Net 1 UEPS Technologies, Inc.: Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2014

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________  To  _________

Commission file number: 000-31203

NET 1 UEPS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Florida 98-0171860
(State or other jurisdiction
of incorporation or organization)
(IRS Employer
Identification No.)

President Place, 4th Floor, Cnr. Jan Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South Africa
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: 27-11-343-2000

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  [ X ]  NO  [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  [ X ]  NO  [   ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

[  ] Large accelerated filer [ X ] Accelerated filer
   
[   ] Non-accelerated filer [   ]  Smaller reporting company
(do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  [   ]  NO  [ X ]

As of February 3, 2015 (the latest practicable date), 46,547,153 shares of the registrant’s common stock, par value $0.001 per share, net of treasury shares, were outstanding.


Form 10-Q

NET 1 UEPS TECHNOLOGIES, INC.

Table of Contents

      Page No.
PART I. FINANCIAL INFORMATION   
     Item 1. Financial Statements  
Unaudited Condensed Consolidated Balance Sheets at Decenber 31, 2014 and June 30, 2014 2
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended December 31, 2014 and 2013 3
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2014 and 2013 4
Unaudited Condensed Consolidated Statement of Changes in Equity for the Six Months Ended December 31, 2014 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended December 31, 2014 and 2013 6
    Notes to Unaudited Condensed Consolidated Financial Statements 7
     Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24
     Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
     Item 4. Controls and Procedures 37
PART II. OTHER INFORMATION   
     Item 1. Legal Proceedings 38
     Item 1A. Risk Factors 38
     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
     Item 6. Exhibits 39
     Signatures    
     EXHIBIT 31.1  
     EXHIBIT 31.2
     EXHIBIT 32  

1


Part I. Financial Information

Item 1. Financial Statements

     NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Balance Sheets

    Unaudited     (A)  
    December 31,     June 30,  
    2014     2014  
    (In thousands, except share data)  
ASSETS    
CURRENT ASSETS            
     Cash and cash equivalents $  70,981   $  58,672  
     Pre-funded social welfare grants receivable (Note 2)   6,254     4,809  
     Accounts receivable, net of allowances of – December: $2,175; June: $1,313   128,338     148,067  
     Finance loans receivable, net of allowances of – December: $4,403; June: $3,083   60,309     53,124  
     Inventory (Note 3)   12,501     10,785  
     Deferred income taxes   6,286     7,451  
             Total current assets before settlement assets   284,669     282,908  
                     Settlement assets (Note 4)   480,962     725,987  
                             Total current assets   765,631     1,008,895  
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of – December: $94,376; June: $91,422 49,361 47,797
EQUITY-ACCOUNTED INVESTMENTS   954     878  
GOODWILL (Note 6)   172,237     186,576  
INTANGIBLE ASSETS, net (Note 6)   55,884     68,514  
OTHER LONG-TERM ASSETS, including reinsurance assets (Note 5 and Note 7)   35,426     38,285  
     TOTAL ASSETS   1,079,493     1,350,945  
LIABILITIES    
CURRENT LIABILITIES            
     Accounts payable   15,838     17,101  
     Other payables   39,263     42,257  
     Current portion of long-term borrowings (Note 9)   -     14,789  
     Income taxes payable   3,094     7,676  
             Total current liabilities before settlement obligations   58,195     81,823  
                     Settlement obligations (Note 4)   480,962     725,987  
                             Total current liabilities   539,157     807,810  
DEFERRED INCOME TAXES   12,676     15,522  
LONG-TERM BORROWINGS (Note 9)   59,698     62,388  
OTHER LONG-TERM LIABILITIES, including insurance policy liabilities (Note 7)   20,831     23,477  
     TOTAL LIABILITIES   632,362     909,197  
COMMITMENTS AND CONTINGENCIES (Note 17)            
EQUITY    
     COMMON STOCK (Note 10)
               Authorized: 200,000,000 with $0.001 par value; 
               Issued and outstanding shares, net of treasury - December: 46,547,153; 
              June: 47,819,299
64 63
     PREFERRED STOCK 
            Authorized shares: 50,000,000 with $0.001 par value;
            Issued and outstanding shares, net of treasury: December: -; June: -
- -
     ADDITIONAL PAID-IN-CAPITAL   211,743     202,401  
     TREASURY SHARES, AT COST: December: 18,057,228; June: 15,883,212   (214,520 )   (200,681 )
     ACCUMULATED OTHER COMPREHENSIVE LOSS   (120,504 )   (82,741 )
     RETAINED EARNINGS   569,596     522,729  
             TOTAL NET1 EQUITY   446,379     441,771  
             NON-CONTROLLING INTEREST   752     (23 )
                     TOTAL EQUITY   447,131     441,748  
                             TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $  1,079,493   $  1,350,945  

(A) – Derived from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial Statements

2


     NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations

    Three months ended     Six months ended  
    December 31,     December 31,  
    2014     2013     2014     2013  
    (In thousands, except per share data)     (In thousands, except per share data)  
             
REVENUE $  154,131   $ 137,283   $  310,572   $ 260,777  
                         
EXPENSE                        
                         
         Cost of goods sold, IT processing, servicing and support   71,774     67,883     146,180     124,442  
                         
         Selling, general and administration   41,385     40,824     80,121     81,330  
                         
         Depreciation and amortization   10,157     9,774     20,331     19,803  
                         
OPERATING INCOME   30,815     18,802     63,940     35,202  
                         
INTEREST INCOME   3,587     3,236     7,677     6,555  
                         
INTEREST EXPENSE   1,107     2,226     2,419     3,978  
                         
INCOME BEFORE INCOME TAX EXPENSE   33,295     19,812     69,198     37,779  
                         
INCOME TAX EXPENSE (Note 16)   10,203     7,099     21,851     13,584  
                         
NET INCOME BEFORE EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS   23,092     12,713     47,347     24,195  
                         
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS   76     47     168     150  
                         
NET INCOME   23,168     12,760     47,515     24,345  
                         
LESS NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST   794     11     1,052     -  
                         
NET INCOME ATTRIBUTABLE TO NET1 $  22,374   $ 12,749   $  46,463   $ 24,345  
                         
Net income per share, in United States dollars
(Note 13)
               
                         
      Basic earnings attributable to Net1 shareholders $ 0.48   $ 0.28   $ 0.99   $ 0.53  
                         
      Diluted earnings attributable to Net1 shareholders $ 0.48   $ 0.28   $ 0.99   $ 0.53  

See Notes to Unaudited Condensed Consolidated Financial Statements

3


NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income

    Three months ended     Six months ended  
    December 31,     December 31,  
    2014     2013     2014     2013  
    (In thousands)     (In thousands)  
                         
Net income $  23,168   $ 12,760   $  47,515   $  24,345  
                         

Other comprehensive (loss) income

                       
                      Net unrealized loss on asset available for sale, net of tax - 216 (226 ) (39 )
                      Movement in foreign currency translation reserve (16,401 ) (2,597 ) (37,586 ) 4,972
                            Total other comprehensive (loss) income, net of taxes (16,401 ) (2,381 ) (37,812 ) 4,933
                         

                    Comprehensive income

  6,767     10,379     9,703     29,278  
                    Less comprehensive income attributable to non-controlling interest (771 ) (11 ) (1,003 ) -
                            Comprehensive income attributable to Net1 $ 5,996 $ 10,368 $ 8,700 $ 29,278

See Notes to Unaudited Condensed Consolidated Financial Statements

4


NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statement of Changes in Equity for the six months ended December 31, 2014 (dollar amounts in thousands)

    Net 1 UEPS Technologies, Inc. Shareholders            
                                              Accumulated                    
                Number of           Number of     Additional           other           Non-        
    Number of           Treasury     Treasury     shares, net of     Paid-In     Retained     comprehensive     Total Net1     controlling        
    Shares     Amount     Shares     Shares     treasury     Capital     Earnings     loss     Equity     Interest     Total  
Balance – July 1, 2014   63,702,511   $ 63     (15,883,212 ) $ (200,681 )   47,819,299   $ 202,401   $ 522,729   $ (82,741 ) $ 441,771   $ (23 ) $ 441,748  
Repurchase of common stock (Note 10)               (1,837,432 )   (9,151 )   (1,837,432 )                     (9,151 )         (9,151 )
Restricted stock granted (Note 12)   213,237                       213,237                       -           -  
Exercise of stock option (Note 12)   688,633     1     (336,584 )   (4,688 )   352,049     5,677                 990           990  
Stock-based compensation charge (Note 12)                       1,951             1,951         1,951  
Income tax benefit from vested stock awards                       483             483         483  
Transactions with non-controlling interests (Note 10)                       1,231     404         1,635     (228 )   1,407  
Net income                                       46,463           46,463     1,052     47,515  
Other comprehensive loss (Note 11)                                             (37,763 )   (37,763 )   (49 )   (37,812 )
Balance – December 31, 2014   64,604,381   $ 64     (18,057,228 ) $ (214,520 )   46,547,153   $ 211,743   $ 569,596   $ (120,504 ) $ 446,379   $ 752   $ 447,131  

 See Notes to Unaudited Condensed Consolidated Financial Statements

5


     NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows

    Three months ended     Six months ended  
    December 31,     December 31,  
    2014     2013     2014     2013  
    (In thousands)     (In thousands)  
Cash flows from operating activities                        
Net income $  23,168   $  12,760   $  47,515   $  24,345  
Depreciation and amortization   10,157     9,774     20,331     19,803  
Earnings from equity-accounted investments   (76 )   (47 )   (168 )   (150 )
Fair value adjustments   (234 )   72     179     (61 )
Interest payable   140     694     1,299     1,666  
Profit on disposal of property, plant and equipment   (109 )   (15 )   (231 )   (16 )
Stock-based compensation charge   1,035     968     1,951     1,898  
Facility fee amortized   52     509     134     578  
Increase in accounts receivable, pre-funded social                        
welfare grants receivable and finance loans receivable (7,315 ) (37,977 ) 2,155 (61,078 )
Increase in inventory   (622 )   (2,853 )   (2,745 )   (1,842 )
Decrease in accounts payable and other payables   (1,456 )   (4,883 )   (12,389 )   (13,551 )
(Decrease) increase in taxes payable   (9,963 )   (5,559 )   (3,352 )   1,362  
Decrease in deferred taxes   (168 )   (691 )   (558 )   (1,878 )
   Net cash provided (used in ) by operating activities   14,609   (27,248 )   54,121   (28,924 )
                         
Cash flows from investing activities                        
Capital expenditures   (9,137 )   (6,845 )   (18,515 )   (12,461 )
Proceeds from disposal of property, plant and equipment 373 1,953 614 2,001
Proceeds from sale of business (Note 14)   -     -     1,895     -  
Other investing activities   (29 )   -     (29 )   (1 )
Net change in settlement assets   241,652     204,730     198,598     256,503  
   Net cash provided by investing activities   232,859     199,838     182,563     246,042  
                         
Cash flows from financing activities                        
Repayment of long-term borrowings (Note 9)   (14,128 )   (87,008 )   (14,128 )   (87,008 )
Long-term borrowings utilized   1,081     -     2,178     -  
Acquisition of treasury stock (Note 10)   -     -     (9,151 )   -  
Sale of equity to non-controlling interest (Note 10)   -     -     1,407     -  
Proceeds from issue of common stock   -     -     989     -  
Long-term borrowings obtained   -     71,605     -     71,605  
Payment of facility fee   -     (872 )   -     (872 )
Proceeds from bank overdraft   -     24,580     -     24,580  
Acquisition of interests in KSNET (Note 10)   -     (1,968 )   -     (1,968 )
Net change in settlement obligations   (241,652 )   (204,730 )   (198,598 )   (256,503 )
   Net cash used in financing activities   (254,699 )   (198,393 )   (217,303 )   (250,166 )
                         
Effect of exchange rate changes on cash   (2,973 )   495     (7,072 )   1,745  
Net (decrease) increase in cash and cash equivalents (10,204 ) (25,308 ) 12,309 (31,303 )
Cash and cash equivalents – beginning of period   81,185     47,670     58,672     53,665  
Cash and cash equivalents – end of period $  70,981   $  22,362   $  70,981   $  22,362  

See Notes to Unaudited Condensed Consolidated Financial Statements

6


NET 1 UEPS TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
for the three and six months ended December 31, 2014 and 2013
(All amounts in tables stated in thousands or thousands of United States Dollars, unless otherwise stated)

1.

Basis of Presentation and Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements include all majority-owned subsidiaries over which the Company exercises control and have been prepared in accordance with US generally accepted accounting principles (“GAAP”) and the rules and regulations of the 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, 2014 and 2013, are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.

These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented.

References to the “Company” refer to Net1 and its consolidated subsidiaries, unless the context otherwise requires. References to Net1 are references solely to Net 1 UEPS Technologies, Inc.

Recent accounting pronouncements adopted

 In March 2013, the FASB issued guidance regarding Parent’s Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity. This guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance is effective for the Company beginning July 1, 2014, and is applied prospectively. The adoption of this guidance did not have a material impact on the Company’s financial statements.

Recent accounting pronouncements not yet adopted as of December 31, 2014 

 In May 2014, the FASB issued guidance regarding Revenue from Contracts with Customers. This guidance requires an entity to recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for the Company beginning July 1, 2017. Early adoption is not permitted. The Company expects that this guidance will have a material impact on its financial statements and is currently evaluating the impact of this guidance on its financial statements on adoption.

In August 2014, the FASB issued guidance regarding Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. This guidance requires an entity to perform interim and annual assessments of its ability to continue as a going concern within one year of the date that its financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for the Company beginning July 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.

2.

Pre-funded social welfare grants receivable

Pre-funded social welfare grants receivable represents amounts pre-funded by the Company to certain merchants participating in the merchant acquiring system. The January 2015 payment service commenced on January 1, 2015, but the Company pre-funded certain merchants participating in the merchant acquiring system on the last two days of December 2014.

7



3.

Inventory

The Company’s inventory comprised the following categories as of December 31, 2014 and June 30, 2014.

      December 31,     June 30,  
      2014     2014  
  Finished goods $ 12,501   $ 10,785  
    $ 12,501   $ 10,785  

4.

Settlement assets and settlement obligations

Settlement assets comprise (1) cash received from the South African government that the Company holds pending disbursement to recipient cardholders of social welfare grants and (2) cash received from customers on whose behalf the Company processes payroll payments that the Company will disburse to customer employees, payroll-related payees and other payees designated by the customer.

Settlement obligations comprise (1) amounts that the Company is obligated to disburse to recipient cardholders of social welfare grants, (2) amounts that the Company is obligated to pay to customer employees, payroll-related payees and other payees designated by the customer.

The balances at each reporting date may vary widely depending on the timing of the receipts and payments of these assets and obligations.

5.

Fair value of financial instruments

Initial recognition and measurement

Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction costs.

Risk management

The Company seeks to reduce its exposure to currencies other than the South African Rand (“ZAR”) through a policy of matching, to the extent possible, assets and liabilities denominated in those currencies. In addition, the Company uses financial instruments in order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company is also exposed to equity price and liquidity risks as well as credit risks.

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 US dollar. The Company has used forward contracts in order to limit its exposure in these transactions to fluctuations in exchange rates between the ZAR, on the one hand, and the US 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 US dollar is its reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The US dollar to ZAR exchange rate has fluctuated significantly over the past three years. As exchange rates are outside the Company’s control, there can be no assurance that future fluctuations will not adversely affect the Company’s results of operations and financial condition.

Interest rate risk

As a result of its normal borrowing and leasing activities, the Company’s operating results are exposed to fluctuations in interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited investment in cash equivalents and has occasionally invested in marketable securities.

8



5.

Fair value of financial instruments (continued)

   Risk management (continued)

Credit risk

Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties. The Company maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an evaluation of a potential counterparty’s financial condition, credit rating, and other credit criteria and risk mitigation tools as the Company’s management deems appropriate.

With respect to credit risk on financial instruments, the Company maintains a policy of entering into such transactions only with South African and European financial institutions that have a credit rating of BBB or better, as determined by credit rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings.

UEPS-based microlending credit risk

The Company is exposed to credit risk in its UEPS-based microlending activities, which provides unsecured short-term loans to qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer and assigns a “creditworthiness score”, which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses.

Equity price and liquidity risk

Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities that it holds and the risk that it may not be able to liquidate these securities. The market price of these securities may fluctuate for a variety of reasons, consequently, the amount the Company may obtain in a subsequent sale of these securities may significantly differ from the reported market value.

Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an extended period of time without influencing the exchange traded price, or at all.

Financial instruments

The following section describes the valuation methodologies the Company uses to measure its significant financial assets and liabilities at fair value. 

 In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to Level 1 investments. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments are included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect 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 Finbond Group Limited (“Finbond”)

The Company's Level 3 asset represents an investment of 156,788,712 shares of common stock of Finbond, which are exchange-traded equity securities. Finbond’s shares are traded on the Johannesburg Stock Exchange (“JSE”) and the Company has designated such shares as available for sale investments. The Company has concluded that the market for Finbond shares is not active and consequently has employed alternative valuation techniques in order to determine the fair value of such stock. Finbond issues financial products and services under a mutual banking licence and also has a microlending offering. In determining the fair value of Finbond, the Company has considered amongst other things Finbond’s historical financial information (including its most recent public accounts), press releases issued by Finbond and its published net asset value. The Company believes that the best indicator of fair value of Finbond is its published net asset value and has used this value to determine the fair value.

9



5.

Fair value of financial instruments (continued)

Financial instruments (continued)

        Asset measured at fair value using significant unobservable inputs – investment in Finbond Group Limited (“Finbond”) (continued)

The fair value of these securities as of December 31, 2014, represented approximately 1% of the Company’s total assets, including these securities. The Company expects to hold these securities for an extended period of time and it is not concerned with short-term equity price volatility with respect to these securities provided that the underlying business, economic and management characteristics of the company remain sound.

 Derivative transactions - Foreign exchange contracts

As part of the Company’s risk management strategy, the Company enters into derivative transactions to mitigate exposures to foreign currencies using foreign exchange contracts. These foreign exchange contracts are over-the-counter derivative transactions. Substantially all of the Company’s derivative exposures are with counterparties that have long-term credit ratings of BBB or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair value (Level 2). The Company has no derivatives that require fair value measurement under Level 1 or 3 of the fair value hierarchy.

The Company’s outstanding foreign exchange contracts are as follows:

As of December 31, 2014

            Fair market        
  Notional amount   Strike price     value price     Maturity  
  EUR 174,424.50   ZAR 15.6729     ZAR 14.1043     January 20, 2015  
  EUR 174,424.50   ZAR 15.8119     ZAR 14.1043     January 20, 2015  
  EUR 938,834.00   ZAR 14.7811     ZAR 14.2503     March 20, 2015  
  EUR 706,205.00   ZAR 14.8645     ZAR 14.3307     April 20, 2015  
  EUR 512,865.00   ZAR 14.9455     ZAR 14.4113     May 20, 2015  
  EUR 526,263.00   ZAR 15.0345     ZAR 14.5000     June 22, 2015  
  EUR 526,263.00   ZAR 15.1145     ZAR 14.5762     July 20, 2015  
  EUR 526,263.00   ZAR 15.2025     ZAR 14.6619     August 20, 2015  
  EUR 526,263.00   ZAR 15.2944     ZAR 14.7502     September 21, 2015  
  EUR 526,263.00   ZAR 15.3809     ZAR 14.8329     October 20, 2015  
  EUR 509,516.00   ZAR 15.4728     ZAR 14.9238     November 20, 2015  
  EUR 529,865.00   ZAR 15.5654     ZAR 15.0147     December 21, 2015  
  EUR 526,663.00   ZAR 15.6625     ZAR 15.1057     January 20, 2016  

As of June 30, 2014

 

        Fair market        
 

Notional amount

  Strike price     value price     Maturity  
 

EUR 182,272.50

  ZAR 15.2077     ZAR 14.5803     July 21, 2014  
 

EUR 182,272.50

  ZAR 15.3488     ZAR 14.5803     July 21, 2014  
 

EUR 180,022.50

  ZAR 15.4228     ZAR 14.6542     August 20, 2014  
 

EUR 180,022.50

  ZAR 15.2819     ZAR 14.6542     August 20, 2014  
 

EUR 180,022.50

  ZAR 15.3623     ZAR 14.7367     September 22, 2014  
 

EUR 180,022.50

  ZAR 15.5041     ZAR 14.7367     September 22, 2014  
 

EUR 181,570.50

  ZAR 15.5739     ZAR 14.8119     October 20, 2014  
 

EUR 181,570.50

  ZAR 15.4316     ZAR 14.8119     October 20, 2014  
 

EUR 180,022.50

  ZAR 15.6552     ZAR 14.8982     November 20, 2014  
 

EUR 180,022.50

  ZAR 15.5136     ZAR 14.8982     November 20, 2014  
 

EUR 180,022.50

  ZAR 15.5970     ZAR 14.9874     December 22, 2014  
 

EUR 180,022.50

  ZAR 15.7391     ZAR 14.9874     December 22, 2014  
 

EUR 174,424.50

  ZAR 15.8119     ZAR 15.0671     January 20, 2015  
 

EUR 174,424.50

  ZAR 15.6729     ZAR 15.0671     January 20, 2015  

10



5.

Fair value of financial instruments (continued)

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2014, according to the fair value hierarchy:

      Quoted                    
      Price in                    
      Active     Significant              
      Markets for     Other     Significant        
      Identical     Observable     Unobservable        
      Assets     Inputs     Inputs        
      (Level 1)   (Level 2)   (Level 3)   Total  
  Assets                        
      Related to insurance business (included in
    other long-term assets):
               
         Cash and cash equivalents $ 1,688   $ -   $ -   $ 1,688  
      Investment in Finbond (available for sale
     assets included in other long-term assets)
- - 7,358 7,358
     Other   -     44     -     44  
         Total assets at fair value $ 1,688   $ 44   $ 7,358   $ 9,090  
  Liabilities                        
     Foreign exchange contracts $ -   $ 345   $ -   $ 345  
         Total liabilities at fair value $ -   $ 345   $ -   $ 345  

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2014, according to the fair value hierarchy:

      Quoted                    
      Price in                    
      Active     Significant              
      Markets for     Other     Significant        
      Identical     Observable     Unobservable        
      Assets     Inputs     Inputs        
      (Level 1)   (Level 2)   (Level 3)   Total  
  Assets                        
      Related to insurance business (included in
    other long-term assets):
               
           Cash and cash equivalents $ 1,800   $ -   $ -   $ 1,800  
       Investment in Finbond (available for sale
     assets included in other long-term assets)
- - 8,068 8,068
     Other   -     47     -     47  
          Total assets at fair value $ 1,800   $ 47   $ 8,068   $ 9,915  
  Liabilities                        
      Foreign exchange contracts $ -   $ 164   $ -   $ 164  
         Total liabilities at fair value $ -   $ 164   $ -   $ 164  

Changes in the Company’s investment in Finbond (Level 3 that are measured at fair value on a recurring basis) were insignificant during the three and six months ended December 31, 2014 and 2013, respectively. There have been no transfers in or out of Level 3 during the three and six months ended December 31, 2014 and 2013, respectively.

     Assets and liabilities measured at fair value on a nonrecurring basis

The Company measures its assets at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The Company has no liabilities that are measured at fair value on a nonrecurring basis. The Company reviews the carrying values of its assets when events and circumstances warrant and considers all available evidence in evaluating when declines in fair value are other-than-temporary. The fair values of the Company’s assets are determined using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the assets exceeds its fair value and the excess is determined to be other-than-temporary. The Company has not recorded any impairment charges during the reporting periods presented herein.

11



6.

Goodwill and intangible assets, net

   
  Goodwill  
   
  Summarized below is the movement in the carrying value of goodwill for the three and six months ended December 31, 2014: 
            Accumulated     Carrying  
      Gross value     impairment     value  
  Balance as of June 30, 2014 $ 186,576   $ -   $ 186,576  
       Foreign currency adjustment (1)   (14,339 )   -     (14,339 )
               Balance as of December 31, 2014 $ 172,237   $ -   $ 172,237  

(1) – The foreign currency adjustment represents the effects of the fluctuations between the South African rand and the Korean won, and the US dollar on the carrying value.

Goodwill has been allocated to the Company’s reportable segments as follows:

      As of     As of  
      December 31,     June 30,  
      2014     2014  
               
  South African transaction processing $ 26,011   $ 28,517  
  International transaction processing   118,689     128,427  
  Financial inclusion and applied technologies   27,537     29,632  
     Total $ 172,237   $ 186,576  

Intangible assets, net

Carrying value and amortization of intangible assets

Summarized below is the carrying value and accumulated amortization of the intangible assets as of December 31, 2014 and June 30, 2014:

      As of December 31, 2014     As of June 30, 2014  
      Gross           Net     Gross           Net  
      carrying     Accumulated     carrying     carrying     Accumulated     carrying  
      value     amortization     value     value     amortization     value  
 

Finite-lived intangible assets:

                                   
       Customer relationships $ 90,966   $ (42,445 ) $ 48,521   $ 98,676   $ (41,273 ) $ 57,403  
       Software and unpatented                                    
       technology   30,966     (26,706 )   4,260     33,604     (26,207 )   7,397  
       FTS patent   3,301     (3,301 )   -     3,619     (3,619 )   -  
       Exclusive licenses   4,506     (4,506 )   -     4,506     (4,506 )   -  
       Trademarks   6,334     (3,231 )   3,103     6,890     (3,176 )   3,714  
       Total finite-lived intangible assets $ 136,073   $ (80,189 ) $ 55,884   $ 147,295   $ (78,781 ) $ 68,514  

Aggregate amortization expense on the finite-lived intangible assets for the three and six months ended December 31, 2014, was approximately $3.9 million and $7.7 million, respectively (three and six months ended December 31, 2013, was approximately $4.1 million and $7.8 million, respectively).

Future estimated annual amortization expense for the next five fiscal years and thereafter, assuming exchange rates prevailing on December 31, 2014, 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.

  2015 $ 14,605    
  2016   10,920    
  2017   8,696    
  2018   8,696    
  2019   8,375    
  Thereafter $ 11,644    

12



7.

Reinsurance assets and policy holder liabilities under insurance and investment contracts

Reinsurance assets and policy holder liabilities under insurance contracts

Summarized below is the movement in reinsurance assets and policy holder liabilities under insurance contracts during the six months ended December 31, 2014:

      Reinsurance     Insurance  
      assets (1)

 

  contracts (2)

 

  Balance as of June 30, 2014 $ 21,062   $ (21,478 )
       Foreign currency adjustment (3)   (1,851 )   1,887  
           Balance as of December 31, 2014 $ 19,211   $ (19,591 )

(1) Included in other long-term assets.
(2) Included in other long-term liabilities.
(3) The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the US dollar.

The Company has agreements with reinsurance companies in order to limit its losses from large insurance contracts, however, if the reinsurer is unable to meet its obligations, the Company retains the liability.

The value of insurance contract liabilities is based on best estimates 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 future mortality and morbidity (an appropriate base table of standard mortality is chosen depending on the type of contract and class of business), withdrawals (based on recent withdrawal investigations and expected future trends), investment returns (based on government treasury rates adjusted by an applicable margin), expense inflation (based on a 10-year real return on CPI-linked government bonds from the risk-free rate and adding an allowance for salary inflation and book shrinkage of 1% per annum) and claim reporting delays (based on average industry experience).

Assets and policy holder liabilities under investment contracts

Summarized below is the movement in assets and policy holder liabilities under investment contracts during the six months ended December 31, 2014:

            Investment  
      Assets (1)   contracts (2)
  Balance as of June 30, 2014 $ 688   $ (688 )
       Foreign currency adjustment (3)   (60 )   60  
           Balance as of December 31, 2014 $ 628   $ (628 )

(1) Included in other long-term assets.
(2) Included in other long-term liabilities.
(3) The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the US dollar.

The Company does not offer any investment products with guarantees related to capital or returns.

8.

Short-term credit facility

The Company’s short-term credit facilities are described in Note 12 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2014.

South Africa

As of December 31, 2014, and June 30, 2014, the Company had not utilized any of its ZAR 250.0 million ($21.5 million, translated at exchange rates applicable as of December 31, 2014) overdraft facility. As of December 31, 2014, the interest rate on the overdraft facility was 8.10% . At December 31, 2014, the Company had utilized approximately ZAR 137.2 million ($11.8 million, translated at exchange rates applicable as of December 31, 2014) of its ZAR 150 million indirect and derivative facilities to obtain foreign exchange contracts from the bank and to enable the bank to issue guarantees, including stand-by letters of credit, in order for the Company to honor its obligations to third parties requiring such guarantees (refer to Note 17). As of June 30, 2014, the Company had utilized approximately ZAR 139.0 million ($13.1 million, translated at exchange rates applicable as of June 30, 2014) of its indirect and derivative facilities.

13



8.

Short-term credit facility (continued)

Korea

The Company had not utilized any of its KRW 10 billion ($9.1 million, translated at exchange rates applicable as of December 31, 2014) overdraft facility as of December 31, 2014 and June 30, 2014. As of December 31, 2014, the interest rate on the overdraft facility was 4.47% . The facility expired in January 2015.

9.

Long-term borrowings

The Company’s Korean senior secured loan facility 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, 2014. The current carrying value as of December 31, 2014, is $59.7 million. As of December 31, 2014, the carrying amount of the long-term borrowings approximated fair value. The interest rate in effect on December 31, 2014, was 5.24% .

Interest expense incurred during the three and six months ended December 31, 2014 and 2013, was $0.9 million and $1.8 million; and $2.0 million and $3.6 million, respectively. Prepaid facility fees amortized during the three and six months ended December 31, 2014 and 2013, was $0.1 million and $0.5 million; and $0.1 million and $0.6 million, respectively. Prepaid facility fees amortized during the three and six months ended December 31, 2013, include the remaining prepaid facility fees related to the refinanced facility of approximately $0.4 million that were expensed.

The first scheduled principal repayment of $14.1 million was paid on October 29, 2014. The next scheduled principal payment of $9.1 million (translated at exchange rates applicable as of December 31, 2014) will be made on April 29, 2016.

10.

Capital structure

The following table presents reconciliation between the number of shares, net of treasury, presented in the unaudited condensed consolidated statement of changes in equity during the six months ended December 31, 2014 and 2013, 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, 2014 and 2013, respectively:

      2014     2013  
               
  Number of shares, net of treasury:            
       Statement of changes in equity   46,547,153     45,773,342  
       Less: Non-vested equity shares that have not vested (Note 12)   (524,863 )   (569,111 )
           Number of shares, net of treasury excluding non-vested
         equity shares that have not vested
  46,022,290 45,204,231  

Common stock repurchases and transaction with non-controlling interests

The Company did not repurchase any of its shares during the three and six months ended December 31, 2014 and 2013, under its share repurchase authorization. However, on August 27, 2014, the Company entered into a Subscription and Sale of Shares Agreement with Business Venture Investments No 1567 Proprietary Limited (RF) (“BVI”), one of the Company’s BEE partners, in preparation for any new potential SASSA tender. Pursuant to the agreement: (i) the Company repurchased BVI’s remaining 1,837,432 shares of the Company’s common stock for approximately ZAR 97.4 million in cash ($9.2 million translated at exchange rates prevailing as of August 27, 2014) and (ii) BVI has subscribed for new ordinary shares of Cash Paymaster Services (Pty) Ltd (“CPS”) representing approximately 12.5% of CPS’ ordinary shares outstanding after the subscription for ZAR 15.0 million in cash (approximately $1.4 million translated at exchange rates prevailing as of August 27, 2014). In connection with transactions described above, the CPS shareholder agreement that was negotiated as part of the original December 2013 Relationship Agreement became effective.

Acquisition of KSNET non-controlling interests

During the three and six months ended December 31, 2013, the Company acquired substantially all of the issued share capital of KSNET, Inc. that it did not previously own for approximately $2.0 million in cash. After the acquisition of the additional shares, the Company owned 99.90% of KSNET. The Company purchased the remaining shares it did not own during the three months ended March 31, 2014. The transaction was accounted for as an equity transaction with a non-controlling interest and accordingly, no gain or loss was recognized in the Company’s consolidated statement of operations. The carrying amount of the non-controlling interest was adjusted to reflect the change in ownership interest in KSNET. The difference between the fair value of the consideration paid and the amount by which the non-controlling interest was adjusted, of $1.5 million, was recognized in equity attributable to Net1.

14



11.

Accumulated other comprehensive loss

The table below presents the change in accumulated other comprehensive (loss) income per component during the six months ended December 31, 2014:

            Six months ended        
            December 31, 2014        
            Accumulated        
            Net        
            unrealized        
      Accumulated     income (loss)        
      Foreign     on asset        
      currency     available for        
      translation     sale, net of        
      reserve     tax     Total  
                     
  Balance as of June 30, 2014 $ (83,359 ) $ 618   $ (82,741 )
       Movement in foreign currency translation reserve   (37,537 )   -     (37,537 )
      Unrealized loss on asset available for sale, net of tax of $88   -     (226 )   (226 )
               Balance as of December 31, 2014 $ (120,896 ) $ 392   $ (120,504 )

There were no reclassifications from accumulated other comprehensive loss to comprehensive (loss) income during the three and six months ended December 31, 2014 or 2013, respectively.

12.

Stock-based compensation

Stock option and restricted stock activity

Options

The following table summarizes stock option activity for the six months ended December 31, 2014 and 2013:

                  Weighted           Weighted  
            Weighted     Average           Average  
            average     Remaining     Aggregate     Grant  
            exercise     Contractual     Intrinsic     Date Fair  
      Number of     price     Term     Value     Value  
      shares     ($)     (in years)     ($’000)   ($)  
                                 
  Outstanding – June 30, 2014   2,710,392     14.16     5.38     3,909        
      Granted under Plan: August 2014   464,410     11.23     10.00     2,113     4.55  
       Exercised   (688,633 )   8.24           3,697        
          Outstanding – December 31, 2014   2,486,169     15.24     5.20     1,842      
                                 
  Outstanding – June 30, 2013   2,648,583     15.15     5.98     313        
       Granted under Plan: August 2013   224,896     7.35     10.00     568     2.53  
          Outstanding – December 31, 2013   2,873,479     14.54     5.79     1,037      

The fair value of each option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the assumptions noted in the following table. The estimated expected volatility is calculated based on the Company’s 250 day volatility. The estimated expected life of the option was determined based on historical behavior of employees who were granted options with similar terms. The Company has estimated no forfeitures for options awarded in August 2013 and 2014, respectively.

15



12.

Stock-based compensation (continued)

Stock option and restricted stock activity (continued)

Options (continued)

The table below presents the range of assumptions used to value options granted during the six months ended December 31, 2014 and 2013:

      Six months ended  
      December 31,  
      2014     2013  
  Expected volatility   60%     50%  
  Expected dividends   0%     0%  
  Expected life (in years)   3     3  
  Risk-free rate   1.0%     0.9%  

There were no forfeitures during the three and six months ended December 31, 2014 and 2013.

The following table presents stock options vested and expecting to vest as of December 31, 2014:

                  Weighted        
            Weighted     Average        
            average     Remaining     Aggregate  
            exercise     Contractual     Intrinsic  
      Number of     price     Term     Value  
      shares     ($)     (in years)     ($’000)
  Vested and expecting to vest – December 31, 2014 2,486,169 15.24 5.20 1,842

These options have an exercise price range of $7.35 to $24.46.

The following table presents stock options that are exercisable as of December 31, 2014:

                  Weighted        
            Weighted     Average        
            average     Remaining     Aggregate  
            exercise     Contractual     Intrinsic  
      Number of     price     Term     Value  
      shares     ($)     (in years)     ($’000)
  Exercisable – December 31, 2014   1,728,163     17.55     3.51     775  

During the three months ended December 31, 2014 and 2013, respectively, 57,334 and 159,666 stock options became exercisable. During the six months ended December 31, 2014 and 2013, respectively, 330,967 and 358,333 stock options became exercisable. During the six months ended December 31, 2014, the Company received approximately $1.0 million from 116,395 stock options exercised. The remaining 572,238 stock options were exercised through recipients delivering 336,584 shares of the Company’s common stock to the Company on September 9, 2014, to settle the exercise price due. No stock options were exercised during the three months ended December 31, 2014, or during the three and six months ended December 31, 2013. The Company issues new shares to satisfy stock option exercises.

16



12.

Stock-based compensation (continued)

Stock option and restricted stock activity (continued)

Restricted stock

The following table summarizes restricted stock activity for the six months ended December 31, 2014 and 2013:

            Weighted  
      Number of     Average  
      Shares of     Grant Date  
      Restricted     Fair Value  
      Stock     ($’000)
 

Non-vested – June 30, 2014

  385,778     3,534  
 

 Granted – August 2014

  141,707     581  
 

 Granted – November 2014

  71,530     229  
 

 Vested – August 2014

  (74,152 )   828  
 

     Non-vested – December 31, 2014

  524,863     3,795  
 

           
 

Non-vested – June 30, 2013

  405,226     4,393  
   Granted – August 2013   187,963     1,382  
   Vested – August 2013   (16,907 )   161  
   Forfeitures – October 2013   (7,171 )   161  
       Non-vested – December 31, 2013   569,111     5,572  

The August 2014 grants comprise 127,626 and 14,081 shares of restricted stock awarded to employees and non-employee directors, respectively. All of the November 2014 grants were awarded to employees. The 127,626 and 71,530 shares of restricted stock will vest in full only on the date, if any, the following conditions are satisfied: (1) the closing price of the Company’s common stock equals or exceeds $19.41 (subject to appropriate adjustment for any stock split or stock dividend) for a period of 30 consecutive trading days during a measurement period commencing on the date that the Company files its Annual Report on Form 10-K for the fiscal year ended 2017 and ending on December 31, 2017 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited. The $19.41 price target represents a 20% increase, compounded annually, in the price of the Company’s common stock on Nasdaq over the $11.23 closing price on August 27, 2014.

The 127,626 and 71,530 shares of restricted stock are effectively forward starting knock-in barrier options with a strike price of zero. The fair value of these shares of restricted stock was calculated utilizing an adjusted Monte Carlo simulation discounted cash flow model which was developed for the purpose of the valuation of these shares. For each simulated share price path, the market share price condition was evaluated to determine whether or not the shares would vest under that simulation. The “adjustment” to the Monte Carlo simulation model incorporates a “jump diffusion” process to the standard Geometric Brownian Motion simulation, in order to capture the discontinuous share price jumps observed in the Company’s share price movements on stock exchanges on which it is listed. Therefore, the simulated share price paths capture the idiosyncrasies of the observed Company share price movements.

In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the final vested value on maturity is the share price on vesting date. The value of the grant is the average of the discounted vested values. The Company used an expected volatility of 76.01%, an expected life of approximately three years, a risk-free rate of 1.27% and no future dividends in its calculation of the fair value of the 127,626 shares of restricted stock. The Company used an expected volatility of 63.73%, an expected life of approximately three years, a risk-free rate of 1.21% and no future dividends in its calculation of the fair value of the 71,530 shares of restricted stock. Estimated expected volatility was calculated based on the Company’s 30 day VWAP share price using the exponentially weighted moving average of returns.

The fair value of restricted stock vesting during the six months ended December 31, 2014 and 2013, respectively, was $0.8 million and $0.2 million. The fair value of restricted stock is based on the closing price of the Company’s stock quoted on The Nasdaq Global Select Market on the date of grant.

17



12.

Stock-based compensation (continued)

Stock-based compensation charge and unrecognized compensation cost

The Company has recorded a stock-based compensation charge of $1.0 million during each of the three months ended December 31, 2014 and 2013, respectively, which comprised:

            Allocated to cost        
            of goods sold, IT     Allocated to  
            processing,     selling, general  
      Total     servicing and     and  
      charge     support     administration  
  Three months ended December 31, 2014                  
   Stock-based compensation charge $ 1,035   $ -   $ 1,035  
             Total – three months ended December 31, 2014 . $ 1,035   $ -   $ 1,035  
                     
  Three months ended December 31, 2013                  
   Stock-based compensation charge $ 974   $ -   $ 974  
   Reversal of stock compensation charge related to restricted stock forfeited   (6 )   -     (6 )
             Total – three months ended December 31, 2013 . $ 968   $ -   $ 968  

The Company has recorded a stock-based compensation charge of $2.0 million and $1.9 million, respectively, during the six months ended December 31, 2014 and 2013, which comprised:

            Allocated to cost        
            of goods sold, IT     Allocated to  
            processing,     selling, general  
      Total     servicing and     and  
      charge     support     administration  
 

Six months ended December 31, 2014

                 
 

 Stock-based compensation charge

$ 1,951   $ -   $ 1,951  
 

           Total –six months ended December 31, 2014

$ 1,951   $ -   $ 1,951  
 

                 
 

Six months ended December 31, 2013

                 
 

 Stock-based compensation charge

$ 1,904   $ -   $ 1,904  
 

 Reversal of stock compensation charge related to restricted stock forfeited

  (6 )   -     (6 )
             Total –six months ended December 31, 2013 $ 1,898   $ -   $ 1,898  

The stock-based compensation charges have been allocated to selling, general and administration based on the allocation of the cash compensation paid to the employees.

As of December 31, 2014, the total unrecognized compensation cost related to stock options was approximately $2.4 million, which the Company expects to recognize over approximately three years. As of December 31, 2014, the total unrecognized compensation cost related to restricted stock awards was approximately $1.8 million, which the Company expects to recognize over approximately two years.

As of December 31, 2014 and June 30, 2014, respectively, the Company has recorded a deferred tax asset of approximately $1.3 million and $1.6 million related to the stock-based compensation charge recognized related to employees and directors of Net1 as it is able to deduct the grant date fair value for taxation purposes in the United States.

13.

Earnings per share

Basic earnings per share include shares of restricted stock that meet the definition of a participating security because these shares are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Basic earnings per share have been calculated using the two-class method and basic earnings per share for the three and six months ended December 31, 2014 and 2013, reflects only undistributed earnings. The computation below of basic earnings per share excludes the net income attributable to shares of unvested restricted stock (participating non-vested restricted stock) from the numerator and excludes the dilutive impact of these unvested shares of restricted stock from the denominator.

18



13.

Earnings per share (continued)

Diluted earnings per share has been calculated to give effect to the number of shares of additional common stock that would have been outstanding if the potential dilutive instruments had been issued in each period. Stock options are included in the calculation of diluted earnings per share utilizing the treasury stock method and are not considered to be participating securities as the stock options do not contain non-forfeitable dividend rights. The calculation of diluted earnings per share includes the dilutive effect of a portion of the restricted stock granted to employees in February 2012, August 2013 and August 2014 as these shares of restricted stock are considered contingently returnable shares for the purposes of the diluted earnings per share calculation and the vesting conditions in respect of a portion of the restricted stock had been satisfied. The vesting conditions are discussed in Note 18 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2014.

The following table presents net income attributable to Net1 (income from continuing operations) and the share data used in the basic and diluted earnings per share computations using the two-class method:

      Three months ended     Six months ended  
      December 31,     December 31,  
      2014     2013     2014     2013  
      (in thousands except percent     (in thousands except percent  
      and     and  
      per share data)     per share data)  
  Numerator:                        
       Net income attributable to Net1 $ 22,374   $ 12,749   $ 46,463   $ 24,345  
       Undistributed earnings   22,374     12,749     46,463     24,345  
       Percent allocated to common shareholders
     (Calculation 1)
  99%     99%     99%     99%  
       Numerator for earnings per share: basic and diluted $ 22,102   $ 12,594   $ 45,947   $ 24,075  
                           
  Denominator:                        
       Denominator for basic earnings per share:                        
       weighted-average common shares outstanding   45,953     45,221     46,352     45,218  
       Effect of dilutive securities:                        
               Stock options   125     156     117     113  
                   Denominator for diluted earnings per 
                 share: adjusted weighted average 
                 common shares outstanding and
                 assumed conversion
  46,078     45,377     46,469     45,331  
                           
  Earnings per share:                        
       Basic $ 0.48   $ 0.28   $ 0.99   $ 0.53  
       Diluted $ 0.48   $ 0.28   $ 0.99   $ 0.53  
                           
 

(Calculation 1)

                       
       Basic weighted-average common shares
     outstanding (A)
  45,953     45,221     46,352     45,218  
       Basic weighted-average common shares
     outstanding and unvested restricted shares
     expected to vest (B)
  46,519     45,776     46,873     45,725  
       Percent allocated to common shareholders (A) / (B)   99%     99%     99%     99%  

Options to purchase 1,858,853 shares of the Company’s common stock at prices ranging from $11.23 to $24.46 per share were outstanding during the three and six months ended December 31, 2014, but were not included in the computation of diluted earnings per share because the options’ exercise price were greater than the average market price of the Company’s common stock. The options, which expire at various dates through August 27, 2024, were still outstanding as of December 31, 2014.

19



14.

Supplemental cash flow information

The following table presents supplemental cash flow disclosures for the three and six months ended December 31, 2014 and 2013:

      Three months ended     Six months ended  
      December 31,     December 31,  
      2014     2013     2014     2013  
  Cash received from interest $ 3,577   $ 3,223   $ 7,740   $ 6,464  
  Cash paid for interest $ 1,195   $ 2,027   $ 2,413   $ 3,666  
  Cash paid for income taxes $ 20,393   $ 14,029   $ 25,553   $ 14,527  

The sale of the Company’s NUETS business is described in Note 19 to its audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2014. The Company received cash sale proceeds of $1.9 million related to this transaction in July 2014.

As discussed in Note 12, during the six months ended December 31, 2014, employees exercised stock options through the delivery 336,584 shares of the Company’s common stock at the closing price on September 9, 2014 or $13.93 under the terms of their option agreements. These shares are included in the Company’s total share count and amount reflected as treasury shares on the unaudited condensed consolidated balance sheet as of December 31, 2014 and unaudited condensed consolidated statement of changes in equity for the six months ended December 31, 2014.

15.

Operating segments

The Company discloses segment information as reflected in the management information systems reports that its chief operating decision maker uses in making decisions and to report certain entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets or reports material revenues. A description of the Company’s operating segments is contained in Note 23 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2014.

The reconciliation of the reportable segments revenue to revenue from external customers for the three months ended December 31, 2014 and 2013, respectively, is as follows:

            Revenue        
                  From  
      Reportable     Inter-     external  
      Segment     segment     customers  
  South African transaction processing $ 58,427   $ 5,437   $ 52,990  
  International transaction processing   40,466     -     40,466  
  Financial inclusion and applied technologies   67,531     6,856     60,675  
   Total for the three months ended December 31, 2014   166,424     12,293     154,131  
                     
  South African transaction processing   58,754     2,280     56,474  
  International transaction processing   37,738     -     37,738  
  Financial inclusion and applied technologies   50,480     7,409     43,071  
   Total for the three months ended December 31, 2013 $ 146,972   $ 9,689   $ 137,283  

The reconciliation of the reportable segments revenue to revenue from external customers for the six months ended December 31, 2014 and 2013, respectively, is as follows:

            Revenue        
                  From  
      Reportable     Inter-     external  
      Segment     segment     customers  
  South African transaction processing $ 118,679   $ 10,558   $ 108,121  
  International transaction processing   83,670     -     83,670  
  Financial inclusion and applied technologies   132,728     13,947     118,781  
   Total for the six months ended December 31, 2014 $ 335,077   $ 24,505   $ 310,572  

20



15.

Operating segments (continued)


      Revenue  
                  From  
      Reportable     Inter-     external  
      Segment     segment     customers  
  South African transaction processing $ 115,915   $ 2,980   $ 112,935  
  International transaction processing   75,279     -     75,279  
  Financial inclusion and applied technologies   87,276     14,713     72,563  
   Total for the six months ended December 31, 2013 $ 278,470   $ 17,693   $ 260,777  

The Company does not allocate interest income, interest expense or income tax expense to its reportable segments. The Company evaluates segment performance based on segment operating income before acquisition-related intangible asset amortization which represents operating income before acquisition-related intangible asset amortization and allocation of expenses allocated to Corporate/Eliminations, all under GAAP. The reconciliation of the reportable segments measure of profit or loss to income before income taxes for the three and six months ended December 31, 2014 and 2013, respectively, is as follows:

      Three months ended     Six months ended  
      December 31,     December 31,  
 

  2014     2013     2014     2013  
 

Reportable segments measure of profit or loss

$ 36,453   $ 25,532   $ 75,048   $ 50,352  
   Operating income: Corporate/Eliminations   (5,638 )   (6,730 )   (11,108 )   (15,150 )
   Interest income   3,587     3,236     7,677     6,555  
   Interest expense   (1,107 )   (2,226 )   (2,419 )   (3,978 )
       Income before income taxes $ 33,295   $ 19,812   $ 69,198   $ 37,779  

The following tables summarize segment information which is prepared in accordance with GAAP for the three and six months ended December 31, 2014 and 2013:

      Three months ended     Six months ended  
      December 31,     December 31,  
      2014     2013     2014     2013  
 

Revenues

                       
 

     South African transaction processing

$ 58,427   $ 58,754   $ 118,679   $ 115,915  
 

     International transaction processing

  40,466     37,738     83,670     75,279  
 

     Financial inclusion and applied technologies

  67,531     50,480     132,728     87,276  
 

         Total

  166,424     146,972     335,077     278,470  
 

Operating income (loss)

                       
 

     South African transaction processing

  12,883     7,128     26,522     13,589  
 

     International transaction processing

  5,743     5,139     13,092     10,663  
 

     Financial inclusion and applied technologies

  17,827     13,265     35,434     26,100  
 

          Subtotal: Operating segments

  36,453     25,532     75,048     50,352  
 

             Corporate/Eliminations

  (5,638 )   (6,730 )   (11,108 )   (15,150 )
 

                 Total

  30,815     18,802     63,940     35,202  
 

 Depreciation and amortization

                       
 

     South African transaction processing

  1,823     1,949     3,545     3,822  
 

     International transaction processing

  4,292     3,604     8,664     7,863  
 

     Financial inclusion and applied technologies

  203     174     382     323  
 

         Subtotal: Operating segments

  6,318     5,727     12,591     12,008  
 

            Corporate/Eliminations

  3,839     4,047     7,740     7,795  
 

                 Total

$ 10,157   $ 9,774   $ 20,331   $ 19,803  

21



15.

Operating segments (continued)


      Three months ended     Six months ended  
      December 31,     December 31,  
      2014     2013     2014     2013  
 

Expenditures for long-lived assets

                       
 

   South African transaction processing

$ 1,482   $ 2,044   $ 2,164   $ 2,600  
 

   International transaction processing

  7,279     4,685     15,606     9,516  
 

   Financial inclusion and applied technologies

  376     116     745     345  
 

     Subtotal: Operating segments

  9,137     6,845     18,515     12,461  
 

          Corporate/Eliminations

  -     -     -     -  
 

                   Total

$ 9,137   $ 6,845   $ 18,515   $ 12,461  

The segment information as reviewed by the chief operating decision maker does not include a measure of segment assets per segment as all of the significant assets are used in the operations of all, rather than any one, of the segments. The Company does not have dedicated assets assigned to a particular operating segment. Accordingly, it is not meaningful to attempt an arbitrary allocation and segment asset allocation is therefore not presented.

It is impractical to disclose revenues from external customers for each product and service or each group of similar products and services.

16.

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 or extraordinary items, for instance, changes in tax law, valuation allowances and non-deductible transaction-related expenses that are reported separately, and have an impact on the tax charge. The cumulative effect of any change in the enacted tax rate, if and when applicable, on the opening balance of deferred tax assets and liabilities is also included in the tax charge as a discrete event in the interim period in which the enactment date occurs.

For the three and six months ended December 31, 2014, the tax charge was calculated using the expected effective tax rate for the year. The Company’s effective tax rate for the three and six months ended December 31, 2014, was 30.6% and 31.6%, respectively, and was higher than the South African statutory rate primarily as a result of non-deductible expenses (including consulting and legal fees, interest expense related to the Company’s long-term Korean borrowings and stock-based compensation charges).

The Company’s effective tax rate for the three and six months ended December 31, 2013, was 35.8% and 35.9%, respectively, and was higher than the South African statutory rate primarily as a result of non-deductible expenses (including interest expense related to the Company’s long-term Korean borrowings and stock-based compensation charges).

Uncertain tax positions

There were no changes during the three and six months ended December 31, 2014. As of December 31, 2014, the Company had accrued interest related to uncertain tax positions of approximately $0.2 million on its balance sheet.

The Company does not expect changes related to its unrecognized tax benefits will have a significant impact on its results of operations or financial position in the next 12 months.

As of December 31, 2014 and June 30, 2014, respectively the Company has unrecognized tax benefits of $1.1 million and $1.2 million, all of which would impact the Company’s effective tax rate. The Company files income tax returns mainly in South Africa, South Korea, Austria, Botswana and in the US federal jurisdiction. As of December 31, 2014, 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, 2010. 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.

22



17.

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 135.0 million ($11.6 million, translated at exchange rates applicable as of December 31, 2014) and thereby utilizing part of the Company’s short-term facility. The Company in turn has provided nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 125.0 million ($10.8 million, translated at exchange rates applicable as of December 31, 2014). The Company pays commission of between 0.2% per annum to 2.0% per annum of the face value of these guarantees and does not recover any of the commission from third parties.

The Company has not recognized any obligation related to these counter-guarantees in its consolidated balance sheet as of December 31, 2014 and June 30, 2014. The maximum potential amount that the Company could pay under these guarantees is ZAR 135.0 million ($11.6 million, translated at exchange rates applicable as of December 31, 2014). The guarantees have reduced the amount available for borrowings under the Company’s short-term credit facility described in Note 8.

Contingencies

Securities Litigation

On January 16, 2015, the Company filed a motion to dismiss plaintiff’s amended complaint for failure to state a claim. Plaintiff has until March 6, 2015 to file an opposition to the Company’s motion. The Company continues to believe this lawsuit has no merit and intends to defend it vigorously.

The Company is subject to a variety of insignificant claims and suits that arise from time to time in the ordinary course of business.

Management currently believes that the resolution of these matters, individually or in the aggregate, will not have a material adverse impact on the Company’s financial position, results of operations and cash flows.

23


     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, 2014, 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” and elsewhere in our Annual Report on Form 10-K for the year ended June 30, 2014, and Item 1A.—“Risk Factors” and elsewhere in this Form 10-Q. 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 which we have filed with the Securities and Exchange Commission completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Recent Developments

      New SASSA tender process

     As ordered by the South African Constitutional Court in its April 2014 ruling, SASSA has initiated a new tender process for a five-year contract for the payment of social grants. SASSA issued an initial request for proposals (“RFP”) on October 22, 2014, which required bidders to submit proposals by December 12, 2014. However, following a detailed analysis of the tender specifications, we concluded that the tender specifications were not sufficiently clear regarding a number of critical points and failed to comply with the RFP requirements specified in the Court's order. We wrote a letter to SASSA, requesting that the RFP be withdrawn, corrected and reissued. SASSA declined our request. We then applied to the Court on November 6, 2014, for an order setting aside the RFP and directing SASSA to issue a corrected RFP. We initiated the request to SASSA, and subsequently to the Court, in order to ensure that there is no ambiguity in the tender specifications or conflict with the Court's April 2014 remedy order in an attempt to reduce the likelihood of another prolonged legal challenge should SASSA award a new tender. SASSA and AllPay (an unsuccessful bidder during the previous RFP and a party to the Court's April 2014 ruling) opposed our application.

     Following the submission of further affidavits and arguments to the Court, on December 5, 2014, the Court ordered SASSA to (1) extend the deadline for the submission of bids to February 27, 2015, (2) circulate and file with the Court a draft amended RFP by December 20, 2014 and (3) issue a bidder’s notice calling for bidders to furnish SASSA with objections or questions to the draft amended RFP by January 15, 2015. The Court also permitted litigating parties to file further affidavits or submissions by January 27, 2015.

     On December 8, 2014, SASSA extended the bid deadline as ordered and on December 20, 2014, it issued a draft amended RFP. We analyzed the draft amended RFP in detail and believed that its specifications were still not sufficiently clear and that it still failed to comply with the RFP requirements contained in the Court’s April 2014 order. We submitted a list of questions and objections to SASSA on January 15, 2015. SASSA replied to us on January 19, 2015. However, in our view, SASSA did not provide sufficient answers to our questions and objections and we therefore submitted a further affidavit to the Court on January 20, 2015, requesting the Court to set aside the RFP and to order SASSA to issue a new RFP that complies with the Court’s 2014 ruling. On the same day, SASSA and AllPay submitted affidavits asking the Court to dismiss our objections and to allow SASSA to proceed with the amended RFP. Also on January 20, 2015, SASSA issued a second amended RFP. On January 27, 2015, we made a further submission to the Court arguing that the second amended RFP remains vague and uncertain in several respect and non-compliant with the Court’s December 5, 2014 order. SASSA and AllPay have also made further submissions again asking the Court to dismiss our objections and to allow SASSA to proceed with the second amended RFP. We cannot predict when or how the Court will rule on our application.

24


     We intend to participate in the tender and to submit a bid. We cannot predict the timing of the tender process or what the outcome will be.

      See Part II, Item 1A.—“Risk Factors,” for additional details.

Critical Accounting Policies

     Our unaudited condensed consolidated financial statements have been prepared in accordance with US GAAP, which requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires management’s judgment based on a variety of assumptions and other determinants such as historical experience, current and expected market conditions and certain scientific evaluation techniques.

     Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially may result in materially different results under different assumptions and conditions. Management has identified the following critical accounting policies that are described in more detail in our Annual Report on Form 10-K for the year ended June 30, 2014:

         Recent accounting pronouncements adopted

         Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements adopted, including the dates of adoption and the effects on our condensed consolidated financial statements.

        Recent accounting pronouncements not yet adopted as of December 31, 2014

        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, 2014, 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,  
    2014     2013     2014     2013     2014  
ZAR : $ average exchange rate   11.2236     10.1603     10.9909     10.0809     10.3798  
Highest ZAR : $ rate during period   11.6941     10.5730     11.6941     10.5730     11.2579  
Lowest ZAR : $ rate during period   10.8651     9.7143     10.5128     9.5436     9.6259  
Rate at end of period   11.6088     10.5037     11.6088     10.5037     10.5887  
                               
KRW : $ average exchange rate   1,088     1,065     1,057     1,089     1,068  
Highest KRW : $ rate during period   1,122     1,077     1,122     1,152     1,147  
Lowest KRW : $ rate during period   1,048     1,031     1,009     1,031     1,014  
Rate at end of period   1,098     1,063     1,098     1,063     1,014  

25




26


Translation exchange rates for financial reporting purposes

     We are required to translate our results of operations from ZAR and KRW to US dollars on a monthly basis. Thus, the average rates used to translate this data for the three and six months ended December 31, 2014 and 2013, vary slightly from the averages shown in the table above. The translation rates we use in presenting our results of operations are the rates shown in the following table:

Table 2

    Three months ended     Six months ended     Year ended  
    December 31,     December 31,     June 30,  
    2014     2013     2014     2013     2014  
Income and expense items: $1 = ZAR   11.2066     10.1592     10.9688     10.0809     10.3966  
Income and expense items: $1 = KRW   1,051     1,021     1,036     1,087     1,049  
                               
Balance sheet items: $1 = ZAR   11.6088     10.5037     11.6088     10.5037     10.5887  
Balance sheet items: $1 = KRW   1,098     1,063     1,098     1,063     1,014  

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 US GAAP. We analyze our results of operations both in US dollars, as presented in the consolidated financial statements, and supplementally in ZAR, because ZAR is the functional currency of the entities which contribute the majority of our profits and is the currency in which the majority of our transactions are initially incurred and measured. Due to the significant impact of currency fluctuations between the US dollar and ZAR on our reported results and because we use the US 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.

     Fiscal 2015 does not include MediKredit and the NUETS business and fiscal 2014 includes MediKredit and the NUETS business for the entire period.

     Our operating segment revenue presented in “—Results of operations by operating segment” represents total revenue per operating segment before inter-segment eliminations. A reconciliation between total operating segment revenue and revenue presented in our consolidated financial statements is included in Note 15 to those statements.

     We analyze our business and operations in terms of three inter-related but independent operating segments: (1) South African transaction processing, (2) International transaction processing and (3) Financial inclusion and applied technologies. In addition, corporate and corporate office activities that are impracticable to ascribe directly to any of the other operating segments, as well as any inter-segment eliminations, are included in corporate/eliminations.

     Second quarter of fiscal 2015 compared to second quarter of fiscal 2014

     The following factors had a significant influence on our results of operations during the second quarter of fiscal 2015 as compared with the same period in the prior year:

27


     Consolidated overall results of operations

     This discussion is based on the amounts which were prepared in accordance with US GAAP.

     The following tables show the changes in the items comprising our statements of operations, both in US dollars and in ZAR:

Table 3

    In United States Dollars  
        (US GAAP)        
    Three months ended December 31,  
    2014     2013   $ %  
  $ ’000   $ ’000     change  
Revenue   154,131     137,283     12%  
Cost of goods sold, IT processing, servicing and support   71,774     67,883     6%  
Selling, general and administration   41,385     40,824     1%  
Depreciation and amortization   10,157     9,774     4%  
Operating income   30,815     18,802     64%  
Interest income   3,587     3,236     11%  
Interest expense   1,107     2,226     (50% )
Income before income tax expense   33,295     19,812     68%  
Income tax expense   10,203     7,099     44%  
Net income before earnings from equity-accounted investments   23,092     12,713     82%  
Earnings from equity-accounted investments   76     47     62%  
Net income   23,168     12,760     82%  
Less net income attributable to non-controlling interest   794     11     nm  
Net income attributable to us   22,374     12,749     75%  

Table 4

    In South African Rand  
          (US GAAP)        
    Three months ended December 31,  
    2014     2013        
    ZAR     ZAR     ZAR %  
    ’000     ’000     change  
Revenue   1,727,284     1,394,685     24%  
Cost of goods sold, IT processing, servicing and support   804,342     689,636     17%  
Selling, general and administration   463,785     414,740     12%  
Depreciation and amortization   113,825     99,296     15%  
Operating income   345,332     191,013     81%  
Interest income   40,198     32,875     22%  
Interest expense   12,406     22,614     (45% )
Income before income tax expense   373,124     201,274     85%  
Income tax expense   114,341     72,120     59%  
Net income before earnings from equity-accounted investments   258,783     129,154     100%  
Earnings from equity-accounted investments   852     477     79%  
Net income   259,635     129,631     100%  
Less net income attributable to non-controlling interest   8,898     112     nm  
Net income attributable to us   250,737     129,519     94%  

     The increase in revenue was primarily due to higher prepaid airtime sales, more low-margin transaction fees generated from beneficiaries using the South African National Payment System, an increase in the number of UEPS-based loans, an increase in the number of SASSA UEPS/ EMV cardholders paid and a higher contribution from KSNET.

     The increase in cost of goods sold, IT processing, servicing and support was primarily due to higher expenses incurred from increased usage of the South African National Payment System by beneficiaries and higher prepaid airtime.

     In ZAR, our selling, general and administration expense increased due to increases in goods and services purchased from third parties.

     Our operating income margin for second quarter of fiscal 2015 and 2014 was 20% and 14%, respectively. We discuss the components of operating income margin under “—Results of operations by operating segment.” The increase is primarily attributable to higher volumes of transaction in South Africa, including prepaid airtime sales, lending and SASSA grants paid.

28


     Depreciation and amortization were higher primarily as a result of an increase in depreciation related to more terminals used to provide transaction processing in Korea, which was partially offset by no Eason intangible asset amortization as these intangible assets were fully amortized at the end of June 2014.

     Interest on surplus cash increased to $3.6 million (ZAR 40.2 million) from $3.2 million (ZAR 32.9 million), due primarily to higher average daily ZAR cash balances.

     Interest expense decreased to $1.1 million (ZAR 12.4 million) from $2.2 million (ZAR 22.6 million), due to a lower average long-term debt balance on our South Korean debt and a lower interest rate.

     Fiscal 2015 tax expense was $10.2 million (ZAR 114.3 million) compared to $7.1 million (ZAR 72.1 million) in fiscal 2014. Our effective tax rate for fiscal 2015, was 30.6% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees, the interest expense related to our long-term South Korean borrowings and stock-based compensation charges). Our effective tax rate for fiscal 2014, was 35.8% and was higher than the South African statutory rate as a result of non-deductible expenses (including interest expense related to our long-term Korean borrowings and stock-based compensation charges).

      Results of operations by operating segment

      The composition of revenue and the contributions of our business activities to operating income are illustrated below

Table 5

          In United States Dollars (US GAAP)        
          Three months ended December 31,        
    2014     % of     2013     % of     %  
Operating Segment $ ’000     total   $ ’000     total     change  
Revenue:                              
South African transaction processing   58,427     38%     58,754     43%     (1% )
International transaction processing   40,466     26%     37,738     27%     7%  
Financial inclusion and applied technologies   67,531     44%     50,480     37%     34%  
       Subtotal: Operating segments   166,424     108%     146,972     107%     13%  
       Intersegment eliminations   (12,293 )   (8% )   (9,689 )   (7% )   27%  

           Consolidated revenue

  154,131     100%     137,283     100%     12%  
Operating income (loss):                              
South African transaction processing   12,883     42%     7,128     38%     81%  
International transaction processing   5,743     19%     5,139     27%     12%  
Financial inclusion and applied technologies   17,827     58%     13,265     71%     34%  
       Subtotal: Operating segments   36,453     119%     25,532     136%     43%  
       Corporate/Eliminations   (5,638 )   (19% )   (6,730 )   (36% )   (16% )
               Consolidated operating income   30,815     100%     18,802     100%     64%  

Table 6

          In South African Rand (US GAAP)        
          Three months ended December 31,        
    2014           2013              
    ZAR     % of     ZAR     % of     %  
Operating Segment   ’000     total     ’000     total     change  
Revenue:                              
South African transaction processing   654,768     38%     596,894     43%     10%  
International transaction processing   453,486     26%     383,388     27%     18%  
Financial inclusion and applied technologies   756,793     44%     512,836     37%     48%  
       Subtotal: Operating segments   1,865,047     108%     1,493,118     107%     25%  
       Intersegment eliminations   (137,763 )   (8% )   (98,433 )   (7% )   40%  

           Consolidated revenue

  1,727,284     100%     1,394,685     100%     24%  
Operating income (loss):                              
South African transaction processing   144,375     42%     72,414     38%     99%  
International transaction processing   64,360     19%     52,208     27%     23%  
Financial inclusion and applied technologies   199,780     58%     134,762     71%     48%  
       Subtotal: Operating segments   408,515     119%     259,384     136%     57%  
       Corporate/Eliminations   (63,183 )   (19% )   (68,371 )   (36% )   (8% )
               Consolidated operating income   345,332     100%     191,013     100%     81%  

29


     South African transaction processing

     In ZAR, the increase in segment revenues was primarily due to more low-margin transaction fees generated from beneficiaries using the South African National Payment System and more inter-segment transaction processing activities. In addition, revenue from the distribution of social welfare grants grew modestly during the year and was in-line with the increase in unique welfare cardholder recipients, net of removal of invalid and fraudulent beneficiaries, partially offset by the loss of MediKredit revenue as a result of the sale of that business.

     Our operating income margin for the second quarter of fiscal 2015 and 2014 was 22% and 12%, respectively, and has increased primarily due to more higher-margin inter-segment transaction processing activities, the elimination of MediKredit losses and an increase in the number of beneficiaries paid in fiscal 2015.

     International transaction-based activities

     Revenue and operating income increased primarily due to higher transaction volume at KSNET during the second quarter of fiscal 2015. Operating income and margin for the second quarter of fiscal 2015, was negatively impacted by ad hoc incentives provided to staff due to the strong operating performance of KSNET during calendar 2014. Operating income margin for the segment is lower than for most of our South African transaction processing businesses. Operating income margin for each of the second quarter of fiscal 2015 and 2014, was 14%

     Financial inclusion and applied technologies

     Financial inclusion and applied technologies revenue and operating income increased primarily due to higher prepaid airtime sales driven by the rollout of our prepaid airtime product, an increase in the number of UEPS-based loans as we rolled out our product nationally, and, in ZAR, an increase in intersegment revenues. Smart Life did not contribute to operating income in fiscal 2015 and 2014 due to the FSB suspension of its license.

     Operating income margin for the Financial inclusion and applied technologies segment was 26% during each of the second quarter of fiscal 2015 and 2014, respectively.

     Corporate/ Eliminations

     Our corporate expenses generally include acquisition-related intangible asset amortization; expenditure related to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors’ fees; employee and executive bonuses; stock-based compensation; legal fees; audit fees; directors and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and elimination entries.

     The decrease in our corporate expenses was primarily due to lower US government investigations-related and US lawsuit expenses, audit fees and other corporate head office-related expenses.

     First half of fiscal 2015 compared to first half of fiscal 2014

     The following factors had a significant influence on our results of operations during the first half of fiscal 2015 as compared with the same period in the prior year:

30


     Consolidated overall results of operations

     This discussion is based on the amounts which were prepared in accordance with US GAAP.

     The following tables show the changes in the items comprising our statements of operations, both in US dollars and in ZAR:

Table 7

    In United States Dollars  
        (US GAAP)        
    Six months ended December 31,  
    2014     2013   $ %  
  $ ’000   $ ’000     change  
Revenue   310,572     260,777     19%  
Cost of goods sold, IT processing, servicing and support   146,180     124,442     17%  
Selling, general and administration   80,121     81,330     (1% )
Depreciation and amortization   20,331     19,803     3%  
Operating income   63,940     35,202     82%  
Interest income   7,677     6,555     17%  
Interest expense   2,419     3,978     (39% )
Income before income tax expense   69,198     37,779     83%  
Income tax expense   21,851     13,584     61%  
Net income before earnings from equity-accounted investments   47,347     24,195     96%  
Earnings from equity-accounted investments   168     150     12%  
Net income   47,515     24,345     95%  
Less net income attributable to non-controlling interest   1,052     -     nm  
Net income attributable to us   46,463     24,345     91%  

Table 8

    In South African Rand  
        (US GAAP)        
    Six months ended December 31,  
    2014     2013        
    ZAR     ZAR     ZAR %  
    ’000     ’000     change  
Revenue   3,406,601     2,628,867     30%  
Cost of goods sold, IT processing, servicing and support   1,603,419     1,254,488     28%  
Selling, general and administration   878,830     819,880     7%  
Depreciation and amortization   223,006     199,633     12%  
Operating income   701,346     354,866     98%  
Interest income   84,207     66,080     27%  
Interest expense   26,534     40,102     (34% )
Income before income tax expense   759,019     380,844     99%  
Income tax expense   239,679     136,939     75%  
Net income before earnings from equity-accounted investments   519,340     243,905     113%  
Earnings from equity-accounted investments   1,843     1,512     22%  
Net income   521,183     245,417     112%  
Less net income attributable to non-controlling interest   11,539     -     nm  
Net income attributable to us   509,644     245,417     108%  

     The increase in revenue was primarily due to higher prepaid airtime sales, more low-margin transaction fees generated from beneficiaries using the South African National Payment System, an increase in the number of UEPS-based loans, an increase in the number of SASSA UEPS/ EMV cardholders paid and a higher contribution from KSNET.

     The increase in cost of goods sold, IT processing, servicing and support was primarily due to higher expenses incurred from increased usage of the South African National Payment System by beneficiaries and higher prepaid airtime.

     In ZAR, our selling, general and administration expense increased due to increases in goods and services purchased from third parties.

     Our operating income margin for first half of fiscal 2015 and 2014 was 21% and 13%, respectively. We discuss the components of operating income margin under “—Results of operations by operating segment.” The increase is primarily attributable to higher volumes of transaction in South Africa, including prepaid airtime sales, lending and SASSA grants paid.

31


     Depreciation and amortization were higher primarily as a result of an increase in depreciation related to more terminals used to provide transaction processing in Korea, which was partially offset by no Eason intangible asset amortization as these intangible assets were fully amortized at the end of June 2014.

     Interest on surplus cash increased to $7.7 million (ZAR 84.2 million) from $6.6 million (ZAR 66.1 million), due primarily to higher average daily ZAR cash balances.

     Interest expense decreased to $2.4 million (ZAR 26.5 million) from $4.0 million (ZAR 40.1 million), due to a lower average long-term debt balance on our South Korean debt and a lower interest rate.

     Fiscal 2015 tax expense was $21.9 million (ZAR 239.7 million) compared to $13.6 million (ZAR 136.9 million) in fiscal 2014. Our effective tax rate for fiscal 2015, was 31.6% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees, the interest expense related to our long-term South Korean borrowings and stock-based compensation charges). Our effective tax rate for fiscal 2014, was 35.9% and was higher than the South African statutory rate as a result of non-deductible expenses (including interest expense related to our long-term Korean borrowings and stock-based compensation charges).

        Results of operations by operating segment

        The composition of revenue and the contributions of our business activities to operating income are illustrated below

Table 9

          In United States Dollars (US GAAP)        
          Six months ended December 31,        
    2014     % of     2013     % of     %  
Operating Segment $ ’000     total   $ ’000     total     change  
Revenue:                              
South African transaction processing   118,679     38%     115,915     44%     2%  
International transaction processing   83,670     27%     75,279     29%     11%  
Financial inclusion and applied technologies   132,728     43%     87,276     33%     52%  
       Subtotal: Operating segments   335,077     108%     278,470     106%     20%  
       Intersegment eliminations   (24,505 )   (8% )   (17,693 )   (6% )   39%  
               Consolidated revenue   310,572     100%     260,777     100%     19%  
Operating income (loss):                              
South African transaction processing   26,522     41%     13,589     39%     95%  
International transaction processing   13,092     20%     10,663     30%     23%  
Financial inclusion and applied technologies   35,434     55%     26,100     74%     36%  
       Subtotal: Operating segments   75,048     116%     50,352     143%     49%  
       Corporate/Eliminations   (11,108 )   (16% )   (15,150 )   (43% )   (27% )
               Consolidated operating income   63,940     100%     35,202     100%     82%  

Table 10

          In South African Rand (US GAAP)        
          Six months ended December 31,        
    2014           2013              
    ZAR     % of     ZAR     % of     %  
Operating Segment   ’000     total     ’000     total     change  
Revenue:                              
South African transaction processing   1,301,766     38%     1,168,527     44%     11%  
International transaction processing   917,759     27%     758,880     29%     21%  
Financial inclusion and applied technologies   1,455,867     43%     879,821     33%     65%  
       Subtotal: Operating segments   3,675,392     108%     2,807,228     106%     31%  
       Intersegment eliminations   (268,791 )   (8% )   (178,361 )   (6% )   51%  

               Consolidated revenue

  3,406,601     100%     2,628,867     100%     30%  
Operating income (loss):                              
South African transaction processing   290,915     41%     136,989     39%     112%  
International transaction processing   143,604     20%     107,492     30%     34%  
Financial inclusion and applied technologies   388,668     55%     263,111     74%     48%  
       Subtotal: Operating segments   823,187     116%     507,592     143%     62%  
       Corporate/Eliminations   (121,841 )   (16% )   (152,726 )   (43% )   (20% )
               Consolidated operating income   701,346     100%     354,866     100%     98%  

32


     South African transaction processing

     In ZAR, the increase in segment revenues was primarily due to more low-margin transaction fees generated from beneficiaries using the South African National Payment System and more inter-segment transaction processing activities. In addition, revenue from the distribution of social welfare grants grew modestly during the year and was in-line with the increase in unique welfare cardholder recipients, net of removal of invalid and fraudulent beneficiaries, partially offset by the loss of MediKredit revenue as a result of the sale of that business.

     Our operating income margin for the first half of fiscal 2015 and 2014 was 22% and 12%, respectively, and has increased primarily due to more higher-margin inter-segment transaction processing activities, the elimination of MediKredit losses and an increase in the number of beneficiaries paid in fiscal 2015.

     International transaction-based activities

     Revenue and operating income increased primarily due to higher transaction volume at KSNET during the first half of fiscal 2015. Operating income margin for the segment is lower than for most of our South African transaction processing businesses. Operating income margin for the first half of fiscal 2015 and 2014, was 16% and 14%, respectively.

     Financial inclusion and applied technologies

     Financial inclusion and applied technologies revenue and operating income increased primarily due to higher prepaid airtime sales driven by the rollout of our prepaid airtime product, an increase in the number of UEPS-based loans as we rolled out our product nationally, and, in ZAR, an increase in intersegment revenues. Fiscal 2014 operating income includes expenses related to the national roll-out of our UEPS-based lending offering and the establishment of the allowance for doubtful finance loans in fiscal 2014. Smart Life did not contribute to operating income in fiscal 2015 and 2014 due to the FSB suspension of its license.

     Notwithstanding the national roll-out expenses incurred in fiscal 2014, operating income margin for the Financial inclusion and applied technologies segment decreased to 27% from 30%, primarily as a result of more low-margin prepaid airtime and the sale of competitively-priced financial inclusion products to address the needs of the broader market.

     Corporate/ Eliminations

     Our corporate expenses generally include acquisition-related intangible asset amortization; expenditure related to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors’ fees; employee and executive bonuses; stock-based compensation; legal fees; audit fees; directors and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and elimination entries.

     The decrease in our corporate expenses was primarily due to lower US government investigations-related and US lawsuit expenses, audit fees and other corporate head office-related expenses.

     Liquidity and Capital Resources

     At December 31, 2014, our cash balances were $71.0 million, which comprised mainly ZAR-denominated balances of ZAR 643.5 million ($55.4 million), KRW-denominated balances of KRW 10.7 billion ($9.7 million) and US dollar-denominated balances of $4.6 million and other currency deposits, primarily Botswana Pula, of $1.2 million. The increase in our cash balances from June 30, 2014, was primarily due to the expansion of all of our core businesses, and to a lesser extent due to the cash conservation resulting from the sale of loss-incurring businesses, offset by provisional tax payments and the scheduled Korean debt repayment in October 2014.

     We currently believe that our cash and credit facilities are sufficient to fund our future operations for at least the next four quarters.

     We generally invest the surplus cash held by our South African operations in overnight call accounts that we maintain at South African banking institutions, and surplus cash held by our non-South African companies in the US money markets. We have invested surplus cash in Korea in short-term investment accounts at Korean banking institutions.

     Historically, we have financed most of our operations, research and development, working capital, capital expenditures and acquisitions through our internally generated cash. When considering whether to borrow under our financing facilities, we consider the cost of capital, cost of financing, opportunity cost of utilizing surplus cash and availability of tax efficient structures to moderate financing costs.

33


     We have a short-term South African credit facility with Nedbank Limited of ZAR 400 million ($34.5 million). The short-term facility comprises an overdraft facility of up to ZAR 250 million and indirect and derivative facilities of up to ZAR 150 million, which includes letters of guarantee, letters of credit and forward exchange contracts. As of December 31, 2014, we have used none of the overdraft and ZAR 137.2 million ($11.8 million) of the indirect and derivative facilities to obtain foreign exchange contracts and to support guarantees issued by Nedbank to various third parties on our behalf. Refer to Note 12 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2014, for additional information related to our short-term facilities.

     As of December 31, 2014, we had outstanding long-term debt of KRW 65.5 billion (approximately $59.7 million translated at exchange rates applicable as of December 31, 2014) under credit facilities with a group of South Korean banks. The loans bear interest at the South Korean CD rate in effect from time to time (2.14% as of December 31, 2014) plus a margin of 3.10% for one of the term loan facilities and the revolver and a margin of 2.90% for the other term loan facility. We repaid the KRW 15 billion other term loan facility in full in October 2014 in accordance with the repayment schedule. Scheduled remaining repayments of the term loans and loan under the revolving credit facility are as follows: April 2016, 2017 and 2018 (KRW 10 billion each) and October 2018 (KRW 30 billion plus all outstanding loans under our revolving credit facility). Refer to Note 9 to our unaudited condensed consolidated financial statements for the three and six months ended December 31, 2014, for additional information related to our long-term borrowings.

     Cash flows from operating activities

          Second quarter of fiscal 2015

     Net cash provided by operating activities for the second quarter of fiscal 2015 was $14.6 million (ZAR 163.7 million) compared to cash utilized in operating activities of $27.2 million (ZAR 276.8 million) for the second quarter of fiscal 2014. Excluding the impact of interest received, interest paid under our Korean debt and taxes presented in the table below, the increase in cash from operating activities resulted from improved trading activity during fiscal 2015.

     During the second quarter of fiscal 2015, we paid South African tax of $18.8 million (ZAR 215.7 million) related to our 2015 tax year. We also paid taxes totaling $1.9 million in other tax jurisdictions, primarily South Korea. During the second quarter of fiscal 2014, we paid South African tax of $13.3 million (ZAR 137.8 million) related to our 2013 tax year and $0.2 million (ZAR 2.4 million) related to prior tax years. We also paid provisional Korean taxes of $0.5 million related to our tax year ended December 31, 2013.

     Taxes paid during the second quarter of fiscal 2015 and 2014 were as follows:

Table 11

          Three months ended December 31,        
    2014     2013     2014     2013  
  $    $      ZAR     ZAR  
    ‘000     ‘000     ‘000     ‘000  
First provisional payments   18,775     13,292     215,677     137,773  
Taxation paid related to prior years   -     228     3     2,360  
Taxation refunds received   (243 )   -     (2,700 )   -  
       Total South African taxes paid   18,532     13,520     212,980     140,133  
       Foreign taxes paid: primarily Korea   1,861     509     20,645     5,193  

               Total tax paid

  20,393     14,029     233,625     145,326  

          First half of fiscal 2015

     Net cash provided by operating activities for the first half of fiscal 2015 was $54.1 million (ZAR 593.6 million) compared to cash utilized in operating activities of $28.9 million (ZAR 291.6 million) for the first half of fiscal 2014. Excluding the impact of interest received, interest paid under our Korean debt and taxes presented in the table below, the increase in cash from operating activities resulted from improved trading activity during fiscal 2015.

     During the first half of fiscal 2014, we paid South African tax of $18.8 million (ZAR 215.7 million) related to our 2015 tax year and $2.4 million (ZAR 26.4 million) related to prior tax years. We also paid taxes totaling $4.6 million in other tax jurisdictions, primarily South Korea. During the first half of fiscal 2014, we paid South African tax of $13.3 million (ZAR 137.8 million) related to our 2014 tax year and $0.2 million (ZAR 2.4 million) related to prior tax years. We also paid provisional Korean taxes of $1.0 million related to our tax year ended December 31, 2013.

34


     Taxes paid during the first half of fiscal 2015 and 2014 were as follows:

Table 12

          Six months ended December 31,        
    2014     2013     2014     2013  
  $    $      ZAR     ZAR  
    ‘000     ‘000     ‘000     ‘000  
First provisional payments   18,775     13,292     215,677     137,773  
Taxation paid related to prior years   2,408     228     26,395     2,360  
Taxation refunds received   (277 )   -     (3,065 )   -  
       Total South African taxes paid   20,906     13,520     239,007     140,133  
       Foreign taxes paid: primarily Korea   4,647     1,007     50,815     10,177  

             Total tax paid

  25,553     14,527     289,822     150,310  

     Cash flows from investing activities

          Second quarter of fiscal 2015

     Cash used in investing activities for the second quarter of fiscal 2015 includes capital expenditure of $9.1 million (ZAR 102.6 million), primarily for the acquisition of payment processing terminals in Korea.

     Cash used in investing activities for the second quarter of fiscal 2014 includes capital expenditure of $6.8 million (ZAR 69.5 million), primarily for the acquisition of payment processing terminals in Korea.

          First half of fiscal 2015

     Cash used in investing activities for the first half of fiscal 2015 includes capital expenditure of $18.5 million (ZAR 203.5 million), primarily for the acquisition of payment processing terminals in Korea. We also received approximately $1.9 million resulting from the sale of NUETS business.

     Cash used in investing activities for the first half of fiscal 2014 includes capital expenditure of $12.5 million (ZAR 125.6 million), primarily for the acquisition of payment processing terminals in Korea.

     Cash flows from financing activities

          Second quarter of fiscal 2015

     During the second quarter of fiscal 2015, we made a scheduled Korean debt repayment of $14.1 million utilizing available cash reserves. We also utilized approximately $1.1 million of our Korean borrowings to pay quarterly interest due.

     During the second quarter of fiscal 2014, we refinanced our Korean debt and received $85 million from Korean banks. We used $71.6 million of these new borrowings and $15.4 million of our surplus cash to repay the $87.0 million due under our old facility. In addition, we paid the facility fees related to our new Korean borrowings of approximately $0.9 million in October 2013. We also paid approximately $2.0 million for substantially all of the shares of KSNET we did not already own during the second quarter of fiscal 2014.

          First half of fiscal 2015

     During the first half of fiscal 2015, we made a scheduled Korean debt repayment of $14.1 million, repurchased BVI’s remaining 1,837,432 shares of Net1 common stock for approximately $9.2 million and received $1.4 million from BVI for 12.5% of CPS’ issued and outstanding ordinary shares. We also utilized approximately $2.2 million of our Korean borrowings to pay quarterly interest due and received approximately $1.0 million from the exercise of stock options during the first quarter of fiscal 2015.

     We had no cash flows from financing activities for the first half of fiscal 2014, except as described above.

Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements.

Capital Expenditures

     We expect capital spending for the third quarter of fiscal 2015 to primarily include the acquisition of payment terminals for the expansion of our operations in Korea.

35


     Our historical capital expenditures for the second quarter of fiscal 2015 and 2014 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, 2014, of $0.3 million related mainly to computer equipment. We expect to fund these expenditures through internally-generated funds.

Contingent Liabilities, Commitments and Contractual Obligations

     The following table sets forth our contractual obligations as of December 31, 2014:

Table 13

    Payments due by Period, as of December 31, 2014 (in $ ’000s)   
          Less                 More  
          than 1     1-3     3-5     than 5  
    Total     year     years     years     years  
Long-term debt obligations (A)   71,091     3,152     24,131     43,808     -  
Operating lease obligations   8,753     4,165     4,205     383     -  
Purchase obligations   10,788     10,788     -     -     -  
Capital commitments   270     270     -     -     -  
Other long-term obligations (B)(C)   20,831     -     -     -     20,831  
       Total   111,733     18,375     28,336     44,191     20,831  

(A) – Includes $59.7 million of long-term debt and interest payable at the rate applicable on December 31, 2014, under our Korean debt facility.
(B) – Includes policy holder liabilities of $20.2 million related to our insurance business.
(C) – We have excluded cross-guarantees in the aggregate amount of $12.0 million issued as of December 31, 2014, to Nedbank to secure guarantees it has issued to third parties on our behalf as the amounts that will be settled in cash are not known and the timing of any payments is uncertain.

36


Item 3. Quantitative and Qualitative Disclosures About Market Risk

     In addition to the tables below, see Note 5 to the unaudited condensed consolidated financial statements for a discussion of market risk.

     The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of December 31, 2014, as a result of changes in the Korean CD. The effect of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in each of the Korean CD rate as of December 31, 2014, are shown. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.

Table 14

    As of December 31, 2014  
        Hypothetical     Estimated annual  
          change in     expected interest  
          Korean CD     charge after  
          rate or South     hypothetical change in  
    Annual     Africa     Korean CD rate or  
    expected     overdraft     South African  
    interest     facility rate,     overdraft facility rate,  
    charge     as     as appropriate  
    ($ ’000)   appropriate     ($ ’000)
Interest on Korean long-term debt   3,128     1%     3,725  
          (1% )   2,531  

      The following table summarizes our exchange-traded equity securities with equity price risk as of December 31, 2014. The effects of a hypothetical 10% increase and a 10% decrease in market prices as of December 31, 2014, is also shown. The selected 10% hypothetical change does not reflect what could be considered the best or worst case scenarios. Indeed, results could be far worse due both to the nature of equity markets and the aforementioned liquidity risk.

Table 15

          As of December 31, 2014        
                         
                      Hypothetical  
                Estimated fair     Percentage  
                value after     Increase  
    Fair           hypothetical     (Decrease) in  
    value     Hypothetical     change in price     Shareholders’  
    ($ ’000)   price change     ($ ’000)   Equity  
Exchange-traded equity securities   7,358     10%     8,094     0.16%  
          (10% )   6,622     (0.16% )

Item 4. Controls and Procedures

     Evaluation of disclosure controls and procedures

     Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of December 31, 2014. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2014.

     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, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

37


Part II. Other Information

Item 1. Legal Proceedings

     United States securities litigation

     On January 16, 2015, we filed a motion to dismiss plaintiff’s amended complaint for failure to state a claim. Plaintiff has until March 6, 2015 to file an opposition to our motion. We continue to believe this lawsuit has no merit and are defending it vigorously.

     Application to Constitutional Court

     See disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the application we made to the Constitutional Court in connection with the new SASSA tender process.

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, 2014, 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 and in “Item 1A RISK FACTORS in Part II of our Form 10-Q for the quarter ended September 30, 2014, 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, 2014.

     SASSA has initiated a new tender process for the payment of social grants. As a result, we cannot predict whether our current SASSA contract will remain in effect for the remainder of its five-year term. We derive a substantial portion of our revenues from this contract and from the provision of financial and other services to our cardholder base. If we were to lose our SASSA contract or we were to obtain a new contract on terms that are substantially inferior to our current contract, our business would suffer significantly.

     As ordered by the South African Constitutional Court in its April 2014 ruling, SASSA has initiated a new tender process for a five-year contract relating to the payment of social grants. SASSA issued an initial RFP on October 22, 2014, which required bidders to submit proposals by December 12, 2014. As discussed above in more detail under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—New SASSA Tender Process,” we identified ambiguities and other deficiencies in the tender specifications and applied to the Court for an order setting aside the RFP and directing SASSA to issue a corrected RFP. Although the Court did not set aside the RFP, on December 5, 2014, it did order SASSA to extend the bid deadline to February 27, 2015 and to issue a draft amended RFP. Since that ruling, SASSA has issued amended RFPs on two separate occasions, and we have continued to object to the RFP, as amended, on the grounds that it remains vague and uncertain in several respects and that it does not comply with the Court’s rulings. SASSA and AllPay have asked the Court to dismiss our objections and to allow SASSA to proceed with the amended RFP.

     We cannot predict when or how the Court will rule on our application for withdrawal of the amended RFP, what the timing or ultimate outcome of the tender process will be, or if a new tender award will be made at all after the process is complete. We intend to participate in the new tender, which, as with prior SASSA tenders, will continue to consume a substantial amount of our management’s time and attention and impact their ability to focus on other matters, including other South African and international business development activities. We cannot assure you that the current tender process will result in our receiving a contract to continue to distribute social welfare grants nationally. If a new contract is awarded and we are not the winning bidder, we would lose the benefit of the remaining portion of our current contract. Even if we win the tender and do receive a new contract, we cannot predict the terms that such contract will contain. Any new contract we receive may contain pricing or other terms that would be less favorable to us than the terms of our current contract.

     In addition to the revenue generated by CPS from our SASSA contract we also earn revenue from a variety of innovative financial and other services, such as provision of UEPS-based loans and sale of prepaid airtime to customers, including, at their election, certain social welfare recipient cardholders. Although we believe that our offerings frequently represent the lowest-cost alternative for our customers for these types of services, if we were to lose our SASSA contract or if our SASSA contract were to limit the provision of these services, it might be less convenient for our cardholder customers to purchase these services from us and thus, we may have difficulty growing or even maintaining this aspect of our South African business, which would negatively affect our future operating performance.

38


     Further, in connection with the litigation challenging the award of the previous SASSA tender to us, we included our entire 2011 SASSA tender submission in the court record, which court record is in the public domain. Our previous tender submission contained competitively sensitive business information. As a result of this disclosure, our existing and future competitors have access to this information which could adversely affect our competitive position in the current tender process to the extent that such information continues to remain competitively sensitive.

     Finally, if we were to be awarded one or more contracts by SASSA, an unsuccessful tenderor could seek to challenge the award, which could result in the contract being set aside or could require us to expend time and resources in an attempt to defeat any such challenge.

Item 6. Exhibits

The following exhibits are filed as part of this Form 10-Q:

      Incorporated by Reference Herein
Exhibit   Included      
No. Description of Exhibit Herewith Form  Exhibit Filing Date
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act X      
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act X      
32 Certification pursuant to 18 USC Section 1350 X      
101.INS XBRL Instance Document X      
101.SCH XBRL Taxonomy Extension Schema X      
101.CAL XBRL Taxonomy Extension Calculation Linkbase X      
101.DEF XBRL Taxonomy Extension Definition Linkbase X      
101.LAB XBRL Taxonomy Extension Label Linkbase X      
101.PRE XBRL Taxonomy Extension Presentation Linkbase X      

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 5, 2015.

  NET 1 UEPS TECHNOLOGIES, INC.
   
  By: /s/ Dr. Serge C.P. Belamant
   
  Dr. Serge C.P. Belamant
  Chief Executive Officer, Chairman of the Board and Director
   
  By: /s/ Herman Gideon Kotzé
   
  Herman Gideon Kotzé
  Chief Financial Officer, Treasurer and Secretary, Director

39


Net 1 UEPS Technologies, Inc.: Exhibit 31.1 - Filed by newsfilecorp.com

Exhibit 31.1

     CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULES 13A-14(A) AND 15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Serge Belamant, certify that:
   
1.

I have reviewed this quarterly report on Form 10-Q of Net 1 UEPS Technologies, Inc. (“Net1”) for the quarter ended December 31, 2014;

   
2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

   
3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Net1 as of, and for, the periods presented in this report;

   
4.

Net1’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Net1 and have:


  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Net1, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  (c) Evaluated the effectiveness of Net1’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  (d) Disclosed in this report any change in Net1’s internal control over financial reporting that occurred during Net1’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Net1’s internal control over financial reporting; and

5. Net1’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
  reporting, to Net1’s auditors and the Audit Committee of Net1’s Board of Directors (or persons performing the equivalent functions):

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Net1’s ability to record, process, summarize and report financial information; and
     
  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Net1’s internal control over financial reporting.

Date: February 5, 2015 /s/ Dr. Serge C. P. Belamant
  Dr. Serge C. P. Belamant
  Chief executive officer


Net 1 UEPS Technologies, Inc.: Exhibit 31.2 - Filed by newsfilecorp.com

Exhibit 31.2

     CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULES 13A-14(A) AND 15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Herman Kotzé, certify that:
   
1. I have reviewed this quarterly report on Form 10-Q of Net 1 UEPS Technologies, Inc. (“Net1”) for the quarter ended December 31, 2014;
   
2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

   
3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Net1 as of, and for, the periods presented in this report;

   
4.

Net1’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Net1 and have:


  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Net1, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  (c) Evaluated the effectiveness of Net1’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  (d) Disclosed in this report any change in Net1’s internal control over financial reporting that occurred during Net1’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Net1’s internal control over financial reporting; and

5. Net1’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Net1’s auditors and the Audit Committee of Net1’s Board of Directors (or persons performing the equivalent functions):

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Net1’s ability to record, process, summarize and report financial information; and
     
  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Net1’s internal control over financial reporting.

Date: February 5, 2015 /s/ Herman Gideon Kotzé
  Herman Gideon Kotzé
  Chief financial officer


Net 1 UEPS Technologies, Inc.: Exhibit 32 - Filed by newsfilecorp.com

Exhibit 32

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

                    In connection with the quarterly report of Net 1 UEPS Technologies, Inc. (“Net1”) on Form 10-Q for the quarter ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Dr. Serge Belamant and Herman Kotz, Chief Executive Officer and Chief Financial Officer, respectively, of Net1, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that to their knowledge:

  1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     
  2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Net1.


Date: February 5, 2015 /s/: Dr. Serge C. P. Belamant
  Name: Dr. Serge C. P. Belamant
  Chief Executive Officer and Chairman
  of the Board
   
Date: February 5, 2015 /s/: Herman Kotzé
  Name: Herman Kotzé
  Chief Financial Officer, Treasurer and
  Secretary