NET 1 UEPS TECHNOLOGIES, INC. (NASDAQ:UEPS) Files An 8-K Completion of Acquisition or Disposition of Assets
Item 2.01. Completion of Acquisition or Disposition of Assets.
DNI’s audited consolidated statement of operations for the year ended June 30, 2018, reflects net income attributable to DNI shareholders of ZAR 264.5 million ($20.8 million, translated at average rate of exchange for the year ended June 30, 2018). DNI was not consolidated into the Company’s consolidated statement of operations for the year ended June 30, 2018, because the Company only acquired control of DNI as of June 30, 2018. Therefore, a pro forma adjustment has not been made to deconsolidate DNI’s operations from the Company’s unaudited pro forma statement of operations for the year ended June 30, 2018. The Company has included 38% of the $20.8 million net income attributable to DNI shareholders, or $7.918 million, in earnings from equity accounted investments in the unaudited pro forma statement of operations for the year ended June 30, 2018. The Company recorded a deferred tax adjustment of $1.774 million related to an increase in the basis difference between the financial reporting carrying value of DNI and its tax value.
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(b) Consideration received on Disposal
The fair value of the consideration received on Disposal was ZAR 400.0 million ($27.8 million, translated at exchange rates applicable as of December 31, 2018). The purchasers acquired the DNI shares on loan account and the Company ceded the loan account to settle the ZAR 400.0 million subscription price due related to the contingent consideration mechanism.
(c) Loss recognized on Disposal
The table below presents the calculation of the loss recognized on Disposal:
| Before | ||||||||
| FCTR | FCTR(1) | Total | ||||||
| ZAR ‘000 | $‘000 | |||||||
| Fair value of consideration received | 400,000 | 27,786 | – | 27,786 | ||||
| Fair value of retained interest in 38% of DNI(2) | 894,118 | 62,108 | – | 62,108 | ||||
| Carrying value of non-controlling interest | 1,307,441 | 90,820 | – | 90,820 | ||||
| Subtotal | 2,601,559 | 180,714 | – | 180,714 | ||||
| Less: carrying value of DNI | 2,841,862 | 197,407 | 5,206 | 202,613 | ||||
| Less: retained in Company | – | – | (3,597 | ) | (3,597 | ) | ||
| Loss recognized on Disposal, before tax, comprising | (240,303 | ) | (16,693 | ) | (1,609 | ) | (18,302 | ) |
| Related to sale of 17% of DNI | (74,276 | ) | (5,160 | ) | (1,609 | ) | (6,769 | ) |
| Related to fair value adjustment of retained interest in 38% of DNI | (166,027 | ) | (11,533 | ) | – | (11,533 | ) | |
| Taxes related to gain recognized on Disposal(3) | – | – | – | – | ||||
| Loss recognized on Disposal, after tax | (240,303 | ) | (16,693 | ) | (1,609 | ) | (18,302 | ) |
| (1) |
The Company recorded a foreign currency translation reserve loss of $5.206 million related to its investment in DNI which was included within accumulated other comprehensive loss in its consolidated balance sheet. The Company released $1. 609 million from its accumulated other comprehensive loss related to the Disposal and included this loss in the determination of the loss on Disposal. The balance of $3. 597 million is retained in accumulated other comprehensive loss. |
| (2) |
The fair value of the retained interest in 38% of DNI has been calculated using the implied fair value of DNI to the Disposal and has been calculated as ZAR 400.0 million divided by 17% multiplied by 38%, translated to dollars at the December 31, 2018, rate of exchange. |
| (3) |
The Disposal result in a capital loss for tax purposes of approximately $0.6 million. The Company has provided a valuation allowance of $0. 6 million against this capital loss because it does not have any capital gains to offset against this amount. |
(d) Components of retained interest in 38% of DNI using the equity method
The equity-accounted investment in 38% of DNI comprises the following components:
| $‘000 | |
| Net carrying value (assets less liabilities) | 7,224 |
| Acquired intangibles, net of deferred tax (refer to Note e) | 24,470 |
| Goodwill, including re-measurements | 30,414 |
| Equity-accounted investment – 38% of DNI | 62,108 |
(e) Acquired intangible assets and amortization expense included in equity-accounted investments and earnings from equity-accounted investments
The Company previously recognized acquired intangible assets related to its acquisition of a controlling stake in DNI on June 30, 2018. The Company retained a 38% interest in these acquired intangible assets as a result of the Disposal and this portion of these acquired intangible assets, net of deferred tax liabilities, is included in the Company’s equity-accounted investments included on the unaudited pro forma balance sheet as of December 31, 2018. These acquired intangible assets are amortized and an amount, net of deferred taxes, is included in earnings from equity-accounted investments in the Company’s condensed consolidated statement of operations.
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The December 31, 2018, carrying value of these acquired intangible assets, net of deferred tax liabilities, their expected remaining useful lives, and the amortization, net, included in equity accounted earnings are presented in the table below.
| December 31, 2018 | Amortization expense, net of | |||||||
| Carrying value of 38% of | deferred tax(1) | |||||||
| intangible assets | ($ ‘000) | |||||||
| Six months | ||||||||
| Estimated | ended | Year ended | ||||||
| useful life | December 31, | June 30, | ||||||
| (ZAR ‘ 000) | ($ ‘000) | (in years) | ||||||
| Finite lived intangibles assets | ||||||||
| Customer relationships | 466,252 | 32,388 | 4.5–14.5 | 1,670 | 3,771 | |||
| Software and unpatented technology | 2,813 | 195 | 4.5 | 22 | 49 | |||
| Trademarks | 20,203 | 1,403 | 4.5 | 157 | 354 | |||
| Deferred tax | (136,995 | ) | (9,516 | ) | (518 | ) | (1,169 | ) |
| 352,273 | 24,470 | 1,331 | 3,005 |
| (1) |
Amortization expense, net has been calculated using the respective average exchange rate for the six months ended December 31, 2018, and the year ended June 30, 2018, as appropriate. The amortization expense, net has been offset against earnings from equity-accounted investments in the consolidated statement of operations for the six months ended December 31, 2018, and the year ended June 30, 2018, as appropriate. |
(f) Adjustments in respect of the Company’s DNI contingent liability
Under the terms of its subscription agreements with DNI, the Company agreed to pay to DNI an additional amount of up to ZAR 400.0 million ($27.8 million, translated at exchange rates applicable as of December 31, 2018), in cash, subject to the achievement of certain performance targets by DNI. The Company expected to pay the contingent consideration during the first quarter of the year ended June 30, 2020, and recorded an amount of ZAR 385.6 million ($26.8 million), in other payables in its consolidated balance sheet as of December 31, 2018, which amount represents the present value of the ZAR 400 million to be paid. The present value of ZAR 385.6 million has been calculated using the following assumptions (a) the maximum additional amount of ZAR 400 million would be paid on August 1, 2019 and (b) an interest rate of 6.3 % (the rate used to calculate interest earned by the Company on its surplus South African funds) has been used to discount the ZAR 400.0 million to its present value as of December 31, 2018. Utilization of different inputs, or changes to these inputs, may result in significantly higher or lower fair value measurement.
Additional interest of ZAR 14.4 million ($0.996 million translated at exchange rates applicable as of December 31, 2018) has been recognized in the unaudited pro forma consolidated balance sheet to accrete the present value amount of R385.6 million to the ZAR 400 million settled.
The Company has reversed interest accreted and included in interest expense in the unaudited pro forma consolidated statement of operations for the six months ended December 31, 2018, of ZAR 12.0 million ($0.839 million), in respect of the contingent liability.
(g) Elimination of recorded earnings from equity accounted investments attributed to interest in DNI for the year ended June 30, 2018
The Company accounted for its interest in DNI using the equity method from August 1, 2017, until June 30, 2018, the date upon which it acquired control of DNI. The Company recognized earnings from DNI of $7.0 million in earnings from equity-accounted investments during the year ended June 30, 2018, which comprised the Company’s share of DNI’s net income of $9.510 million, net of amortization of intangible assets, net of $2.505 million ($3.480 million amortization less net of deferred tax of $0.975 million). These earnings have been eliminated in the unaudited pro forma statement of operations for the year ended June 30, 2018.
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(h) Transaction costs – incurred subsequent to December 31, 2018
Represents the Company’s estimate of the expected disposal costs of ZAR 1.0 million ($0.07 million) owing to external professional advisors for services provided which are not reflected in the Company’s December 31, 2018 consolidated balance sheet. These costs have been accrued as a current liability. The Company does not expect to deduct these expenses for tax purposes. Because the Company is required to expense these costs as they are incurred, it has charged them to retained earnings as of December 31, 2018. No adjustment has been made to the unaudited pro forma consolidated statement of operations for these costs as they are non-recurring.
(i) Reversal of loss on re-measurement of previously held non-controlling interest during the year ended June 30, 2018
At the time the Company obtained control of DNI in June 2018, it recognized a non-cash loss of $4.614 million related to the re-measurement of its previously held non-controlling interest in DNI, at 49%, upon acquisition in June 2018. The remeasurement loss was included in selling, general and administration expenses in the consolidated statement of operations for the year ended June 30, 2018, and has been reversed in the unaudited pro forma consolidated statement of operations.
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About NET 1 UEPS TECHNOLOGIES, INC. (NASDAQ:UEPS)
Net 1 UEPS Technologies, Inc. is a provider of payment solutions, transaction processing services and financial technology across multiple industries. The Company develops and markets a transaction processing solution that encompasses its smart card-based alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction channels. The Company operates through three segments: South African transaction processing, International transaction processing, and Financial inclusion and applied technologies. The Company also provides secure transaction technology solutions and services, by offering transaction processing, financial and clinical risk management solutions to various industries. It offers secure online transaction processing, cryptography, mobile telephony, integrated circuit card (chip/smart card) technologies, and the design and provision of financial and value-added services to its cardholder base.