |
|
|
|
| ( |
| ||
|
| Foreign currency adjustment |
|
| ( |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance loans receivable, net | $ |
|
|
| $ |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Inventory
|
| December 31, |
|
| June 30, |
| |
|
|
| 2021 |
|
| 2020 |
|
|
|
|
|
|
|
|
|
| Finished goods | $ |
| $ |
| ||
|
| $ |
| $ |
| ||
As of December 31, 2021 and June 30, 2021, respectively finished goods includes $
In support of Cell C’s liquidity position, the Company has limited the resale of this airtime to its own distribution channels until such time as Cell C’s recapitalisation process is concluded.
4. Fair value of financial instruments
Initial recognition and measurement
Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction costs.
Risk management
The Company manages its exposure to currency exchange, translation, interest rate, customer concentration, credit and equity price and liquidity risks as discussed below.
Currency exchange risk
The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and U.S. dollar. The Company has used forward contracts in order to limit its exposure in these transactions to fluctuations in exchange rates between the South African rand (“ZAR”), on the one hand, and the U.S. dollar and the euro, on the other hand.
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 a significant amount of its expenses in ZAR. The U.S. dollar has fluctuated significantly against the ZAR 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.
11
4. Fair value of financial instruments (continued)
Risk management (continued)
Interest rate risk
As a result of its normal borrowing 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 investments in cash equivalents and held to maturity investments and has occasionally invested in marketable securities.
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.
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 in respect of 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.
Equity price and liquidity risk
Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities that it holds. 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 relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which those securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an extended period of time without influencing the exchange-traded price, or at all.
Financial instruments
The following section describes the valuation methodologies the Company uses to measure its significant financial assets and liabilities at fair value.
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology would apply to Level 1 investments. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would be included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. Investments valued using such techniques are included in Level 3 investments.
Asset measured at fair value using significant unobservable inputs – investment in Cell C
The Company’s Level 3 asset represents an investment of
12
4. Fair value of financial instruments (continued)
Financial instruments (continued)
Asset measured at fair value using significant unobservable inputs – investment in Cell C (continued)
The following key valuation inputs were used as of December 31, 2021 and June 30, 2021:
| Weighted Average Cost of Capital ("WACC"): | Between |
|
| Long term growth rate: |
| |
| Marketability discount: |
| |
| Minority discount: |
| |
| Net adjusted external debt - December 31, 2021:(1) | ZAR |
|
| Net adjusted external debt - June 30, 2021:(2) | ZAR |
|
(1) translated from ZAR to U.S. dollars at exchange rates applicable as of December 31, 2021.
(2) translated from ZAR to U.S. dollars at exchange rates applicable as of June 30, 2021.
The following table presents the impact on the carrying value of the Company’s Cell C investment of a 4.2% increase and 3.2% decrease in the WACC rate and the EBITDA margins used in the Cell C valuation on December 31, 2021, all amounts translated at exchange rates applicable as of December 31, 2021:
| Sensitivity for fair value of Cell C investment |
| 4.2% increase |
| 3.1% decrease |
|
| WACC rate | $ | $ |
| ||
| EBITDA margin | $ | $ |
|
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 in respect of operational costs 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
Notional amount ('000) | Strike price | Fair market | Maturity | |||
EUR | USD | USD | July 02, 2021 | |||
Derivative transactions - Foreign exchange option contracts
The Company holds a significant amount of U.S. dollars and intends to use a portion of these funds to settle part of the purchase consideration related to the Connect Group acquisition. The purchase consideration will be settled in ZAR. Accordingly, the Company entered into foreign exchange option contracts with FirstRand Bank Limited acting through Rand Merchant Bank division (“RMB”) in November 2021 in order to manage the risk of currency volatility and to fix the ZAR amount to be utilized for part of the purchase consideration settlement. These foreign exchange option contracts, also known as synthetic forwards, are over-the-counter derivative transactions (Level 2). The Company purchased foreign currency put options and sold foreign currency call options at the same strike price. The strike price of the synthetic forwards on the date of entering into the contracts was equal to the exchange rate of a traditional forward exchange contract at that time.
The Company expects to record a realized currency gain if the USD/ ZAR spot price on the maturity date is below the strike price because, as the holder of the put options, the Company would exercise the put option and receive a higher rate of exchange compared to the spot price. The call options sold would be out-of-the-money on the maturity date and would expire unexercised. On the other hand, the Company expects to incur a realized currency loss if the USD/ ZAR spot price on the maturity date is above the strike price because the put options would be out-of-the-money and would expire unexercised, but RMB would exercise its call options and the Company would be required to deliver USD at a lower ZAR rate than the spot price.
13
4. Fair value of financial instruments (continued)
Financial instruments
Derivative transactions - Foreign exchange option contracts (continued)
The Company has marked-to-market the synthetic forwards as of December 31, 2021, using a Black-Scholes option pricing model which determines the respective fair value of the options utilizing current market parameters, and recorded an unrealized loss of $
Notional amount ('000) | Strike price | Fair market | Maturity | |||
Purchased put options |
|
|
|
|
| |
USD | ZAR | ZAR | February 24, 2022 | |||
USD | ZAR | ZAR | February 24, 2022 | |||
USD | ZAR | ZAR | February 24, 2022 | |||
USD | ZAR | ZAR | February 24, 2022 | |||
USD | ZAR | ZAR | February 24, 2022 | |||
|
|
|
|
|
|
|
Sold call options |
|
|
|
|
| |
USD | ZAR | ZAR | February 24, 2022 | |||
USD | ZAR | ZAR | February 24, 2022 | |||
USD | ZAR | ZAR | February 24, 2022 | |||
USD | ZAR | ZAR | February 24, 2022 | |||
USD | ZAR | ZAR | February 24, 2022 | |||
|
|
|
|
|
| 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, cash equivalents and restricted cash (included in other long-term assets) |
|
|
|
|
|
|
|
| ||||||
|
| Fixed maturity investments (included in cash and cash equivalents) |
|
|
|
|
|
|
|
| ||||||
|
| Total assets at fair value | $ |
| $ |
| $ |
| $ |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Foreign exchange options |
|
|
|
|
|
|
|
| ||||||
|
|
| Total liabilities at fair value | $ |
| $ |
| $ |
| $ |
| |||||
14
4. Fair value of financial instruments (continued)
The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2021, 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) |
|
|
|
|
|
|
|
| ||||||
|
|
| Total assets at fair value | $ |
| $ |
| $ |
| $ |
| |||||
There have been
There was
|
|
|
|
|
| Carrying value |
| |
| Assets |
|
|
| ||||
| Balance as of June 30, 2021 | $ |
| |||||
|
| Foreign currency adjustment(1) |
|
| ||||
|
|
| Balance as of December 31, 2021 | $ |
| |||
|
|
|
|
|
| Carrying value |
| |
| Assets |
|
|
| ||||
| Balance as of June 30, 2020 | $ |
| |||||
|
| Foreign currency adjustment(1) |
|
| ||||
|
|
| Balance as of December 31, 2020 | $ |
| |||
Assets 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. Refer to Note 5 for impairment charges recorded during the reporting periods presented herein. The Company has no liabilities that are measured at fair value on a nonrecurring basis.
15
5.Equity-accounted investments and other long-term assets
Refer to Note 8 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2021, for additional information regarding its equity-accounted investments and other long-term assets.
Equity-accounted investments
The Company’s ownership percentage in its equity-accounted investments as of December 31, 2021, and June 30, 2021, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
| June 30, |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2021 |
| 2021 |
| |||
| Finbond Group Limited (“Finbond”) |
| % |
| % |
| ||||||||||||||
| Carbon Tech Limited (“Carbon”) |
| % |
| % |
| ||||||||||||||
| SmartSwitch Namibia (Pty) Ltd (“SmartSwitch Namibia”) |
| % |
| % |
| ||||||||||||||
5.Equity-accounted investments and other long-term assets (continued)
Equity-accounted investments (continued)
Finbond
As of December 31, 2021, the Company owned
Summarized below is the movement in equity-accounted investments and loans provided to equity-accounted investments during the six months ended December 31, 2021:
|
|
|
|
|
|
|
| Finbond |
| Other(1) |
| Total |
| |||
| Investment in equity |
|
|
|
|
|
|
|
|
| ||||||
|
| Balance as of June 30, 2021 | $ |
| $ |
| $ |
| ||||||||
|
|
| Stock-based compensation |
|
|
|
|
|
| |||||||
|
|
| Comprehensive loss: |
| ( |
|
|
|
| ( |
| |||||
|
|
|
| Other comprehensive loss |
| ( |
|
|
|
| ( |
| ||||
|
|
|
| Equity accounted loss |
| ( |
|
|
|
| ( |
| ||||
|
|
|
|
| Share of net loss |
| ( |
|
|
|
| ( |
| |||
|
|
| Dividends received |
|
|
| ( |
|
| ( |
| |||||
|
|
| Foreign currency adjustment(2) |
| ( |
|
| ( |
|
| ( |
| ||||
|
| Balance as of December 31, 2021 | $ |
| $ |
| $ |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity |
| Loans |
| Total |
| |||
| Carrying amount as of : |
|
|
|
|
|
|
|
|
| ||||||
|
|
| June 30, 2021 | $ |
| $ |
| $ |
| |||||||
|
|
| December 31, 2021 | $ |
| $ |
| $ |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes Carbon and SmartSwitch Namibia.
(2) The foreign currency adjustment represents the effects of the fluctuations of the ZAR, Nigerian naira and Namibian dollar against the U.S. dollar on the carrying value.
16
5.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 December 31, 2021, and June 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
|
| June 30, | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2021 |
|
| 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments | $ |
| $ | |||||||||||||
|
|
| Investment in |
|
|
| |||||||||||
|
|
| Investment in |
|
|
| |||||||||||
|
|
| Investment in |
|
|
| |||||||||||
| Total held to maturity investments |
|
|
| |||||||||||||
|
|
| Investment in |
|
|
| |||||||||||
| Long-term portion of amount due related to sale of interest in Bank Frick(3) |
|
|
| |||||||||||||
| Policy holder assets under investment contracts (Note 7) |
|
|
| |||||||||||||
| Reinsurance assets under insurance contracts (Note 7) |
|
|
| |||||||||||||
|
|
| Total other long-term assets | $ |
| $ | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) On October 16, 2020, the High Court of South Africa, Gauteng Division, Pretoria ordered that CPS be placed into liquidation.
(2) The note is included in accounts receivable, net and other receivables as of December 31, 2021 (refer to Note 2).
(3) Long-term portion of amount due related to sale of interest in Bank Frick as of June 30, 2021, represents the amount due from the purchaser in July 2022 and is included in accounts receivable, net, and other receivables as of December 31, 2021 (refer to Note 2).
MobiKwik
In October 2021, the Company converted its
In early November 2020, MobiKwik entered into an agreement to raise additional capital through the issuance of additional shares to a new shareholder at a valuation of $
The change in the fair value of MobiKwik during the three and six months ended December 31, 2020, of $
Summarized below are the components of the Company’s equity securities without readily determinable fair value and held to maturity investments as of December 31, 2021:
|
|
|
|
|
|
|
|
|
|
| Cost basis |
|
| Unrealized holding |
|
| Unrealized holding |
|
| Carrying |
|
|
|
|
|
|
|
|
|
|
|
|
|
| gains |
|
| losses |
|
| value |
| |
| Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Investment in MobiKwik | $ |
| $ |
| $ |
| $ |
| |||||||||||
|
| Investment in CPS |
|
|
|
|
|
|
|
| |||||||||||
| Held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Investment in Cedar Cellular notes (Note 2) |
|
|
|
|
|
|
|
| |||||||||||
|
|
|
| Total | $ |
| $ |
| $ |
| $ |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
5.Equity-accounted investments and other long-term assets (continued)
Other long-term assets (continued)
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, 2021:
|
|
|
|
|
|
|
|
|
|
| Cost basis |
|
| Unrealized holding |
|
| Unrealized holding |
|
| Carrying |
|
|
|
|
|
|
|
|
|
|
|
|
|
| gains |
|
| losses |
|
| value |
| |
| Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Investment in MobiKwik | $ |
| $ |
| $ |
| $ |
| |||||||||||
|
| Investment in CPS |
|
|
|
|
|
|
|
| |||||||||||
| Held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Investment in Cedar Cellular notes |
|
|
|
|
|
|
|
| |||||||||||
|
|
|
| Total | $ |
| $ |
| $ |
| $ |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.Goodwill and intangible assets, net
Goodwill
Summarized below is the movement in the carrying value of goodwill for the six months ended December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross value |
|
| Accumulated impairment |
|
| Carrying value |
|
|
| Balance as of June 30, 2021 |
| $ |
| $ | ( |
| $ |
| ||||||||||||
|
|
| Foreign currency adjustment (1) |
|
| ( |
|
|
|
| ( |
| ||||||||||
|
|
|
| Balance as of December 31, 2021 |
| $ |
| $ | ( |
| $ |
| ||||||||||
Refer to Note 17 for additional information regarding changes to the Company’s reportable segments during the three months ended December 31, 2021. Goodwill has been allocated to the Company’s reportable segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer |
| Merchant |
| Other |
| Carrying value | ||||
|
| Balance as of June 30, 2021 |
| $ |
| $ |
| $ |
| $ | ||||||
|
|
| Foreign currency adjustment (1) |
|
|
|
| ( |
|
|
|
| ( | |||
|
|
|
| Balance as of December 31, 2021 |
| $ |
| $ |
| $ |
| $ | ||||
18
6.Goodwill and intangible assets, net (continued)
Intangible assets, net
Carrying value and amortization of intangible assets
Summarized below is the carrying value and accumulated amortization of intangible assets as of December 31, 2021, and June 30, 2021:
|
|
|
|
| As of December 31, 2021 |
| As of June 30, 2021 |
| ||||||||||||||
|
|
|
|
|
| Gross carrying value |
|
| Accumulated amortization |
|
| Net carrying value |
|
| Gross carrying value |
|
| Accumulated amortization |
|
| Net carrying value |
|
| Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Customer relationships | $ |
| $ | ( |
| $ |
| $ |
| $ | ( |
| $ |
| ||||||
|
| Software and unpatented technology |
|
|
| ( |
|
|
|
|
|
| ( |
|
|
| ||||||
|
| FTS patent |
|
|
| ( |
|
|
|
|
|
| ( |
|
|
| ||||||
|
| Trademarks |
|
|
| ( |
|
|
|
|
|
| ( |
|
|
| ||||||
|
| Total finite-lived intangible assets | $ |
| $ | ( |
| $ |
| $ |
| $ | ( |
| $ |
| ||||||
Aggregate amortization expense on the finite-lived intangible assets for each of the three months ended December 31, 2021 and 2020, was approximately $
Future estimated annual amortization expense for the next five fiscal years and thereafter, assuming exchange rates that prevailed on December 31, 2021, is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a result of acquisitions, changes in useful lives, exchange rate fluctuations and other relevant factors.
| Fiscal 2022 |
| $ |
| |||||||||
| Fiscal 2023 |
|
|
| |||||||||
| Fiscal 2024 |
|
|
| |||||||||
| Fiscal 2025 |
|
|
| |||||||||
| Fiscal 2026 |
|
|
| |||||||||
|
| Total future estimated annual amortization expense |
|
|
|
|
|
|
|
| $ |
| |
19
7.Assets and policyholder liabilities under insurance and investment contracts
Reinsurance assets and policyholder liabilities under insurance contracts
Summarized below is the movement in reinsurance assets and policyholder liabilities under insurance contracts during the six months ended December 31, 2021:
|
|
|
|
|
| Reinsurance Assets(1) |
|
| Insurance contracts(2) |
|
| Balance as of June 30, 2021 | $ |
| $ | ( |
| ||||
|
| Increase in policy holder benefits under insurance contracts |
|
|
|
| ||||
|
| Claims and decrease in policyholders’ benefits under insurance contracts |
| ( |
|
| ( |
| ||
|
| Foreign currency adjustment(3) |
| ( |
|
|
| |||
|
|
| Balance as of December 31, 2021 | $ |
| $ | ( |
| ||
(1) Included in other long-term assets (refer to Note 5);
(2) Included in other long-term liabilities;
(3) Represents the effects of the fluctuations of the ZAR against the U.S. dollar.
The Company has agreements with reinsurance companies in order to limit its losses from various 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).
Assets and policyholder liabilities under investment contracts
Summarized below is the movement in assets and policyholder liabilities under investment contracts during the six months ended December 31, 2021:
|
|
|
|
| Assets(1) |
| Investment contracts(2) |
| ||
| Balance as of June 30, 2021 | $ |
| $ | ( |
| ||||
|
| Increase in policy holder benefits under investment contracts |
|
|
| ( |
| |||
|
| Claims and decrease in policyholders’ benefits under investment contracts |
| ( |
|
|
| |||
|
| Foreign currency adjustment (3) |
| ( |
|
|
| |||
|
|
| Balance as of December 31, 2021 | $ |
| $ | ( |
| ||
(1) Included in other long-term assets (refer to Note 5);
(2) Included in other long-term liabilities;
(3) Represents the effects of the fluctuations of the ZAR against the U.S. dollar.
20
8.Borrowings
Refer to Note 11 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2021, for additional information regarding its borrowings.
South Africa
July 2017 Facilities, as amended, comprising long-term borrowings (all repaid) and a short-term facility (Facility E)
Available short-term facility - Facility E
As of December 31, 2021, the aggregate amount of the Company’s short-term South African overdraft facility with RMB was ZAR
Nedbank facility, comprising short-term facilities
As of December 31, 2021, the aggregate amount of the Company’s short-term South African credit facility with Nedbank Limited was ZAR
As of December 31, 2021 and June 30, 2021, the Company had utilized approximately ZAR
Movement in short-term credit facilities
Summarized below are the Company’s short-term facilities as of December 31, 2021, and the movement in the Company’s short-term facilities from as of June 30, 2021 to as of December 31, 2021, as well as the respective interest rates applied to the borrowings as of December 31, 2021:
|
|
|
|
|
|
| South Africa |
|
| Total |
| |||
|
|
|
|
|
| RMB |
| Nedbank |
|
|
|
| ||
| Short-term facilities available as of December 31, 2021 | $ |
| $ |
| $ |
| |||||||
|
| Overdraft restricted as to use for ATM funding only |
|
|
|
|
|
| ||||||
|
| Indirect and derivative facilities |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest rate (%), based on South African prime rate |
|
|
|
|
|
|
|
| |||||
| Interest rate (%), based on South African prime rate less |
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Movement in utilized overdraft facilities: |
|
|
|
|
|
|
|
|
| ||||
|
| Balance as of June 30, 2021 |
|
|
|
|
|
| ||||||
|
|
| Utilized |
|
|
|
|
|
| |||||
|
|
| Repaid |
| ( |
|
| ( |
|
| ( |
| ||
|
|
| Foreign currency adjustment(1) |
| ( |
|
| ( |
|
| ( |
| ||
|
|
|
| Balance as of December 31, 2021 |
|
|
|
|
|
| ||||
|
|
|
|
| Restricted as to use for ATM funding only |
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Movement in utilized indirect and derivative facilities: |
|
|
|
|
|
|
|
|
| ||||
|
| Balance as of June 30, 2021(2) |
|
|
|
|
|
| ||||||
|
|
| Foreign currency adjustment(1) |
|
|
| ( |
|
| ( |
| |||
|
|
|
| Balance as of December 31, 2021(2) | $ |
| $ |
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
9.Other payables
Summarized below is the breakdown of other payables as of December 31, 2021, and June 30, 2021:
|
|
|
| December 31, |
| June 30, |
| ||
|
|
|
|
| 2021 |
|
| 2021 |
|
| Accruals |
| $ |
| $ |
| |||
| Provisions |
|
|
|
|
| |||
| Other |
|
|
|
|
| |||
| Value-added tax payable |
|
|
|
|
| |||
| Payroll-related payables |
|
|
|
|
| |||
| Participating merchants' settlement obligation |
|
|
|
|
| |||
|
|
| $ |
| $ |
| |||
10.Capital structure
The following table presents a reconciliation between the number of shares, net of treasury, presented in the unaudited condensed consolidated statement of changes in equity during the six months ended December 31, 2021 and 2020, respectively, and the number of shares, net of treasury, excluding non-vested equity shares that have not vested during the six months ended December 31, 2021 and 2020, respectively:
|
|
| December 31, |
| December 31, |
|
|
|
| 2021 |
| 2020 |
|
|
|
|
|
|
|
|
| Number of shares, net of treasury: |
|
|
|
| |
|
| Statement of changes in equity |
|
| ||
|
| Non-vested equity shares that have not vested as of end of period |
|
| ||
| Number of shares, net of treasury, excluding non-vested equity shares that have not vested |
|
| |||
11.Accumulated other comprehensive loss
The table below presents the change in accumulated other comprehensive (loss) income per component during the three months ended December 31, 2021:
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
|
|
|
|
|
|
| December 31, 2021 |
| ||||
|
|
|
|
|
|
|
|
| Accumulated foreign currency translation reserve |
|
| Total |
|
| Balance as of October 1, 2021 |
|
|
|
| $ | ( |
| $ | ( |
| ||
|
| Movement in foreign currency translation reserve |
|
| ( |
|
| ( |
| ||||
|
|
| Balance as of December 31, 2021 |
|
|
|
| $ | ( |
| $ | ( |
|
22
11.Accumulated other comprehensive loss (continued)
The table below presents the change in accumulated other comprehensive (loss) income per component during the three months ended December 31, 2020:
|
|
|
|
| Three months ended |
| ||||
|
|
|
|
| December 31, 2020 |
| ||||
|
|
|
|
|
| Accumulated foreign currency translation reserve |
|
| Total |
|
| Balance as of October 1, 2020 |
| $ | ( |
| $ | ( |
| ||
|
| Movement in foreign currency translation reserve |
|
|
|
|
| |||
|
|
| Balance as of December 31, 2020 |
| $ | ( |
| $ | ( |
|
|
|
|
|
|
|
|
| Six months ended |
| ||||
|
|
|
|
|
|
|
| December 31, 2021 |
| ||||
|
|
|
|
|
|
|
|
| Accumulated foreign currency translation reserve |
|
| Total |
|
| Balance as of July 1, 2021 |
|
|
|
| $ | ( |
| $ | ( |
| ||
|
| Movement in foreign currency translation reserve related to equity-accounted investment |
|
| ( |
|
| ( |
| ||||
|
| Movement in foreign currency translation reserve |
|
| ( |
|
| ( |
| ||||
|
|
| Balance as of December 31, 2021 |
|
|
|
| $ | ( |
| $ | ( |
|
a |
|
|
|
| Six months ended |
| ||||
|
|
|
|
| December 31, 2020 |
| ||||
|
|
|
|
|
| Accumulated foreign currency translation reserve |
|
| Total |
|
| Balance as of July 1, 2020 |
| $ | ( |
| $ | ( |
| ||
|
| Movement in foreign currency translation reserve related to equity-accounted investment |
|
|
|
|
| |||
|
| Movement in foreign currency translation reserve |
|
|
|
|
| |||
|
|
| Balance as of December 31, 2020 |
| $ | ( |
| $ | ( |
|
23
12.Stock-based compensation
The Company’s Amended and Restated 2015 Stock Incentive Plan and the vesting terms of certain stock-based awards granted are described in Note 16 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2021.
Stock option and restricted stock activity
Options
The following table summarizes stock option activity for the six months ended December 31, 2021 and 2020 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of shares |
|
| Weighted average exercise price ($) |
|
| Weighted average remaining contractual term (in years) |
|
| Aggregate intrinsic value ($'000) |
| Weighted average grant date fair value ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding - June 30, 2021 |
|
|
|
|
|
|
|
| |||||||||
|
| Exercised |
| ( |
|
|
|
| - |
|
|
| - | |||||
|
| Forfeited |
| ( |
|
|
|
| - |
|
| - |
| |||||
|
|
| Outstanding - December 31, 2021 |
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding - June 30, 2020 |
|
|
|
|
|
|
|
| |||||||||
|
| Granted – August 2020 |
|
|
|
|
|
|
|
| ||||||||
|
| Granted – November 2020 |
|
|
|
|
|
|
|
| ||||||||
|
| Exercised |
| ( |
|
|
|
| - |
|
|
| - | |||||
|
| Forfeited |
| ( |
|
|
|
| - |
|
| - |
| |||||
|
|
| Outstanding - December 31, 2020 |
|
|
|
|
|
|
|
| |||||||
The fair value of each option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the assumptions noted in the following table. The estimated expected volatility is calculated based on the Company’s
|
|
|
|
| Six months ended | ||
|
|
|
|
| December 31, | ||
|
|
|
|
|
| 2020 |
|
| Expected volatility |
| % | ||||
| Expected life (in years) |
|
| ||||
| Risk-free rate |
| % | ||||
24
12.Stock-based compensation (continued)
Stock option and restricted stock activity (continued)
Options (continued)
The following table presents stock options vested and expected to vest as of December 31, 2021:
|
|
|
|
|
|
| Number of shares |
|
| Weighted average exercise price ($) |
|
| Weighted average remaining contractual term (in years) |
|
| Aggregate intrinsic value ($’000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vested and expecting to vest - December 31, 2021 |
|
|
|
|
|
|
|
|
| |||||||
These options have an exercise price range of $
The following table presents stock options that are exercisable as of December 31, 2021:
|
|
|
|
|
|
| Number of shares |
|
| Weighted average exercise price ($) |
|
| Weighted average remaining contractual term (in years) |
|
| Aggregate intrinsic value ($’000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercisable - December 31, 2021 |
|
|
|
|
|
|
|
|
| |||||||
During the three months ended December 31, 2021 and 2020, respectively,
Restricted stock
The following table summarizes restricted stock activity for the six months ended December 31, 2021 and 2020:
|
|
|
|
|
|
| Number of shares of restricted stock |
|
|
| Weighted average grant date fair value ($’000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
| Non-vested – June 30, 2021 |
|
|
|
|
|
|
| |||||
|
| Total granted |
|
|
|
|
|
|
| ||||
|
|
| Granted – July 2021 |
|
|
|
|
|
|
| |||
|
|
| Granted – August 2021 |
|
|
|
|
|
|
| |||
|
|
| Granted – November and December 2021 |
|
|
|
|
|
|
| |||
|
|
| Granted – December 2021 |
|
|
|
|
|
|
| |||
|
| Total granted and vested - November and December 2021 |
|
| - |
|
|
| - |
|
| ||
|
|
| Granted - November and December 2021 |
|
|
|
|
|
|
| |||
|
|
| Vested - November and December 2021 |
|
| ( |
|
|
|
|
| ||
| Forfeitures |
|
| ( |
|
|
| ( |
|
| |||
|
|
| Non-vested – December 31, 2021 |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non-vested – June 30, 2020 |
|
|
|
|
|
|
| |||||
| Total vested |
|
| ( |
|
|
| ( |
|
| |||
|
|
| Vested – August 2020 |
|
| ( |
|
|
| ( |
|
| |
|
|
| Vested – September 2020 - accelerated vesting |
|
| ( |
|
|
| ( |
|
| |
|
| Forfeitures |
|
| ( |
|
|
| ( |
|
| ||
|
|
|
| Non-vested – December 31, 2020 |
|
|
|
|
|
|
| ||
25
12.Stock-based compensation (continued)
Stock option and restricted stock activity (continued)
Restricted stock (continued)
On June 30, 2021, the Company entered into employment agreements with Mr. Chris G.B. Meyer, under which Mr. Meyer was appointed Group Chief Executive Officer of the Company effective July 1, 2021. Mr. Meyer was awarded
Upon joining the Company, each of Messrs. Meyer and Lincoln C. Mali, where entitled to receive an award of shares of restricted stock which were subject to them purchasing an agreed value of shares (“matching awards”) in the market during a prescribed period of time. However, these executives were unable to purchase shares in the market during that period due to a Company-imposed insider-trading restriction placed on them. On November 15, 2021, the Company amended the terms of these awards in order to put the executives into an economically equivalent position, as follows:
(i) assume that the executives would have purchased their agreed allocation within their first
(ii) require the executives to fulfill their agreed allocations within a short period following release of the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2021;
(iii) to the extent that the price per share actually paid is greater than the
(iv) adjust the initial matching awards to the aggregate number of shares acquired in terms of (ii) and (iii). The matching awards vest ratably over a period of three years commencing on the first anniversary of the grant of the matching awards.
The executives acquired shares during November and December 2021, and the Company granted the executives
Except as discussed above,
During the six months ended December 31, 2020,
26
12.Stock-based compensation (continued)
Stock-based compensation charge and unrecognized compensation cost
The Company recorded a stock-based compensation charge, net during the three months ended December 31, 2021 and 2020, of $
|
|
|
|
|
| Total charge |
| Allocated to cost of goods sold, IT processing, servicing and support |
| Allocated to selling, general and administration |
| |||
| Three months ended December 31, 2021 |
|
|
|
|
|
|
|
|
|
| |||
|
|
| Stock-based compensation charge |
| $ |
| $ |
| $ |
| ||||
|
|
|
| Total - three months ended December 31, 2021 |
| $ |
| $ |
| $ |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
| |||
|
|
| Stock-based compensation charge |
| $ |
| $ |
| $ |
| ||||
|
|
| Reversal of stock compensation charge related to stock options and restricted stock forfeited |
|
| ( |
|
|
|
| ( |
| ||
|
|
|
| Total - three months ended December 31, 2020 |
| $ |
| $ |
| $ |
| |||
a |
|
|
|
|
| Total charge |
| Allocated to cost of goods sold, IT processing, servicing and support |
| Allocated to selling, general and administration |
| |||
| Six months ended December 31, 2021 |
|
|
|
|
|
|
|
|
|
| |||
|
|
| Stock-based compensation charge |
| $ |
| $ |
| $ |
| ||||
|
|
| Reversal of stock compensation charge related to stock options forfeited |
|
| ( |
|
|
|
| ( |
| ||
|
|
|
| Total - six months ended December 31, 2021 |
| $ |
| $ |
| $ |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
| |||
|
|
| Stock-based compensation charge |
| $ |
| $ |
| $ |
| ||||
|
|
| Reversal of stock compensation charge related to stock options and restricted stock forfeited |
|
| ( |
|
|
|
| ( |
| ||
|
|
|
| Total - six months ended December 31, 2020 |
| $ |
| $ |
| $ |
| |||
The stock-based compensation charges have been allocated to selling, general and administration based on the allocation of the cash compensation paid to the relevant employees.
As of December 31, 2021, the total unrecognized compensation cost related to stock options was approximately $
As of December 31, 2021, and June 30, 2021, respectively, the Company recorded a deferred tax asset of approximately $
27
13.(Loss) Earnings per share
The Company has issued redeemable common stock which is redeemable at an amount other than fair value. Redemption of a class of common stock at other than fair value increases or decreases the carrying amount of the redeemable common stock and is reflected in basic earnings per share using the two-class method. There were no redemptions of common stock, or adjustments to the carrying value of the redeemable common stock during the three months ended December 31, 2021 and 2020. Accordingly, the two-class method presented below does not include the impact of any redemption. The Company’s redeemable common stock is described in Note 13 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2021.
Basic (loss) earnings per share includes 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 has been calculated using the two-class method and basic (loss) earnings per share for the three months ended December 31, 2021 and 2020, reflects only undistributed earnings. The computation below of basic (loss) earnings per share excludes the net loss 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 (loss) earnings per share utilizing the treasury stock method and are not considered to be participating securities, as the stock options do not contain non-forfeitable dividend rights. The Company has excluded employee stock options to purchase
The calculation of diluted (loss) earnings per share includes the dilutive effect of a portion of the restricted stock granted to employees in May 2018, September 2018, February 2020, May 2021, July 2021, August 2021, November 2021, and December 2021 as these shares of restricted stock are considered contingently returnable shares for the purposes of the diluted (loss) earnings per share calculation and the vesting conditions in respect of a portion of the restricted stock had been satisfied. The vesting conditions for all awards made are discussed in Note 16 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2021.
28
13.(Loss) Earnings per share (continued)
The following table presents net loss attributable to Net1 and the share data used in the basic and diluted (loss) earnings per share computations using the two-class method:
|
|
|
|
|
|
| Three months ended |
| Six months ended |
| ||||||||||||
|
|
|
|
|
|
| December 31, |
| December 31, |
| ||||||||||||
|
|
|
|
|
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| ||||
|
|
|
|
|
|
|
| (in thousands except |
|
|
| (in thousands except |
|
| ||||||||
|
|
|
|
|
|
|
| percent and |
|
|
| percent and |
|
| ||||||||
|
|
|
|
|
|
|
| per share data) |
|
|
| per share data) |
|
| ||||||||
| Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Net loss attributable to Net1 |
| $ | ( |
|
| $ | ( |
|
| $ | ( |
|
| $ | ( |
|
| |||
|
| Undistributed (loss) earnings |
|
| ( |
|
|
| ( |
|
|
| ( |
|
|
| ( |
|
| |||
|
| Percent allocated to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| (Calculation 1) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Numerator for loss per share: basic and diluted |
| $ | ( |
| $ |
| ( |
|
| $ | ( |
|
| $ | ( |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Denominator for basic (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
| Denominator for diluted (loss) earnings per share: adjusted weighted average common shares outstanding and assuming conversion |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Basic |
| $ | ( |
|
| $ | ( |
|
| $ | ( |
|
| $ | ( |
|
| |||
|
| Diluted |
| $ | ( |
|
| $ | ( |
|
| $ | ( |
|
| $ | ( |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Calculation 1) |
|
|
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|
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|
|
|
|
|
|
| ||||
|
| Basic weighted-average common shares outstanding (A) |
|
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|
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|
|
|
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|
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| |||||||
|
| Basic weighted-average common shares outstanding and unvested restricted shares expected to vest (B) |
|
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|
|
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|
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|
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| |||||||
|
| Percent allocated to common shareholders |
|
|
|
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|
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|
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|
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|
| |||
|
| (A) / (B) |
|
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| |||||||
|
|
|
|
| Three months ended |
| Six months ended |
| |||||||
|
|
|
|
| December 31, |
|
| December 31, |
| ||||||
|
|
|
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash received from interest |
| $ |
| $ |
| $ |
| $ |
| ||||
|
| Cash paid for interest |
| $ |
| $ |
| $ |
| $ |
| ||||
|
| Cash paid for income taxes |
| $ |
| $ |
| $ |
| $ |
| ||||
29
14.Supplemental cash flow information (continued)
Disaggregation of cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash included on the Company’s unaudited condensed consolidated statement of cash flows includes restricted cash 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. Cash, cash equivalents and restricted cash also includes cash in certain bank accounts that have been ceded to Nedbank. As this cash has been pledged and ceded it may not be drawn and is considered restricted as to use and therefore is classified as restricted cash as well. Refer to Note 8 for additional information regarding the Company’s facilities. The following table presents the disaggregation of cash, cash equivalents and restricted cash as of December 31, 2021 and 2020, and June 30, 2021:
|
|
|
|
|
|
|
|
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| June 30, 2021 |
|
|
| Cash and cash equivalents |
| $ |
| $ |
| $ |
| ||||||||
|
| Restricted cash |
|
|
|
|
|
|
| ||||||||
|
|
| Cash, cash equivalents and restricted cash |
| $ |
| $ |
| $ |
| |||||||
|
|
|
|
| Three months ended December 31, |
|
| Six months ended December 31, |
| ||||||
|
|
|
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
|
| Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating cash flows from operating leases |
| $ |
| $ |
| $ |
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Right-of-use assets obtained in exchange for lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
| $ |
| $ |
| $ |
| $ |
| ||||
15.Revenue recognition
Disaggregation of revenue
The following table presents the Company’s revenue disaggregated by major revenue streams, including a reconciliation to operating segments for the three months ended December 31, 2021:
|
|
|
| Consumer |
| Merchant |
| Other |
| Total | ||||
| Processing fees | $ |
| $ |
| $ |
| $ | ||||||
|
| South Africa |
|
|
|
|
|
|
| |||||
|
| Rest of world |
|
|
|
|
|
|
| |||||
| Technology products |
|
|
|
|
|
|
| ||||||
| Telecom products and services |
|
|
|
|
|
|
| ||||||
| Lending revenue |
|
|
|
|
|
|
| ||||||
| Insurance revenue |
|
|
|
|
|
|
| ||||||
| Account holder fees |
|
|
|
|
|
|
| ||||||
| Other |
|
|
|
|
|
|
| ||||||
|
| Total revenue, derived from the following geographic locations |
|
|
|
|
|
|
| |||||
|
|
| South Africa |
|
|
|
|
|
|
| ||||
|
|
| Rest of world | $ |
| $ |
| $ |
| $ | ||||
30
15.Revenue recognition (continued)
Disaggregation of revenue (continued)
The following table presents the Company’s revenue disaggregated by major revenue streams, including a reconciliation to operating segments for the three months ended December 31, 2020:
|
|
|
| Consumer |
| Merchant |
| Other |
| Total | ||||
| Processing fees | $ |
| $ |
| $ |
| $ | ||||||
|
| South Africa(1) |
|
|
|
|
|
|
| |||||
|
| Rest of world |
|
|
|
|
|
|
| |||||
| Technology products |
|
|
|
|
|
|
| ||||||
| Telecom products and services |
|
|
|
|
|
|
| ||||||
| Lending revenue |
|
|
|
|
|
|
| ||||||
| Insurance revenue |
|
|
|
|
|
|
| ||||||
| Account holder fees |
|
|
|
|
|
|
| ||||||
| Other |
|
|
|
|
|
|
| ||||||
|
| Total revenue, derived from the following geographic locations |
|
|
|
|
|
|
| |||||
|
|
| South Africa |
|
|
|
|
|
|
| ||||
|
|
| Rest of world | $ |
| $ |
| $ |
| $ | ||||
|
|
|
| Consumer |
| Merchant |
| Other |
| Total | ||||
| Processing fees | $ |
| $ |
| $ |
| $ | ||||||
|
| South Africa |
|
|
|
|
|
|
| |||||
|
| Rest of world |
|
|
|
|
|
|
| |||||
| Technology products |
|
|
|
|
|
|
| ||||||
| Telecom products and services |
|
|
|
|
|
|
| ||||||
| Lending revenue |
|
|
|
|
|
|
| ||||||
| Insurance revenue |
|
|
|
|
|
|
| ||||||
| Account holder fees |
|
|
|
|
|
|
| ||||||
| Other |
|
|
|
|
|
|
| ||||||
|
| Total revenue, derived from the following geographic locations |
|
|
|
|
|
|
| |||||
|
|
| South Africa |
|
|
|
|
|
|
| ||||
|
|
| Rest of world | $ |
| $ |
| $ |
| $ | ||||
|
|
|
| Consumer |
| Merchant |
| Other |
| Total | ||||
| Processing fees | $ |
| $ |
| $ |
| $ | ||||||
|
| South Africa(1) |
|
|
|
|
|
|
| |||||
|
| Rest of world |
|
|
|
|
|
|
| |||||
| Technology products |
|
|
|
|
|
|
| ||||||
| Telecom products and services |
|
|
|
|
|
|
| ||||||
| Lending revenue |
|
|
|
|
|
|
| ||||||
| Insurance revenue |
|
|
|
|
|
|
| ||||||
| Account holder fees |
|
|
|
|
|
|
| ||||||
| Other |
|
|
|
|
|
|
| ||||||
|
| Total revenue, derived from the following geographic locations |
|
|
|
|
|
|
| |||||
|
|
| South Africa |
|
|
|
|
|
|
| ||||
|
|
| Rest of world | $ |
| $ |
| $ |
| $ | ||||
31
16.Leases
The Company has entered into leasing arrangements classified as operating leases under accounting guidance. These leasing arrangements relate primarily to the lease of its corporate head office, administration offices and branch locations through which the Company operates its financial services business in South Africa. The Company’s operating leases have remaining lease terms of between and
The Company has also entered into short-term leasing arrangements, primarily for the lease of branch locations and other locations, to operate its financial services business in South Africa. The Company’s short-term lease expense during the three months ended December 31, 2021 and 2020, was $
|
|
|
| December 31, |
| June 30, |
| ||
|
|
|
| 2021 |
| 2021 |
| ||
|
| Right of use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
| Weighted average remaining lease term (years) |
|
|
|
|
| ||
|
| Weighted average discount rate (percent) |
|
|
|
|
| ||
|
| Maturities of operating lease liabilities |
|
|
|
|
| Year ended June 30, |
|
|
|
|
| 2022 (excluding six months to December 31, 2021) |
| $ | |
|
| 2023 |
|
| |
|
| 2024 |
|
| |
|
| 2025 |
|
| |
|
| 2026 |
|
| |
|
| Thereafter |
|
| |
|
| Total undiscounted operating lease liabilities |
|
| |
|
| Less imputed interest |
|
| |
|
| Total operating lease liabilities, included in |
|
| |
|
| Operating lease liability - current |
|
| |
|
| Operating lease liability - long-term |
| $ |
17.Operating segments
Change to internal reporting structure and restatement of previously reported information
During November 2021, the Company’s chief operating decision maker changed the Company’s operating and internal reporting structures following the establishment of a new management team and the Company’s decision to focus primarily on the South African market. The chief operating decision maker has decided to analyze the Company’s operating performance primarily based on operational lines which group financial services provided to customers (consumers) into the Consumer operating segment and goods and services provided to corporate and other juristic entities into the Merchant operating segment.
Reallocation of certain activities among operating segments
During the second quarter of fiscal 2022, the Company reorganized its operating segments by combining financial services provided to consumers (primarily individuals) from the Financial services operating segment with processing activities provided for customers within the Consumer operating segment, and by allocating processing activities performed for merchants (primarily corporate and juristic customers) from the Processing operating segment to the Merchant operating segment. Sales of hardware and licenses to customers (primarily corporate entities) included in the Technology operating segment have been allocated to the Merchant operating segment. Lastly, processing activities performed outside of South Africa have been allocated from the Processing operating segment to the Other operating segment. Segment results for the three and six months ended December 31, 2021, reflect these changes to the operating segments. Previously reported information has been restated.
32
17.Operating segments (continued)
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, and the countries in which the entity holds material assets or reports material revenues.
The Company currently has three reportable segments: Consumer, Merchant and Other. Consumer and Merchant operate mainly within South Africa and certain of the Company’s current and legacy activities outside of South Africa have been allocated to our Other operating segment. The Company’s reportable segments offer different products and services and require different resources and marketing strategies but share the Company’s assets.
The Consumer segment includes activities related to the provision of financial services to customers, including a bank account, loans and insurance products. The Company charges monthly administration fees for all bank accounts. 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 also earns fees on transactions performed by other banks’ customers utilizing its ATM or POS. The Company provides short-term loans to customers in South Africa for which it earns initiation and monthly service fees. The Company writes life insurance contracts, primarily funeral-benefit policies, and policy holders pay the Company a monthly insurance premium.
The Merchant segment includes activities related to the provision of goods and services provided to corporate and other juristic entities. The Company earns fees from processing activities performed for its customers and revenue generated from the distribution of prepaid airtime. The Company provides its customers with transaction processing services that involve the collection, transmittal and retrieval of all transaction data. This segment also includes sales of hardware and licenses to customers. Hardware includes the sale of POS devices, SIM cards and other consumables which can occur on an ad hoc basis. Licenses include the right to use certain technology developed by the Company.
The Other segment includes our operations outside South Africa and IPG’s processing activities for the applicable period through to the year ended June 30, 2021.
Corporate/Eliminations includes the Company’s head office cost center and the amortization of acquisition-related intangible assets.
33
17.Operating segments (continued)
Operating segments (continued)
The reconciliation of the reportable segment’s revenue to revenue from external customers for the three months ended December 31, 2021 and 2020, is as follows:
|
|
|
|
|
| Revenue | |||||||
|
|
|
|
|
| Reportable Segment |
|
| Inter-segment |
|
| From external customers | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer | $ |
| $ |
| $ | |||||||
| Merchant |
|
|
|
|
| |||||||
| Other |
|
|
|
|
| |||||||
|
| Total for the three months ended December 31, 2021 | $ |
| $ |
| $ | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer | $ |
| $ |
| $ | |||||||
| Merchant |
|
|
|
|
| |||||||
| Other |
|
|
|
|
| |||||||
|
|
| Total for the three months ended December 31, 2020 | $ |
| $ |
| $ | |||||
|
|
|
|
|
| Revenue | |||||||
|
|
|
|
|
| Reportable Segment |
|
| Inter-segment |
|
| From external customers | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer | $ |
| $ |
| $ | |||||||
| Merchant |
|
|
|
|
| |||||||
| Other |
|
|
|
|
| |||||||
|
| Total for the six months ended December 31, 2021 | $ |
| $ |
| $ | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer | $ |
| $ |
| $ | |||||||
| Merchant |
|
|
|
|
| |||||||
| Other |
|
|
|
|
| |||||||
|
|
| Total for the six months ended December 31, 2020 | $ |
| $ |
| $ | |||||
The Company evaluates segment performance based on segment earnings before interest, tax, depreciation and amortization (“EBITDA”), adjusted for items mentioned in the next sentence (“Segment Adjusted EBITDA”). The Company does not allocate depreciation and amortization, impairment of goodwill or other intangible assets, certain lease charges (“Lease adjustments”), non-recurring items (including gains or losses on disposal of investments, fair value adjustments to equity securities, fair value adjustments to currency options), interest income, interest expense, income tax expense or loss from equity-accounted investments to its reportable segments. The Lease adjustments reflects lease charge excluded from the calculation of Segment Adjusted EBITDA and are therefore reported as a reconciling item to reconcile the reportable segments Segment Adjusted EBITDA to the Company’s loss before income tax expense.
34
17.Operating segments (continued)
Operating segments (continued)
The reconciliation of the reportable segments measures of profit or loss to income before income taxes for the three and six months ended December 31, 2021 and 2020, is as follows:
|
|
|
|
| Three months ended |
|
| Six months ended | ||||||
|
|
|
|
| December 31, |
|
| December 31, | ||||||
|
|
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| Reportable segments measure of profit or loss | $ | ( |
| $ | ( |
| $ | ( |
| $ | ( | ||
|
| Operating loss: Corporate/Eliminations |
| ( |
|
| ( |
|
| ( |
|
| ( | |
|
| Lease adjustments |
| ( |
|
| ( |
|
| ( |
|
| ( | |
|
| Depreciation and amortization |
| ( |
|
| ( |
|
| ( |
|
| ( | |
|
| Change in fair value of equity securities |
|
|
|
|
|
|
| |||||
|
| Unrealized loss related to fair value adjustment to currency options |
| ( |
|
|
|
| ( |
|
| |||
|
| Loss on disposal of equity-accounted investment - Bank Frick |
|
|
| ( |
|
|
|
| ( | |||
|
| Interest income |
|
|
|
|
|
|
| |||||
|
| Interest expense |
| ( |
|
| ( |
|
| ( |
|
| ( | |
|
|
| Loss before income taxes | $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
|
|
|
|
|
|
|
|
| Three months ended |
| Six months ended | ||||||||
|
|
|
|
|
|
|
|
| December 31, |
| December 31, | ||||||||
|
|
|
|
|
|
|
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| Revenues |
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Consumer | $ |
| $ |
| $ |
| $ | ||||||||||
|
| Merchant |
|
|
|
|
|
|
| ||||||||||
|
| Other |
|
|
|
|
|
|
| ||||||||||
|
|
| Total |
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| EBITDA |
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Consumer |
| ( |
|
| ( |
|
| ( |
|
| ( | ||||||
|
| Merchant |
|
|
|
|
|
|
| ||||||||||
|
| Other |
|
|
| ( |
|
|
|
| ( | ||||||||
|
|
| Segment Adjusted EBITDA |
| ( |
|
| ( |
|
| ( |
|
| ( | |||||
|
|
| Corporate/Eliminations |
| ( |
|
| ( |
|
| ( |
|
| ( | |||||
|
|
|
| Subtotal |
| ( |
|
| ( |
|
| ( |
|
| ( | ||||
|
|
|
|
| Less: Lease adjustments |
|
|
|
|
|
|
| |||||||
|
|
|
|
| Less: Depreciation and amortization |
|
|
|
|
|
|
| |||||||
|
|
|
|
|
| Total operating loss |
| ( |
|
| ( |
|
| ( |
|
| ( | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Consumer |
|
|
|
|
|
|
| ||||||||||
|
| Merchant |
|
|
|
|
|
|
| ||||||||||
|
| Other |
|
|
|
|
|
|
| ||||||||||
|
|
| Subtotal: Operating segments |
|
|
|
|
|
|
| |||||||||
|
|
| Corporate/Eliminations |
|
|
|
|
|
|
| |||||||||
|
|
|
| Total |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expenditures for long-lived assets |
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Consumer |
|
|
|
|
|
|
| ||||||||||
|
| Merchant |
|
|
|
|
|
|
| ||||||||||
|
| Other |
|
|
|
|
|
|
| ||||||||||
|
|
| Subtotal: Operating segments |
|
|
|
|
|
|
| |||||||||
|
|
| Corporate/Eliminations |
|
|
|
|
|
|
| |||||||||
|
|
|
| Total | $ |
| $ |
| $ |
| $ | ||||||||
35
17.Operating segments (continued)
Operating segments (continued)
The segment information as reviewed by the chief operating decision maker does not include a measure of segment assets per segment as all of the significant assets are used in the operations of all, rather than any one, of the segments. The Company does not have dedicated assets assigned to a particular operating segment. Accordingly, it is not meaningful to attempt an arbitrary allocation and segment asset allocation is therefore not presented.
18.Income tax
Income tax in interim periods
For the purposes of interim financial reporting, the Company determines the appropriate income tax provision by first applying the effective tax rate expected to be applicable for the full fiscal year to ordinary income. This amount is then adjusted for the tax effect of significant unusual items, for instance, changes in tax law, valuation allowances and non-deductible transaction-related expenses that are reported separately, and have an impact on the tax charge. The cumulative effect of any change in the enacted tax rate, if and when applicable, on the opening balance of deferred tax assets and liabilities is also included in the tax charge as a discrete event in the interim period in which the enactment date occurs.
For the three and six months ended December 31, 2021, the Company’s effective tax rate was impacted by the tax effect of the change in the fair value of our equity securities (refer to Note 5), the tax expense recorded by the Company’s profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of the Company’s South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities (including the unrealized loss on the foreign currency options (refer to Note 4)).
For the three months ended December 31, 2020, the Company’s effective tax rate was impacted by the tax effect of the change in the fair value of our equity securities (refer to Note 5), which is at a lower tax rate than the South African statutory rate, which was partially offset by the tax expense recorded by the Company’s profitable South African operations, non-deductible expenses, the on-going losses incurred by IPG and certain of the Company’s South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities.
For the six months ended December 31, 2020, the Company’s effective tax rate was impacted by the tax effect of the change in fair value referred to above, tax expense recorded by the Company’s profitable South African operations, non-deductible expenses, the on-going losses incurred by IPG and certain of the Company’s South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities, which was partially offset by the reversal of the deferred tax liability related to one of the Company’s equity-accounted investments following its impairment (refer to Note 5).
Uncertain tax positions
The Company had no significant uncertain tax positions during the three months ended December 31, 2021, and therefore, the Company had no accrued interest related to uncertain tax positions on its balance sheet. The Company does not expect changes related to its unrecognized tax benefits will have a significant impact on its results of operations or financial position in the next 12 months.
The Company has no unrecognized tax benefits. The Company files income tax returns mainly in South Africa, Germany, Hong Kong, India, the United Kingdom, Botswana and in the U.S. federal jurisdiction. As of December 31, 2021, 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, 2017. 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.
19.Commitments and contingencies
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
36
19.Commitments and contingencies (continued)
Guarantees (continued)
The Company has not recognized any obligation related to these guarantees in its consolidated balance sheet as of December 31, 2021. The maximum potential amount that the Company could pay under these guarantees is ZAR
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.
20. Subsequent events
Commencement of financial services restructuring in January 2022
The Company has incurred significant losses since its contract to distribute social grants expired in September 2018. A strategic imperative for the Company is to return its South African financial services business to breakeven and then profitability as soon as possible. As part of a cost optimization process completed in late calendar 2021, the Company performed a review of its labor structure and determined that a number of its defined employee roles would need to be terminated due to redundancy. The Company therefore determined to embark on a retrenchment process pursuant to Section 189A of the South African Labour Relations Act (“Labour Act”). The Section 189A process requires an employer, before retrenching, to consult with any person affected by the retrenchment process for 60 days and the Company commenced this process on January 10, 2022. Depending on the nature and outcome of the retrenchment process, the Company expects to incur cash costs during the third quarter of fiscal 2022 of between ZAR
Agreement to acquire a controlling interest in the Connect Group – January 2022 definitive loan agreements signed
On October 31, 2021, the Company entered into a Sale of Shares Agreement (the “Sale Agreement”) with the Sellers (as defined in the Sale Agreement), Cash Connect Management Solutions Proprietary Limited (“CCMS”), Ovobix (RF) Proprietary Limited (“Ovobix”), Luxiano 227 Proprietary Limited (“Luxiano”) and K2021477132 (South Africa) Proprietary Limited (“K2021” and together with CCMS, Ovobix and Luxiano, the “Target Companies”). Pursuant to the Sale Agreement, and subject to its terms and conditions, the Company’s wholly-owned subsidiary, Net1 SA, agreed to acquire, and the Sellers agreed to sell, all of the outstanding equity interests and certain claims in the Target Companies. The Company has guaranteed the performance of Net1 SA’s obligations under the Sale Agreement.
Subject to the terms and conditions set forth in the Sale Agreement, at the closing of the transaction, the Sellers shall receive consideration of ZAR
The Sale Agreement includes customary covenants from the Sellers, including (i) to conduct the business in the ordinary course during the period between the execution of the Sale Agreement and the closing of the transactions contemplated thereby, and (ii) not to engage in certain kinds of transactions during such period.
The closing of the transaction is subject to customary closing conditions, including (i) approval from the competition authorities of South Africa, Namibia and Botswana, (ii) exchange control approval from the financial surveillance department of the South African Reserve Bank, and (iii) obtaining certain third-party consents. In addition, the closing of the transaction is subject to entry into definitive agreements by Net1 SA for an aggregate of ZAR
37
20. Subsequent events (continued)
Agreement to acquire a controlling interest in the Connect Group – January 2022 definitive loan agreements signed (continued)
On January 24, 2022, Net1, through Net1 SA, entered into a Fourth Amendment and Restatement Agreement, which includes, among other agreements, an Amended and Restated Common Terms Agreement, a Senior Facility G Agreement and a Senior Facility H Agreement (collectively, the “Loan Documents”) with RMB and 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, and certain other parties. Net1 agreed to guarantee the obligations of Net1 SA to the Lenders. The Loan Documents will become effective upon closing the transaction to acquire the Target Companies.
The Loan Documents contain customary covenants that require Net1 SA to maintain a specified total asset cover ratio, maintain group cash balances (as defined in the Loan Documents) above ZAR
Pursuant to the Senior Facility G Agreement, Net1 SA may borrow up to an aggregate of ZAR
Pursuant to the Senior Facility H Agreement (“Facility H Agreement”), Net1 SA may borrow up to an aggregate of ZAR
The Facility H Agreement provides the Lenders with a right to discuss the capitalization of the Net1 group with its management and Value Capital Partners Proprietary Limited (“VCP”) if Net1’s market capitalization on the NASDAQ Stock Market (based on the closing price on the NASDAQ Stock Market) on any day falls below the USD equivalent of ZAR
If certain conditions related to Net1 SA’s debt financing are not satisfied by their respective due dates for fulfilment for any reason, Net1 SA agreed to pay to the Sellers an amount of ZAR
The Sale Agreement may be terminated under certain customary and limited circumstances at any time prior to the closing of the transactions contemplated thereby.
38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2021, and the unaudited condensed consolidated financial statements and the accompanying notes included in this Form 10-Q.
Forward-looking statements
Some of the statements in this Form 10-Q constitute forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, implied or inferred by these forward-looking statements. Such factors include, among other things, those listed under Item 1A.—“Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2021. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially. We undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.
You should read this Form 10-Q and the documents that we reference herein and the documents we have filed as exhibits hereto and thereto and which we have filed with the United States Securities and Exchange Commission completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Recent Developments
Update on the Consumer business
We remain focused on returning our Consumer business to breakeven by June 2022, followed by profitability in the following half year. Positive momentum was achieved, through continued execution on the three levers that were communicated in the previous quarter’s results:
Increasing active EPE account numbers, through driving customer acquisition;
Improving ARPU, underpinned by increased cross selling; and
Optimizing the cost structure, in line with a focus on customer centricity.
Progress on driving Customer Acquisition
The quarter ended with just under 1.1 million active EPE accounts. Focused investment into our sales capability delivered over 126,000 new gross enrollments. Activation rates on new accounts are in line with previous trends of 45% to 50% after three months from account opening.
A new product EPE lite was piloted, enrolling approximately 20,000 new accounts during the quarter, outperforming initial projections. EPE lite is competitively placed with a ZAR 5.00 ($0.33) membership fee and attractive features for the entry level low-cost transactional account market.
Progress on Cross Selling
With a focus on upskilling and refocusing our employees on customer acquisition and cross-selling, 90% of all sales employees have been retrained to enable them to sell all our financial services products. Penetration into the lending book averaged 38%, with approximately 221,000 new loans originated in the quarter, of which 52% were originated in the month of December. The insurance book provides an ongoing opportunity to execute on our cross-selling strategy, with low penetration levels averaging 19% of the active account base, well below the target rate of 45%. In November 2021, the rebranded core insurance product Smart1 was launched, with an insurable value of up to ZAR 30,000. Over 6,000 new standalone polices were enrolled during the quarter.
Progress on Cost Optimization
Our cost optimization program, delivered cost savings of ZAR 53.5 million ($3.5 million) during the quarter, as a result of the closure of the mobile paypoint infrastructure and various other cost reduction initiatives.
39
In order to optimize the overall cost base and to move the business towards a more sales-focused and client solution driven financial services organization, we launched Project Spring. Project Spring will focus on the restructuring of the financial services business and the rationalization of the distribution network.
Pursuant to Project Spring, a detailed review of the distribution network was performed, to identify underperforming branches and optimize our points of presence, while a significant exercise is underway to ensure our ATM footprint meets the needs of our customer base. The section 189A retrenchment process with employees, as a result of Project Spring initiatives, commenced in January 2022.
Together with the cost initiatives already being implemented, combined, our total cost optimization program is targeted to deliver in excess of ZAR 300.0 million ($19.5 million) in annual cost savings.
Update on Merchant business
The merchant business was negatively impacted by delayed hardware sales in the NUETS terminal supply business, due to the global chip shortage. However, the demand for product remains strong, with continued support from key customers for payment devices ordered. The balance of orders are expected to be fulfilled in the remaining two quarters, with a resultant rebound in revenue.
If the Connect Group acquisition closes, it will form part of the Merchant business and the combined group will be best placed to deliver growth into our business to business (“B2B”) strategy, through the servicing of small and micro enterprises.
Enhancements to the management team
The group welcomes the enhancements to our management team, who offer a wealth of experience in their respective fields:
Basie Kok joined us effective February 2, 2022, as the new Chief Technology Officer. Basie has over 15 years of technology experience and is a seasoned entrepreneur who co-founded the wiGroup.
Karabo Mothibi joined us effective February 1, 2022 as the new head of Human Capital. He has over 18 years extensive experience in Human Resources, with proven success in partnering with business leaders to support, achieve and further corporate goals.
Simphiwe Pakathi joined us effective December 1, 2021 as the new head of Sales and Distribution in our Consumer division. Simphiwe has over 18 years of experience in the Financial Services industry across the African continent.
The new head of Risk and Compliance is Denzel Landie, who will be joining the group on February 14, 2022. Denzel has over 17 years’ experience in risk and compliance across multiple banking institutions.
On December 8, 2021, our board approved the appointment of Naeem Kola as our Group CFO, effective March 1, 2022. Alex Smith will step down as CFO on this date and will take up his role of Group Chief Accounting Officer, a new role in the company.
Investments
MobiKwik filed its draft red herring prospectus in July 2021, with the original intention of completing its initial public offering in November 2021. MobiKwik decided to delay its initial public offering given prevailing market conditions and is anticipating concluding the listing during calendar year 2022. MobiKwik has been focusing on its BNPL offering and has seen significant growth in that area in the last year.
The investment in Cell C is held at a carrying value of $0 (zero) as of December 31, 2021. Cell C remains focused on its recapitalization and implementing various initiatives to improve its operational performance. While it remains in default on its various lending arrangements, Cell C and its lenders continue to work constructively and we understand that they are making steady progress towards its recapitalization. Blue Label Telecoms, the largest Cell C shareholder, announced in August that it has signed term sheets with various lenders to facilitate the recapitalization.
Impact of COVID-19
We do not believe the COVID-19 pandemic has had a significant impact on our South African operations since the initial lockdown period which occurred between March 2020 and June 2020. South Africa operates with a five-level COVID-19 alert system, with Level 1 being the least restrictive and Level 5 being the most restrictive and is currently in adjusted Level 1. The South African government commenced its vaccination program in early calendar 2021, with a stated goal of vaccinating 67% of the South African population by the end of the calendar year 2021. As of February 8, 2022, 41.8% of the adult population had been fully vaccinated.
While we have not experienced significant disruptions thus far from the COVID-19 outbreak, we are unable to accurately predict the impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact on our customers and other factors identified in Part I, Item 1A. “Risk Factors— We are unable to ascertain the full impact the COVID-19 pandemic will have on our future financial position, operations, cash flows and stock price” in our Annual Report on Form 10-K for the year ended June 30, 2021. We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition.
40
Reallocation of certain activities among operating segments
Refer to Note 17 of the unaudited condensed consolidated financial statements for information regarding changes to the Company’s reportable segments during the three and six months ended December 31, 2021.
Critical Accounting Policies
Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities, including the ongoing uncertainty in the current economic environment due to the outbreak of COVID-19. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires management’s judgment based on a variety of assumptions and other determinants such as historical experience, current and expected market conditions and certain scientific evaluation techniques.
Critical accounting policies are those that reflect significant judgments or uncertainties and may potentially result in materially different results under different assumptions and conditions. We have identified the following critical accounting policies that are described in more detail in our Annual Report on Form 10-K for the year ended June 30, 2021:
Valuation of investment in Cell C;
Recoverability of equity-accounted investments and other equity securities;
Business combinations and the recoverability of goodwill;
Intangible assets acquired through acquisitions;
Deferred taxation;
Stock-based compensation; and
Accounts receivable and allowance for doubtful accounts receivable.
Recent accounting pronouncements adopted
Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of accounting pronouncements adopted, including the dates of adoption and the effects on our unaudited condensed consolidated financial statements.
Recent accounting pronouncements not yet adopted as of December 31, 2021
Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of December 31, 2021, including the expected dates of adoption and effects on our financial condition, results of operations and cash flows.
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and at the end of the periods presented were as follows:
Table 1 | Three months ended |
| Six months ended |
| Year ended | ||||
| December 31, |
| December 31, |
| June 30, | ||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
ZAR : $ average exchange rate | 15.4320 |
| 15.6252 |
| 15.0283 |
| 16.2666 |
| 15.4146 |
Highest ZAR : $ rate during period | 16.2968 |
| 16.6447 |
| 16.2968 |
| 17.6866 |
| 17.6866 |
Lowest ZAR : $ rate during period | 14.4684 |
| 14.5456 |
| 14.1630 |
| 14.5456 |
| 13.4327 |
Rate at end of period | 15.9306 |
| 14.6606 |
| 15.9306 |
| 14.6606 |
| 14.3010 |
41
Translation exchange rates for financial reporting purposes
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 three months ended December 31, 2022 and 2021, 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:
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Six months ended |
| Year ended | ||||
Table 2 | December 31, |
| December 31, |
| June 30, | ||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
Income and expense items: $1 = ZAR | 15.3800 |
| 15.4653 |
| 14.9748 |
| 16.4675 |
| 15.7162 |
Balance sheet items: $1 = ZAR | 15.9306 |
| 14.6606 |
| 15.9306 |
| 14.6606 |
| 14.3010 |
Results of Operations
The discussion of our consolidated overall results of operations is based on amounts as reflected in our unaudited condensed consolidated financial statements which are prepared in accordance with U.S. GAAP. We analyze our results of operations both in U.S. dollars, as presented in the unaudited condensed consolidated financial statements, and supplementally in ZAR, because ZAR is the functional currency of the entities which contribute the majority of our revenue 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 the 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 unaudited condensed consolidated financial statements is included in Note 17 to those statements. Our CODM evaluates segment performance based on segment earnings before interest, tax, depreciation and amortization (“EBITDA”), adjusted for items mentioned in the next sentence (“Segment Adjusted EBITDA”). We do not allocate depreciation and amortization, impairment of goodwill or other intangible assets, certain lease charges (“Lease adjustments”), non-recurring items (including gains or losses on disposal of investments, fair value adjustments to equity securities, fair value adjustments to currency options), interest income, interest expense, income tax expense or loss from equity-accounted investments to our reportable segments. The Lease adjustments reflects lease charge excluded from the calculation of Segment Adjusted EBITDA and are therefore reported as a reconciling item to reconcile the reportable segments Segment Adjusted EBITDA to the Company’s loss before income tax expense. A reconciliation of this Segment Adjusted EBITDA to the nearest GAAP measure (net income (loss) before income tax) is included in Note 17 to our unaudited condensed consolidated financial statements.
42
We analyze our business and operations in terms of three inter-related but independent operating segments: (1) Consumer, (2) Merchant and (3) Other. In addition, corporate and corporate office activities that are impracticable to allocate directly to any of the other operating segments, as well as any inter-segment eliminations, are included in Corporate/Eliminations.
Second quarter of fiscal 2022 compared to second quarter of fiscal 2021
The following factors had a significant impact on our results of operations during the second quarter of fiscal 2022 as compared with the same period in the prior year:
Lower revenue: Our revenues decreased 4% in ZAR primarily due to lower hardware sales as a result of the global chip shortage and fewer prepaid airtime sales. The benefit of the increase in active accounts was offset by lower ATM transactions as the number of active ATMs decreased as we go through a relocation process;
Lower operating losses: Operating losses decreased, delivering an improvement of 38% in ZAR compared with the prior period primarily due to the closure of loss-making IPG and the implementation of various cost reduction initiatives in our Consumer business;
Significant transaction costs: We expensed $1.5 million of transaction costs related to the Connect Group acquisition; and
Foreign exchange movements: The U.S. dollar was 1% stronger against the ZAR during the second quarter of fiscal 2022, which impacted our reported results.
Consolidated overall results of operations
This discussion is based on the amounts prepared in accordance with U.S. GAAP.
The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:
Table 3 | In United States Dollars | ||||
| Three months ended December 31, | ||||
| 2021 |
| 2020 |
|
|
| $ ’000 |
| $ ’000 | change | |
Revenue | 31,114 |
| 32,305 |
| (4%) |
Cost of goods sold, IT processing, servicing and support | 20,580 |
| 24,339 |
| (15%) |
Selling, general and administration | 17,746 |
| 22,097 |
| (20%) |
Depreciation and amortization | 726 |
| 1,074 |
| (32%) |
Transaction costs related to Connect Group acquisition | 1,489 |
| - |
| nm |
Operating loss | (9,427) |
| (15,205) |
| (38%) |
Change in fair value of equity securities | - |
| 15,128 |
| nm |
Unrealized loss related to fair value adjustment to currency options | 2,429 |
| - |
| nm |
Loss on disposal of equity-accounted investment | - |
| 13 |
| nm |
Interest income | 313 |
| 717 |
| (56%) |
Interest expense | 765 |
| 677 |
| 13% |
Loss before income tax expense | (12,308) |
| (50) |
| 24,516% |
Income tax expense | 98 |
| 3,468 |
| (97%) |
Net loss before loss from equity-accounted investments | (12,406) |
| (3,518) |
| 253% |
Loss from equity-accounted investments | - |
| (1,016) |
| nm |
Net loss attributable to us | (12,406) |
| (4,534) |
| 174% |
43
Table 4 | In South African Rand | ||||
| Three months ended December 31, | ||||
| 2021 |
| 2020 |
|
|
| ZAR ’000 |
| ZAR ’000 | change | |
Revenue | 478,533 |
| 499,607 |
| (4%) |
Cost of goods sold, IT processing, servicing and support | 316,520 |
| 376,410 |
| (16%) |
Selling, general and administration | 272,933 |
| 341,737 |
| (20%) |
Depreciation and amortization | 11,165 |
| 16,610 |
| (33%) |
Transaction costs related to Connect Group acquisition | 22,901 |
| - |
| nm |
Operating loss | (144,986) |
| (235,150) |
| (38%) |
Change in fair value of equity securities | - |
| 233,959 |
| nm |
Unrealized loss related to fair value adjustment to currency options | 37,358 |
| - |
| nm |
Loss on disposal of equity-accounted investment | - |
| 201 |
| nm |
Interest income | 4,814 |
| 11,089 |
| (57%) |
Interest expense | 11,766 |
| 10,470 |
| 12% |
Loss before income tax expense | (189,296) |
| (773) |
| 24,388% |
Income tax expense | 1,508 |
| 53,634 |
| (97%) |
Net loss before loss from equity-accounted investments | (190,804) |
| (54,407) |
| 251% |
Loss from equity-accounted investments | - |
| (15,713) |
| nm |
Net loss attributable to us | (190,804) |
| (70,120) |
| 172% |
The decrease in revenue was primarily due to fewer hardware sales, reduced prepaid airtime sales and lower lending revenue, which was partially offset by higher processing fees, insurance revenue and higher account holder fees.
The decrease in cost of goods sold, IT processing, servicing and support was primarily due to the implementation of various cost reduction initiatives in our Consumer business, lower cost of hardware sales and prepaid airtime, which was partially offset by an increase in insurance-related claims experience.
In ZAR, the decrease in selling, general and administration expense was due to both lower IPG-related expenses incurred following its closure and some benefits from our cost reduction initiatives, which were partially offset by an increase in our allowance for doubtful finance loans receivable recorded during the second quarter of fiscal 2022 following strong loan originations in December 2021, higher employee-related expenses related to the growth in our senior management team, and the year-over-year impact of inflationary increases on employee-related expenses.
Depreciation and amortization decreased primarily due to lower overall depreciation related to tangible assets that were fully depreciated during the last 12 months.
Transaction costs related to Connect Group acquisition includes fees paid to external service providers associated with the contract drafting and negotiations; legal, financial and tax due diligence activities performed; warranty and indemnity insurance related to the transaction; and other advisory services procured; as well as our portion of the fees paid to competition authorities related to the regulatory filings made in various jurisdictions.
Our operating loss margin for the second quarter of fiscal 2022 and 2021 was (25.3%) and (40.5%), respectively. We discuss the components of operating loss margin under “—Results of operations by operating segment.”
The change in fair value of equity securities during the second quarter of fiscal 2021, represents a non-cash fair value adjustment gain related to MobiKwik. We continue to carry our investment in Cell C at $0 (zero). Refer to Note 5 to our unaudited condensed consolidated financial statements for the methodology and inputs used in the fair value calculation for MobiKwik and Note 4 for the methodology and inputs used in the fair value calculation for Cell C.
Unrealized loss related to fair value adjustment to currency options represents non-cash mark-to-market adjustments to foreign exchange option contracts entered into in November 2021 in order to manage the risk of currency volatility and to fix the USD amount to be utilized for part of the purchase consideration settlement. The option contracts mature in February 2022. Refer to Note 4 to our unaudited condensed consolidated financial statements for additional information related to these currency options.
Interest on surplus cash decreased to $0.3 million (ZAR 4.8 million) from $0.7 million (ZAR 11.1 million), primarily due to lower average daily cash balances during the second quarter of fiscal 2022.
Interest expense increased to $0.8 million (ZAR 11.8 million) from $0.7 million (ZAR 10.5 million), primarily as a result of a higher utilization of our ATM facilities to fund our ATMs.
44
Fiscal 2022 tax expense was $0.1 million (ZAR 1.5 million) compared to $3.5 million (ZAR 53.6 million) in fiscal 2021. Our effective tax rate for fiscal 2022 was impacted by the tax effect of the change in the fair value of our equity securities, the tax expense recorded by our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities (including the unrealized loss on the foreign currency options).
Our effective tax rate for fiscal 2021 was impacted by the tax effect on the change in the fair value of our equity securities, which is at a lower tax rate than the South African statutory rate, the tax charge related to our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities.
Bank Frick was sold in the third quarter of fiscal 2021 and was accounted for using the equity method during the second quarter of fiscal 2021. 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. The table below presents the relative (loss) earnings from our equity accounted investments:
Table 5 | Three months ended December 31, | |||
| 2021 |
| 2020 | $ % |
| $ ’000 |
| $ ’000 | change |
Bank Frick | - |
| 498 | nm |
Share of net income | - |
| 498 | nm |
Finbond | - |
| (806) | nm |
Impairment | - |
| (806) | nm |
Other | - |
| (708) | nm |
Share of net loss | - |
| (160) | nm |
Impairment | - |
| (548) | nm |
Total loss from equity-accounted investments | - |
| (1,016) | nm |
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating (loss) income are illustrated below:
Table 6 |
| In United States Dollars | ||||||||
|
|
| ||||||||
|
| Three months ended December 31, | ||||||||
|
| 2021 |
| % of |
| 2020 |
| % of |
| % change |
Operating Segment | $ ’000 | total | $ ’000 | total | ||||||
Consolidated revenue: |
|
|
|
|
|
|
|
|
|
|
Consumer |
| 16,639 |
| 53% |
| 16,259 |
| 50% |
| 2% |
Merchant |
| 14,102 |
| 45% |
| 15,206 |
| 47% |
| (7%) |
Other |
| 396 |
| 1% |
| 878 |
| 3% |
| (55%) |
Subtotal: Operating segments |
| 31,137 |
| 99% |
| 32,343 |
| 100% |
| (4%) |
Corporate/Eliminations |
| (23) |
| 1% |
| (38) |
| - |
| (39%) |
Total consolidated revenue |
| 31,114 |
| 100% |
| 32,305 |
| 100% |
| (4%) |
EBITDA: |
|
|
|
|
|
|
|
|
|
|
Consumer |
| (4,551) |
| 58% |
| (5,214) |
| 40% |
| (13%) |
Merchant |
| 795 |
| (10%) |
| 1,227 |
| (9%) |
| (35%) |
Other |
| 123 |
| (2%) |
| (4,339) |
| 33% |
| nm |
Segment Adjusted EBITDA |
| (3,633) |
| 46% |
| (8,326) |
| 64% |
| (56%) |
Corporate/eliminations |
| (4,235) |
| 54% |
| (4,743) |
| 36% |
| (11%) |
Subtotal |
| (7,868) |
| 100% |
| (13,069) |
| 100% |
| (40%) |
Less: Lease adjustments |
| 833 |
|
|
| 1,062 |
|
|
|
|
Less: Depreciation and amortization |
| 726 |
|
|
| 1,074 |
|
|
|
|
Total consolidated operating loss |
| (9,427) |
|
|
| (15,205) |
|
|
|
|
45
Table 7 |
| In South African Rand | ||||||||
|
|
| ||||||||
|
| Three months ended December 31, | ||||||||
|
| 2021 |
| % of |
| 2020 |
| % of |
| % change |
Operating Segment | ZAR ’000 | total | ZAR ’000 | total | ||||||
Consolidated revenue: |
|
|
|
|
|
|
|
|
|
|
Consumer |
| 255,908 |
| 53% |
| 251,450 |
| 50% |
| 2% |
Merchant |
| 216,889 |
| 45% |
| 235,165 |
| 47% |
| (8%) |
Other |
| 6,090 |
| 1% |
| 13,579 |
| 3% |
| (55%) |
Subtotal: Operating segments |
| 478,887 |
| 99% |
| 500,194 |
| 100% |
| (4%) |
Corporate/Eliminations |
| (354) |
| 1% |
| (587) |
| - |
| (40%) |
Total consolidated revenue |
| 478,533 |
| 100% |
| 499,607 |
| 100% |
| (4%) |
EBITDA: |
|
|
|
|
|
|
|
|
|
|
Consumer |
| (69,994) |
| 58% |
| (80,636) |
| 40% |
| (13%) |
Merchant |
| 12,227 |
| (10%) |
| 18,976 |
| (9%) |
| (36%) |
Other |
| 1,892 |
| (2%) |
| (67,104) |
| 33% |
| nm |
Segment Adjusted EBITDA |
| (55,875) |
| 46% |
| (128,764) |
| 64% |
| (57%) |
Corporate/eliminations |
| (65,134) |
| 54% |
| (73,352) |
| 36% |
| (11%) |
Subtotal |
| (121,009) |
| 100% |
| (202,116) |
| 100% |
| (40%) |
Less: Lease adjustments |
| 12,812 |
|
|
| 16,424 |
|
|
|
|
Less: Depreciation and amortization |
| 11,166 |
|
|
| 16,610 |
|
|
|
|
Total consolidated operating loss |
| (144,987) |
|
|
| (235,150) |
|
|
|
|
Consumer
Segment revenue increased primarily due to higher insurance revenue and moderately higher account holder fees, which was partially offset by moderately lower lending revenue and lower ATM transaction volumes. Segment EBITDA loss has decreased primarily due to the implementation of various cost reduction initiatives, which was partially offset by an increase in insurance-related claims experience and an increase in our allowance for doubtful finance loans receivable recorded during the second quarter of fiscal 2022 following strong loan originations in December 2021.
Our EBITDA loss margin (calculated as EBITDA loss divided by revenue) for the second quarter of fiscal 2022 and 2021 was (27.4%) and (32.1%), respectively.
Merchant
Segment revenue decreased due to fewer hardware sales as a result of the global chip shortage and fewer prepaid airtime sales, which was partially offset by higher processing fees. The decrease in segment EBITDA is primarily due to the lower revenue.
Our EBITDA margin for the second quarter of fiscal 2022 and 2021 was 5.6% and 8.1%, respectively.
Other
Other includes the activities of IPG in fiscal 2021 and our other business outside South Africa, principally Botswana.
Segment revenue decreased due to lower revenue following the closure of IPG in fiscal 2021. We recorded an EBITDA contribution during the second quarter of fiscal 2022 following the closure of our loss-making activities performed through IPG.
Our EBITDA (loss) margin for the Other segment was 31.1% and (494.2%) during the second quarter of fiscal 2022 and 2021, respectively.
Corporate/Eliminations
Our corporate expenses generally include acquisition-related intangible asset amortization; expenses incurred related to corporate actions; expenditures related to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors’ fees; certain employee and executive bonuses; stock-based compensation; legal fees; audit fees; directors and officer’s insurance premiums; elimination entries; and from fiscal 2022 our group CEO’s compensation.
Our corporate expenses for fiscal 2022 decreased compared with fiscal 2021 due to the inclusion of an allowance on doubtful loans receivable from equity-accounted investments of $0.7 million created during the second quarter of fiscal 2021. Our corporate expenses for fiscal 2022 includes transaction related expenses of $1.5 million (ZAR 22.9 million) related to the Connect Group acquisition. We expect to incur additional expenses related to the Connect Group transaction in the third quarter of fiscal 2022.
46
First half of fiscal 2022 compared to first half of fiscal 2021
The following factors had a significant impact on our results of operations during the first half of fiscal 2022 as compared with the same period in the prior year:
Lower revenue: Our revenues decreased 4% in ZAR, primarily due to lower hardware sales as a result of the global chip shortage and fewer prepaid airtime sales, which was partially offset by higher processing fees. The benefit of the increase in active accounts was offset by lower ATM transactions as the number of active ATMs decreased as we go through a relocation process;
Lower operating losses: Operating losses decreased, delivering an improvement of 28% in ZAR compared with the prior period primarily due to the closure of IPG and the implementation of various cost reduction initiatives in our Consumer business;
Significant transaction costs: We expensed $1.7 million of transaction costs related to the Connect Group acquisition; and
Foreign exchange movements: The U.S. dollar was 1% weaker against the ZAR during the first half of fiscal 2022, which impacted our reported results.
Consolidated overall results of operations
This discussion is based on the amounts prepared in accordance with U.S. GAAP.
The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:
Table 8 | In United States Dollars | ||||
| Six months ended December 31, | ||||
| 2021 |
| 2020 |
|
|
| $ ’000 |
| $ ’000 | change | |
Revenue | 65,618 |
| 67,441 |
| (3%) |
Cost of goods sold, IT processing, servicing and support | 44,787 |
| 50,799 |
| (12%) |
Selling, general and administration | 38,188 |
| 40,625 |
| (6%) |
Depreciation and amortization | 1,621 |
| 1,997 |
| (19%) |
Transaction costs related to Connect Group acquisition | 1,674 |
| - |
| nm |
Operating loss | (20,652) |
| (25,980) |
| (21%) |
Change in fair value of equity securities | - |
| 15,128 |
| nm |
Unrealized loss related to fair value adjustment to currency options | 2,429 |
| - |
| nm |
Loss on disposal of equity-accounted investment | - |
| 13 |
| nm |
Interest income | 702 |
| 1,328 |
| (47%) |
Interest expense | 1,581 |
| 1,424 |
| 11% |
Loss before income tax expense | (23,960) |
| (10,961) |
| 119% |
Income tax expense | 284 |
| 2,378 |
| (88%) |
Net loss before loss from equity-accounted investments | (24,244) |
| (13,339) |
| 82% |
Loss from equity-accounted investments | (1,156) |
| (20,153) |
| (94%) |
Net loss attributable to us | (25,400) |
| (33,492) |
| (24%) |
Table 9 | In South African Rand | ||||
| Six months ended December 31, | ||||
| 2021 |
| 2020 |
|
|
| ZAR ’000 |
| ZAR ’000 | change | |
Revenue | 982,616 |
| 1,110,585 |
| (12%) |
Cost of goods sold, IT processing, servicing and support | 670,676 |
| 836,532 |
| (20%) |
Selling, general and administration | 571,858 |
| 668,991 |
| (15%) |
Depreciation and amortization | 24,274 |
| 32,886 |
| (26%) |
Transaction costs related to Connect Group acquisition | 25,068 |
| - |
| nm |
Operating loss | (309,260) |
| (427,824) |
| (28%) |
Change in fair value of equity securities | - |
| 249,120 |
| nm |
Unrealized loss related to fair value adjustment to currency options | 36,374 |
| - |
| nm |
Loss on disposal of equity-accounted investment | - |
| 214 |
| nm |
Interest income | 10,512 |
| 21,869 |
| (52%) |
Interest expense | 23,675 |
| 23,450 |
| 1% |
Loss before income tax expense | (358,797) |
| (180,499) |
| 99% |
Income tax expense | 4,253 |
| 39,160 |
| (89%) |
Net loss before loss from equity-accounted investments | (363,050) |
| (219,659) |
| 65% |
Loss from equity-accounted investments | (17,311) |
| (331,870) |
| (95%) |
Net loss attributable to us | (380,361) |
| (551,529) |
| (31%) |
47
The decrease in revenue was primarily due to fewer hardware sales and prepaid airtime sales, which was partially offset by higher processing fees, insurance revenue and modestly higher transaction fees and lending revenue.
The decrease in cost of goods sold, IT processing, servicing and support was primarily due to the implementation of various cost reduction initiatives in our Consumer business, lower cost of hardware sales and prepaid airtime, which was partially offset by higher costs related to transaction fees and an increase in insurance-related claims experience.
In ZAR, the decrease in selling, general and administration expenses was primarily due to lower IPG-related expenses incurred following its closure, which was partially offset by higher employee-related expenses related to the growth in our senior management team, and the year-over-year impact of inflationary increases on employee-related expenses.
Depreciation and amortization decreased primarily due to lower overall depreciation related to tangible assets that were fully depreciated during the last twelve months.
Transaction costs related to Connect Group acquisition includes fees paid to external service providers associated with the contract drafting and negotiations; legal, financial and tax due diligence activities performed; warranty and indemnity insurance related to the transaction; and other advisory services procured; as well as our portion of the fees paid to competition authorities related to the regulatory filings made in various jurisdictions.
Our operating loss margin for the first half of fiscal 2022 and 2021 was (26.3%) and (32.8%), respectively. We discuss the components of operating loss margin under “—Results of operations by operating segment.”
The change in fair value of equity securities during the first half of fiscal 2021, represents a non-cash fair value adjustment gain related to MobiKwik. We continue to carry our investment in Cell C at $0 (zero). Refer to Note 5 to our unaudited condensed consolidated financial statements for the methodology and inputs used in the fair value calculation for MobiKwik and Note 4 for the methodology and inputs used in the fair value calculation for Cell C.
Unrealized loss related to fair value adjustment to currency options represents non-cash mark-to-market adjustments to foreign exchange option contracts entered into in November 2021 in order to manage the risk of currency volatility and to fix the USD amount to be utilized for part of the purchase consideration settlement. Refer to Note 4 to our unaudited condensed consolidated financial statements for additional information related to these currency options.
Interest on surplus cash decreased to $0.7 million (ZAR 10.5 million) from $1.3 million (ZAR 21.9 million), primarily due to lower average daily cash balances and lower average interest rates applied to daily cash balances during the first half of fiscal 2022.
Interest expense increased to $1.6 million (ZAR 23.7 million) from $1.4 million (ZAR 23.5 million), primarily as a result of a higher utilization of our ATM facilities to fund our ATMs.
Fiscal 2022 tax expense was $0.3 million (ZAR 4.3 million) compared to $2.4 million (ZAR 39.2 million) in fiscal 2021. Our effective tax rate for fiscal 2022 was impacted by the tax effect of the change in the fair value of our equity securities, the tax expense recorded by our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities (including the unrealized loss on the foreign currency options).
Our effective tax rate for fiscal 2021 was impacted by the tax effect on the change in the fair value of our equity securities, which is at a lower tax rate than the South African statutory rate, the tax charge related to our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities, which was partially offset by the reversal of the deferred tax liability related to one of our equity-accounted investments following its impairment.
48
Bank Frick was sold in the third quarter of fiscal 2021 and was accounted for using the equity method during the first half of fiscal 2021. 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. The table below presents the relative (loss) earnings from our equity accounted investments:
Table 10 | Six months ended December 31, | |||
| 2021 |
| 2020 | $ % |
| $ ’000 |
| $ ’000 | change |
Finbond | (1,156) |
| (20,267) | (94%) |
Share of net loss | (1,156) |
| (2,617) | (56%) |
Impairment | - |
| (17,650) | nm |
Bank Frick | - |
| 979 | nm |
Share of net income | - |
| 979 | nm |
Other | - |
| (865) | nm |
Share of net loss | - |
| (317) | nm |
Impairment | - |
| (548) | nm |
| (1,156) |
| (20,153) | (94%) |
Refer to Note 5 to our unaudited condensed consolidated financial statements for additional information related to the impairment of Finbond and our other equity-accounted investments.
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating (loss) income are illustrated below:
Table 11 |
| In United States Dollars | ||||||||
|
|
| ||||||||
|
| Six months ended December 31, | ||||||||
|
| 2021 |
| % of |
| 2020 |
| % of |
| % change |
Operating Segment | $ ’000 | total | $ ’000 | total | ||||||
Consolidated revenue: |
|
|
|
|
|
|
|
|
|
|
Consumer |
| 33,803 |
| 52% |
| 31,631 |
| 47% |
| 7% |
Merchant |
| 31,174 |
| 48% |
| 33,452 |
| 50% |
| (7%) |
Other |
| 823 |
| 1% |
| 2,434 |
| 4% |
| (66%) |
Subtotal: Operating segments |
| 65,800 |
| 100% |
| 67,517 |
| 100% |
| (3%) |
Corporate/Eliminations |
| (182) |
| - |
| (76) |
| - |
| 139% |
Total consolidated revenue |
| 65,618 |
| 100% |
| 67,441 |
| 100% |
| (3%) |
EBITDA: |
|
|
|
|
|
|
|
|
|
|
Consumer |
| (14,005) |
| 81% |
| (11,785) |
| 53% |
| 19% |
Merchant |
| 2,680 |
| (16%) |
| 4,198 |
| (19%) |
| (36%) |
Other |
| 266 |
| (2%) |
| (6,970) |
| 32% |
| nm |
Segment Adjusted EBITDA |
| (11,059) |
| 64% |
| (14,557) |
| 66% |
| (24%) |
Corporate/eliminations |
| (6,215) |
| 36% |
| (7,539) |
| 34% |
| (18%) |
Subtotal |
| (17,274) |
| 100% |
| (22,096) |
| 100% |
| (22%) |
Less: Lease adjustments |
| 1,757 |
|
|
| 1,887 |
|
|
|
|
Less: Depreciation and amortization |
| 1,621 |
|
|
| 1,997 |
|
|
|
|
Total consolidated operating loss |
| (20,652) |
|
|
| (25,980) |
|
|
|
|
49
Table 12 |
| In South African Rand | ||||||||
|
|
| ||||||||
|
| Six months ended December 31, | ||||||||
|
| 2021 |
| % of |
| 2020 |
| % of |
| % change |
Operating Segment | ZAR ’000 | total | ZAR ’000 | total | ||||||
Consolidated revenue: |
|
|
|
|
|
|
|
|
|
|
Consumer |
| 506,193 |
| 52% |
| 520,884 |
| 47% |
| (3%) |
Merchant |
| 466,824 |
| 48% |
| 550,871 |
| 50% |
| (15%) |
Other |
| 12,324 |
| 1% |
| 40,082 |
| 4% |
| (69%) |
Subtotal: Operating segments |
| 985,341 |
| 100% |
| 1,111,837 |
| 100% |
| (11%) |
Corporate/Eliminations |
| (2,725) |
| - |
| (1,252) |
| - |
| 118% |
Total consolidated revenue |
| 982,616 |
| 100% |
| 1,110,585 |
| 100% |
| (12%) |
EBITDA: |
|
|
|
|
|
|
|
|
|
|
Consumer |
| (209,722) |
| 81% |
| (194,069) |
| 53% |
| 8% |
Merchant |
| 40,132 |
| (16%) |
| 69,131 |
| (19%) |
| (42%) |
Other |
| 3,983 |
| (2%) |
| (114,778) |
| 32% |
| nm |
Segment Adjusted EBITDA |
| (165,607) |
| 64% |
| (239,716) |
| 66% |
| (31%) |
Corporate/eliminations |
| (93,068) |
| 36% |
| (124,148) |
| 34% |
| (25%) |
Subtotal |
| (258,675) |
| 100% |
| (363,864) |
| 100% |
| (29%) |
Less: Lease adjustments |
| 26,311 |
|
|
| 31,074 |
|
|
|
|
Less: Depreciation and amortization |
| 24,274 |
|
|
| 32,886 |
|
|
|
|
Total consolidated operating loss |
| (309,260) |
|
|
| (427,824) |
|
|
|
|
Consumer
The underlying decrease in revenue was primarily due to lower processing fees, partially offset by higher insurance revenue and account holder fees, and moderately higher lending revenues. Segment EBITDA loss has increased primarily due to an increase in insurance-related claims experience, which was partially offset by the implementation of various cost reduction initiatives.
Our EBITDA loss margin for the first half of fiscal 2022 and 2021 was (41.4%) and (37.3%), respectively.
Merchant
Segment revenue decreased due to fewer hardware sales as a result of the global chip shortage and reduced prepaid airtime sales, which was partially offset by higher processing fees. The decrease in segment EBITDA is primarily due to the lower revenue.
Our EBITDA margin for the first half of fiscal 2022 and 2021 was 8.6% and 12.5%, respectively.
Other
Segment revenue decreased due to lower revenue following the closure of IPG in fiscal 2021. We recorded an EBITDA contribution during the second quarter of fiscal 2022 following the closure of our loss-making activities performed through IPG.
Our EBITDA margin for the Other segment was 32.3% and (286.4%) during the first half of fiscal 2022 and 2021, respectively.
Corporate/Eliminations
Our corporate expenses for fiscal 2022 decreased compared with fiscal 2021 due to higher consulting fees incurred in fiscal 2021 and the inclusion of an allowance on doubtful loans receivable from equity-accounted investments of $0.7 million. Our corporate expenses for fiscal 2022 includes transaction related expenses of $1.7 million (ZAR 25.1 million) related to the Connect Group acquisition.
50
Presentation of quarterly revenue and EBITDA by segment for fiscal 2021 and 2020
The tables below present quarterly revenue and EBITDA generated by our three reportable segments for fiscal 2021 and 2020, and reconciliations to consolidated revenue and operating (loss) income, as well as the U.S. dollar/ ZAR exchange rates applicable per fiscal quarter and year:
Table 13 | Fiscal 2021 | ||||||||
| In United States Dollars | ||||||||
| Quarter 1 |
| Quarter 2 |
| Quarter 3 |
| Quarter 4 |
| F2021 |
| $ '000 |
| $ '000 |
| $ '000 |
| $ '000 |
| $ '000 |
Consolidated revenue: |
|
|
|
|
|
|
|
|
|
Consumer | 15,372 |
| 16,259 |
| 16,236 |
| 18,282 |
| 66,149 |
Merchant | 18,246 |
| 15,206 |
| 12,171 |
| 15,855 |
| 61,478 |
Other | 1,556 |
| 878 |
| 421 |
| 463 |
| 3,318 |
Subtotal: Operating segments | 35,174 |
| 32,343 |
| 28,828 |
| 34,600 |
| 130,945 |
Corporate/Eliminations | (38) |
| (38) |
| - |
| (83) |
| (159) |
Total consolidated revenue | 35,136 |
| 32,305 |
| 28,828 |
| 34,517 |
| 130,786 |
|
|
|
|
|
|
|
|
|
|
EBITDA: |
|
|
|
|
|
|
|
|
|
Consumer | (6,571) |
| (5,214) |
| (7,610) |
| (6,908) |
| (26,303) |
Merchant | 2,971 |
| 1,227 |
| 273 |
| 257 |
| 4,728 |
Other | (2,631) |
| (4,339) |
| (3,315) |
| (89) |
| (10,374) |
Segment Adjusted EBITDA | (6,231) |
| (8,326) |
| (10,652) |
| (6,740) |
| (31,949) |
Corporate/eliminations | (2,796) |
| (4,743) |
| (1,404) |
| (4,485) |
| (13,428) |
Subtotal | (9,027) |
| (13,069) |
| (12,056) |
| (11,225) |
| (45,377) |
Less: Lease adjustments | 825 |
| 1,062 |
| 1,104 |
| 1,157 |
| 4,148 |
Less: Depreciation and amortization | 923 |
| 1,074 |
| 1,132 |
| 1,218 |
| 4,347 |
Total consolidated operating loss | (10,775) |
| (15,205) |
| (14,292) |
| (13,600) |
| (53,872) |
|
|
|
|
|
|
|
|
|
|
Income and expense items: $1 = ZAR | 16.7738 |
| 15.4653 |
| 14.9575 |
| 14.1687 |
| 15.7162 |
Table 14 | Fiscal 2020 | ||||||||
| In United States Dollars | ||||||||
| Quarter 1 |
| Quarter 2 |
| Quarter 3 |
| Quarter 4 |
| F2020 |
| $ '000 |
| $ '000 |
| $ '000 |
| $ '000 |
| $ '000 |
Consolidated revenue: |
|
|
|
|
|
|
|
|
|
Consumer | 21,674 |
| 18,618 |
| 18,491 |
| 12,215 |
| 70,998 |
Merchant | 23,564 |
| 19,502 |
| 14,677 |
| 10,916 |
| 68,659 |
Other | 1,199 |
| 850 |
| 1,564 |
| 1,428 |
| 5,041 |
Subtotal: Operating segments | 46,437 |
| 38,970 |
| 34,732 |
| 24,559 |
| 144,698 |
Corporate/Eliminations | (221) |
| (52) |
| (118) |
| (8) |
| (399) |
Total consolidated revenue | 46,216 |
| 38,918 |
| 34,614 |
| 24,551 |
| 144,299 |
|
|
|
|
|
|
|
|
|
|
EBITDA: |
|
|
|
|
|
|
|
|
|
Consumer | (2,784) |
| (2,809) |
| (3,889) |
| (4,507) |
| (13,989) |
Merchant | 2,778 |
| 1,471 |
| 1,710 |
| (783) |
| 5,176 |
Other | (1,969) |
| (2,979) |
| (3,043) |
| (4,024) |
| (12,015) |
Segment Adjusted EBITDA | (1,975) |
| (4,317) |
| (5,222) |
| (9,314) |
| (20,828) |
Corporate/eliminations | (2,304) |
| (3,931) |
| (510) |
| (2,028) |
| (8,773) |
Subtotal | (4,279) |
| (8,248) |
| (5,732) |
| (11,342) |
| (29,601) |
Less: Lease adjustments | 833 |
| 998 |
| 991 |
| 842 |
| 3,664 |
Less: Depreciation and amortization | 1,324 |
| 1,174 |
| 1,153 |
| 996 |
| 4,647 |
Less: Impairments | - |
| - |
| 6,336 |
| - |
| 6,336 |
Total consolidated operating loss | (6,436) |
| (10,420) |
| (14,212) |
| (13,180) |
| (44,248) |
|
|
|
|
|
|
|
|
|
|
Income and expense items: $1 = ZAR | 14.7520 |
| 14.6022 |
| 15.3667 |
| 17.2810 |
| 17.5686 |
51
Liquidity and Capital Resources
At December 31, 2021, our cash and cash equivalents were $182.4 million and comprised of U.S. dollar-denominated balances of $159.4 million, ZAR-denominated balances of ZAR 0.3 billion ($21.0 million), and other currency deposits, primarily Botswana pula, of $2.0 million, all amounts translated at exchange rates applicable as of December 31, 2021. The decrease in our unrestricted cash balances from June 30, 2021, was primarily due to growth in our financial loans receivable book in December 2021, and utilization of cash reserves to fund our operations, partially offset by the receipt of $7.5 million related to the sale of Bank Frick in fiscal 2021.
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.
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.
We have entered into a definite agreement to acquire the entities (the Connect Group) described in Note 20 to our unaudited condensed consolidated financial statements for ZAR 3.7 billion which will be funded through a combination of our existing cash reserves, issue of our common stock, and bank financing of ZAR 1.1 billion.
Available short-term borrowings
Summarized below are our short-term facilities available and utilized as of December 31, 2021:
Table 15 | RMB |
| Nedbank | ||||
| $ ’000 |
| ZAR ’000 |
| $ ’000 |
| ZAR ’000 |
Total short-term facilities available, comprising: |
|
|
|
|
|
|
|
Overdraft restricted as to use(1) | 87,881 |
| 1,400,000 |
| 15,693 |
| 250,000 |
Total overdraft | 87,881 |
| 1,400,000 |
| 15,693 |
| 250,000 |
Indirect and derivative facilities(2) | - |
| - |
| 9,827 |
| 156,556 |
Total short-term facilities available | 87,881 |
| 1,400,000 |
| 25,520 |
| 406,556 |
|
|
|
|
|
|
|
|
Utilized short-term facilities: |
|
|
|
|
|
|
|
Overdraft restricted as to use(1) | 47,960 |
| 764,034 |
| - |
| - |
Indirect and derivative facilities(2) | - |
| - |
| 9,827 |
| 156,556 |
|
|
|
|
|
|
|
|
Interest rate, based on South African prime rate(3) |
|
| 7.25% |
|
|
|
|
Interest rate, based on South African prime rate less 1.15%(4) |
|
|
|
|
|
| 6.10% |
(1) Overdraft may only be used to fund ATMs and upon utilization is considered restricted cash.
(2) Indirect and derivative facilities may only be used for guarantees, letters of credit and forward exchange contracts to support guarantees issued by Nedbank to various third parties on our behalf.
(3) Increased to 7.50% on January 28, 2022, following an increase in the South African repo rate.
(4) Increased to 6.35%, on January 28, 2022, following an increase in the South African repo rate
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 unaudited condensed consolidated statement of cash flows as of December 31, 2021, includes restricted cash of approximately $48.0 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 unaudited condensed consolidated balance sheet.
We have also entered into cession and pledge agreements with Nedbank related to certain of our Nedbank credit facilities and we have ceded and pledged certain bank accounts to Nedbank. The funds included in these bank accounts are restricted as they may not be withdrawn without the express permission of Nedbank. Our cash, cash equivalents and restricted cash presented in our unaudited condensed consolidated statement of cash flows as of December 31, 2021, includes restricted cash of approximately $9.8 million that has been ceded and pledged.
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Cash flows from operating activities
Second quarter
Net cash used in operating activities during the second quarter of fiscal 2022 was $13.8 million (ZAR 212.0 million) compared to $12.0 million (ZAR 185.3 million) during the second quarter of fiscal 2021. Excluding the impact of income taxes, our cash used in operating activities during the second quarter of fiscal 2022 was impacted by the utilization of cash to grow our financial loans receivable book in December 2021, but partially offset by lower cash losses incurred by the majority of our continuing operations.
During the second quarter of fiscal 2022, we paid our first provisional South African tax payments of $0.4 million (ZAR 6.9 million) related to our 2022 tax year and received tax refunds of $0.2 million (ZAR 2.9 million). During the second quarter of fiscal 2021, we paid our first provisional South African tax payments of $0.7 million (ZAR 10.1 million) related to our 2021 tax year.
Taxes paid during the second quarter of fiscal 2022 and 2021 were as follows:
Table 16 | Three months ended December 31, | ||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
$ | $ | ZAR | ZAR | ||||
‘000 | ‘000 | ‘000 | ‘000 | ||||
First provisional payments | 437 |
| 677 |
| 6,933 |
| 10,084 |
Tax refund received | (192) |
| - |
| (2,851) |
| - |
Total South African taxes paid (received) | 245 |
| 677 |
| 4,082 |
| 10,084 |
Foreign taxes paid | 34 |
| 88 |
| 540 |
| 1,391 |
Total tax paid | 279 |
| 765 |
| 4,622 |
| 11,475 |
We expect to pay additional provisional payments in South Africa of approximately $0.1 million (ZAR 2.2 million translated at exchange rates applicable as of December 31, 2021) related to our 2022 tax year in the third quarter of fiscal 2022.
First half
Net cash used in operating activities during the first half of fiscal 2022 was $21.7 million (ZAR 325.4 million) compared to $41.9 million (ZAR 689.3 million) during the first half of fiscal 2021. Excluding the impact of income taxes, our cash used in operating activities during the first half of fiscal 2022 was impacted by the cash losses incurred by the majority of our continuing operations, which in aggregate was lower than in fiscal 2021.
During the first half of fiscal 2022, we paid our first provisional South African tax payments of $0.4 million (ZAR 6.9 million) related to our 2022 tax year and received tax refunds of $0.2 million (ZAR (3.2) million). During the first half of fiscal 2021, we paid our first provisional South African tax payments of $0.7 million (ZAR 10.1 million) related to our 2021 tax year. During the first half of fiscal 2021, we paid South African tax of $0.2 million (ZAR 3.4 million) related to our 2020 tax year. We also paid taxes totaling $15.3 million in other tax jurisdictions, primarily in the U.S.
Taxes paid during the first half of fiscal 2022 and 2021 were as follows:
Table 17 | Six months ended December 31, | ||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
$ | $ | ZAR | ZAR | ||||
‘000 | ‘000 | ‘000 | ‘000 | ||||
First provisional payments | 437 |
| 677 |
| 6,933 |
| 10,084 |
Taxation paid related to prior years | - |
| 205 |
| - |
| 3,423 |
Tax refund received | (217) |
| (12) |
| (3,227) |
| (205) |
Total South African taxes paid | 220 |
| 870 |
| 3,706 |
| 13,302 |
Foreign taxes paid | 70 |
| 15,301 |
| 1,065 |
| 255,841 |
Total tax paid | 290 |
| 16,171 |
| 4,771 |
| 269,143 |
Cash flows from investing activities
Second quarter
Cash used in investing activities for the second quarter of fiscal 2022 included capital expenditures of $0.2 million (ZAR 2.9 million), primarily due to the acquisition of computer equipment. During the second quarter of fiscal 2022, we received a scheduled payment of $7.5 million related to the sale of Bank Frick in fiscal 2021.
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Cash used in investing activities for the second quarter of fiscal 2021 included capital expenditures of $3.0 million (ZAR 46.8 million), primarily due to the acquisition of motor vehicles, which largely comprised a fleet of customized mobile ATMs used to deliver a service to rural communities. During the second quarter of fiscal 2021 we received the outstanding amounts due on the deferred sale proceeds related to the April 2020 sale of DNI, which has now been paid in full. We also extended loan funding of $1.0 million to V2 and $0.2 million to Revix.
First half
Cash used in investing activities for the first half of fiscal 2022 included capital expenditures of $0.9 million (ZAR 13.3 million), primarily due to the roll out of our new express branches and the acquisition of computer equipment. During the first half of fiscal 2022 we received a scheduled payment of $7.5 million related to the sale of Bank Frick in fiscal 2021
Cash used in investing activities for the first half of fiscal 2021 included capital expenditures of $3.3 million (ZAR 54.3 million), primarily due to the acquisition of motor vehicles, which largely comprised a fleet of customized mobile ATMs used to deliver a service to rural communities, computer equipment and leasehold improvements in South Africa. We received $20.1 million related to the sale of our Korean business in March 2020 following the successful refund application of the amounts withheld and paid to the South Korean tax authorities pursuant to that transaction. We received the total amount due on the deferred sale proceeds related to the April 2020 sale of DNI. We also extended loan funding of $1.0 million to V2 and $0.2 million to Revix.
Cash flows from financing activities
Second quarter
During the second quarter of fiscal 2022, we received $0.7 million from the exercise of stock options, and utilized approximately $172.4 million from our South African overdraft facilities to fund our ATMs and repaid $172.8 million of these facilities.
During the second quarter of fiscal 2021, we utilized approximately $137.3 million from our South African overdraft facilities to fund our ATMs and repaid $88.3 million of these facilities.
First half
During the first half of fiscal 2022, we received $0.7 million from the exercise of stock options, and utilized approximately $311.4 million from our South African overdraft facilities to fund our ATMs and repaid $271.7 million of these facilities.
During the first half of fiscal 2021, we utilized approximately $206.5 million from our South African overdraft facilities to fund our ATMs and repaid $165.1 million of these facilities.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
We expect capital spending for the third quarter of fiscal 2022 to primarily include limited investments into our ATM infrastructure and branch network in South Africa. Our capital expenditures for the second quarter of fiscal 2022 and 2021 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 December 31, 2021, of $1.0 million. We expect to fund these expenditures through internally generated funds and available facilities.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In addition to the tables below, see Note 4 to the unaudited condensed consolidated financial statements for a discussion of market risk.
We have short-term borrowings which attract interest at rates that fluctuate based on changes in the South African prime interest rate. The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of December 31, 2021, as a result of changes in the South African prime interest rate, assuming hypothetical short-term borrowings of ZAR 1.0 billion as of December 31, 2021. The effect of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in the South African prime interest rate as of December 31, 2021, are shown. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
Table 18 | As of December 31, 2021 | ||||
| Annual expected interest charge ($ ’000) |
| Hypothetical change in interest rates |
| Estimated annual expected interest charge after hypothetical change in interest rates ($ ’000) |
Interest on South Africa overdraft (South African prime interest rate) | 4,394 |
| 1% |
| 5,022 |
|
|
|
|
|
|
We hold a significant amount of U.S. dollars and intend to use a portion of these funds to settle part of the purchase consideration related to the Connect Group acquisition. The purchase consideration will be settled in ZAR. Accordingly, we entered into foreign exchange option contracts in an aggregate amount of USD 120.0 million with RMB in November 2021 in order to manage the risk of currency volatility and to fix the USD amount required to be converted to generate ZAR 1.9 billion, which will be utilized for part of the purchase consideration settlement. We purchased foreign currency put options and sold foreign currency call options at the same strike price. The strike price of the synthetic forwards on the date of entering into the contracts was equal to the exchange rate of a traditional forward exchange contract with the same value date.
We expect to record a realized currency gain if the USD/ ZAR spot price on the maturity date is below the strike price because, as the holder of the put options, we would exercise the put option and receive a higher rate of exchange compared to the spot price. The call options sold would be out-of-the-money on the maturity date and would expire unexercised. On the other hand, we expect to incur a realized currency loss if the USD/ ZAR spot price on the maturity date is above the strike price because the put options would be out-of-the-money and would expire unexercised, but RMB would exercise its call options and we would be required to deliver USD at a lower ZAR rate than the spot price.
As noted above, we are committed to utilize $120.0 million of our existing cash reserves to purchase ZAR 1.9 billion in February 2022, at an average rate of $1: ZAR 15.72. The following table illustrates the impact of a hypothetical changes (a 1% increase to $: ZAR 15.88 and a 1% decrease to $1: ZAR 15.56) in the exchange rate between the $ and the ZAR. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
Table 19 |
|
| As of December 31, 2021 | ||||
| Contracted ZAR to be received (ZAR ’000) |
| Hypothetical change in exchange rates |
| Expected ZAR received after hypothetical change in exchange rate (ZAR '000) |
| Impact of difference between rate in currency options and hypothetical rate (ZAR '000) |
ZAR received from currency options | 1,886,336 |
| 1% |
| 1,905,199 |
| (18,863) |
|
|
| (1%) |
| 1,867,473 |
| 18,863 |
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Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our group chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of December 31, 2021. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the group chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2021.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Item 1A. Risk Factors
See “Item 1A RISK FACTORS” in Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, for a discussion of risk factors relating to (i) our business, (ii) operating in South Africa and other foreign markets, (iii) government regulation, and (iv) our common stock. Except as set forth below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Failure to complete, or delays in completing, the Connect Group acquisition, could materially and adversely affect our results of operations and stock price.
The completion of the Connect Group acquisition is subject to a number of conditions precedent, including receipt of regulatory approvals, certain third-party consents and the completion of financing arrangements. Some of these conditions are outside our control.
To complete the acquisition, we must make certain filings with and obtain certain consents and approvals from various governmental and regulatory authorities. The regulatory approval processes may take a lengthy period of time to complete, and there can be no assurance as to the outcome of the approval processes, including the undertakings and conditions that may be required for approval, or whether the regulatory approvals will be obtained at all.
We signed loan agreements for a ZAR 2.35 billion ($154.4 million) debt package with RMB on January 24, 2022. The fulfilment of the various conditions precedent to these agreements may take some time to complete, and there can be no assurance as to the outcome. Furthermore, we have agreed that if certain conditions related to our debt financing are not satisfied by their respective due dates for fulfilment for any reason, we have agreed to pay to the Connect Group sellers an amount of ZAR 50,000,000.
As we are financing a significant portion of the acquisition price using the debt package we are in the process of providing certain of our assets as security against the debt package. The final financing agreements also contain covenants that require us to maintain certain specified financial ratios and place restrictions on our ability to make certain distributions from the target group, prepay other debt, encumber their assets, incur additional indebtedness, make capital expenditures above specified levels, engage in certain business combinations and engage in other corporate activities. 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 these covenants, we could be in default under the financing agreements and the indebtedness negotiated thereunder could be accelerated. Furthermore, we may not be able to service scheduled debt or interest repayments, or both, as a result of our inability to generate sufficient future cash flows, which may place us in contravention of the terms of the financing agreements and which may result in an event of default. If any of these events 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.
The loan agreements also include a credit enhancement mechanism of ZAR 350 million ($23.0 million), which has been provided by investment funds managed by Net1’s largest shareholder, Value Capital Partners (Pty) Ltd (“VCP”), on commercially agreed terms, which include a contingent subscription for new shares. There can be no assurance that VCP will perform under the commercially agreed terms and failure by it to fulfil its obligation under the credit enhancement mechanism may put our funding or future repayments at risk.
In addition, the completion of the acquisition is conditional on, among other things, no action or circumstance occurring that would result in a material adverse effect on the Connect Group’s business operations or financial results.
We cannot provide any assurance regarding if or when all conditions precedent to the acquisition will be satisfied or waived. If, for any reason, the acquisition is not completed, its completion is materially delayed and/or the share purchase agreement is terminated, the market price of our common stock may be materially and adversely affected.
In addition, if the acquisition is not completed for any reason, there are risks that the announcement of the acquisition and the dedication of management’s attention and other of our resources to the completion thereof could have a negative impact on our relationships with our stakeholders and could have a material adverse effect on our current and future operations, financial condition and prospects.
We may not realize some or all of the anticipated benefits from the Connect Group acquisition.
Even if we complete the Connect Group acquisition, we may experience unforeseen events, changes or circumstances that may adversely affect us. For example, we may incur unexpected costs, charges or expenses resulting from the transaction, including charges to future earnings if the Connect Group’s business does not perform as expected. Our expectations regarding the Connect Group’s business and prospects may not be realized, including as a result of changes in the financial condition of the markets that the Connect Group serves. In addition, there are risks associated with the Connect Group’s product and service offerings or results of operations, including the risk of reduced cash settlements through Connect Group’s vault infrastructure or higher cash losses, lower than expected growth in Connect Group’s value-added services, lower than expected levels of loan advances or higher credit losses and slower than expected growth in card transactions.
57
Further, there are numerous challenges, risks and costs involved with integrating the operations of Connect Group with ours. For example, integrating the Connect Group into our company 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 cultural differences between our two organizations and the necessity of retaining and integrating personnel, including Connect Group’s key employees. Furthermore, our management certification and auditor attestation regarding the effectiveness of our internal control over financial reporting as of June 30, 2022, will likely exclude the operations of the Connect Group. If some or all of the aforementioned or other risks materialize, our ability to realize the anticipated benefits of the Connect Group could be materially impaired, and as a result, our financial condition, results of operations, cash flows and stock price could suffer.
Item 6. Exhibits
The following exhibits are filed as part of this Form 10-Q:
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| Incorporated by Reference Herein | ||
Exhibit No. |
| Description of Exhibit | Included Herewith | Form | Exhibit | Filing Date |
|
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|
|
10.41 |
| X | 8-K | 10.1 | November 2, 2021 | |
10.42 |
| X | 8-K | 10.1 | December 10, 2021 | |
10.43 |
| X | 8-K | 10.2 | December 10, 2021 | |
10.44 |
| X | 8-K | 10.3 | December 10, 2021 | |
10.45 |
| X | 8-K | 10.4 | December 10, 2021 | |
10.46 |
| X | 8-K | 10.5 | December 10, 2021 | |
10.47 |
| X | 8-K | 10.6 | December 10, 2021 | |
10.48 |
| First Amendment to Restrictive Covenant Agreements, dated as of December 9, 2021 | X | 8-K | 10.7 | December 10, 2021 |
31.1 |
| Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act | X |
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31.2 |
| Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act | X |
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32 |
| X |
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| |
101.INS |
| XBRL Instance Document | X |
|
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|
101.SCH |
| XBRL Taxonomy Extension Schema | X |
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase | X |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase | X |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase | X |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase | X |
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104 |
| Cover page formatted as Inline XBRL and contained in Exhibit 101 |
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58
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 9, 2022.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Chris G.B. Meyer
Chris G.B. Meyer
Group Chief Executive Officer
By: /s/ Alex M.R. Smith
Alex M.R. Smith
Chief Financial Officer, Treasurer and Secretary
59