LESAKA TECHNOLOGIES INC - Annual Report: 2019 (Form 10-K)

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2019

or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                

Commission file number: 000-31203

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

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

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

Securities registered pursuant to section 12(b) of the Act:

Securities registered pursuant to section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [   ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [   ] No [X]

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [   ]

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of December 31, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the closing price of the common stock as reported by The Nasdaq Global Select Market on such date, was $174,172,483. This calculation does not reflect a determination that persons are affiliates for any other purposes.

As of October 18, 2019, 56,568,425 shares of the registrant’s common stock, par value $0.001 per share were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the definitive Proxy Statement for our 2019 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

NET 1 UEPS TECHNOLOGIES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended June 30, 2019

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PART I

FORWARD LOOKING STATEMENTS

            In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Item 1A—“Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Annual Report. We undertake no obligation to release publicly any revisions to the forward-looking statements after the date of this Annual Report. You should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by us during our 2020 fiscal year, which runs from July 1, 2019 to June 30, 2020.

ITEM 1.   BUSINESS

Overview

            We are a leading provider of financial technology, or fintech, products and services to the unbanked and underbanked in a number of emerging and developed economies. In emerging economies these customers are typically individuals, while in developed countries, they are primarily small businesses. We have developed and own most of our payment technologies, and where possible, utilize this technology to provide financial and value-added services to our customers by including them into the formal financial system.

            Our core payment technology is called the Universal Electronic Payment System, or UEPS, and its EMV interoperable derivative, UEPS/EMV, utilizes a form of distributed ledger technology, providing decentralized and biometrically secure smart cards that operate in real-time but both off-line and on-line, unlike traditional payment systems offered by major banking institutions that require immediate access through a communications network to a centralized computer.

            Our off-line UEPS system also offers the highest level of availability and affordability by removing any components that are costly and prone to outages. Our UEPS/EMV solution enables our traditional proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled point of sale terminal or automated teller machine, or ATM. The UEPS/EMV technology has been deployed on an extensive scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our under-banked customers, including social welfare grant recipients. In addition to effecting purchases, cash-backs and any form of payment, our system can be used for banking, healthcare management, money transfers, voting and identification.

            Our transaction processing services include multiple forms of payment processing. We operate leading merchant processors in South Africa through EasyPay and in South Korea through KSNET, a fixed and mobile ATM infrastructure in South Africa, as well as end-to-end issuing, acquiring and processing services across Asia and Europe through our International Payments Group, or IPG. We managed more than 300,000 merchants worldwide and processed more than three billion transactions in Fiscal 2019. With two decades of experience in cryptography and secure transactions, through IPG, we have established a leadership position in partnership with Bank Frick & Co. AG, or Bank Frick, a Liechtenstein-based bank, in Europe focused on cryptocurrency processing and the development of a number of block-chain related products such as our new crypto-asset storage product.

            Our financial inclusion products and services are delivered through our UEPS-based core banking system, providing a low-cost, biometrically secure transactional bank account to our customers, and distributing a number of financial, telecom and other value-added products through this platform in order to garner a greater share of wallet. In South Africa, this system is currently deployed under the brand EasyPay Everywhere, or EPE, and at June 30, 2019, we have approximately 1.1 million active customers on the platform.

            Our technology businesses include the development and deployment of our UEPS and Mobile Virtual Card, or MVC, solutions worldwide, cryptographic solutions including the STS-6 standard for utility vending solutions, hardware security modules or HSM, chip and subscriber identity module, or SIM, cards, and the reselling of point of sale equipment.

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All references to “the Company,” “we,” “us,” or “our” are references to Net 1 UEPS Technologies, Inc. and its consolidated subsidiaries, collectively, and all references to “Net1” are to Net 1 UEPS Technologies, Inc. only, except as otherwise indicated or where the context indicates otherwise.

Market Opportunity

            Services for the under-banked: Dozens of national governments have adopted policies to expand financial inclusion to their citizens. According to the most recent World Bank’s 2017 Global Findex Database, 69% of adults worldwide have access to an account at a financial institution or through a mobile money service. In developing economies, this percentage is 63%. As a result, 1.7 billion adults around the world remain entirely excluded from the financial system. Globally, 20% of the banked population have inactive accounts, i.e. no transactions for twelve months, taking the market opportunity to well over 2 billion adults. This situation arises when banking fees are either too high relative to an individual’s income, a bank account provides little or no meaningful benefit or there is insufficient infrastructure to provide financial services economically in the individual’s geographic location. We refer to these people as the unbanked and the under-banked. These individuals typically receive wages, welfare benefits, money transfers or loans in the form of cash, and conduct commercial transactions, including the purchase of food and clothing, also in cash.

            Our target under-banked customer base in most emerging economies, and particularly in sub-Saharan Africa, has limited access to formal financial services and therefore relies heavily on the unregulated informal sector for such services. The power of financial technology to expand access to, and use of accounts is particularly relevant in sub-Saharan Africa, where 21% of adults have a mobile money account. Globally, the share of adults who borrow from formal sources, has remained flat between 2014 and 2017 at 23%, which implies that half of the borrowers globally rely on informal lenders resulting in exorbitant borrowing costs, questionable recovery practices and the inevitable downward debt spiral. By leveraging our smart card and mobile technologies, we are able to offer affordable, secure and reliable financial services such as transacting accounts, loans and insurance products to these consumers and alleviate some of the challenges they face in dealing with the informal sector, while also allowing them to build a credit history and gain access to the broader formal financial services industry.

            Over the past two decades we have issued millions of cards across more than ten developing countries, and therefore our track record and scale uniquely position us to continue further geographical penetration of our technology in additional emerging countries.

            Similarly, in developed countries, Small and Micro Enterprises, or SMEs, frequently fall into the underbanked category due to cumbersome and costly efforts to secure banking relationships, payment processing and credit. According to a Deloitte report, titled Digital banking for small and medium-sized enterprises Improving access to finance for the underserved, on Digital Banking for Small Businesses, several factors drive low financial inclusion of SMEs, including 1) limited financial infrastructure such as poor coverage by credit bureaus limit availability and cost of securing credit; 2) inadequate distribution channels limit banks from reaching and servicing SMEs in either the physical or digital space; 3) lack of cash-flow visibility forces banks to adopt stringent collateral-based credit risk models which hinder lending to SMEs without collateral; and 4) regulations and compliance costs adversely impact banks from serving small customers and invariably drive up costs.

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            These inefficiencies have created an opportunity for neo-or-challenger banks and fintech companies to improve reach and coverage for SMEs and accelerate access to, and reduce cost of banking and financial services. Our issuing, acquiring and platforms together with our e-money licenses and relationship with Bank Frick, a European bank in which we have a sizeable strategic investment, allows SMEs to open accounts and accept electronic payments almost instantly, letting them focus on running their core business.

            Transaction processing services: The continued global growth of retail credit, debit and prepaid card transactions is reflected in the May 2019 Nilson Report, according to which worldwide annual general purpose card dollar volume increased 19.1% to $33.7 trillion in 2018, while transaction volume increased by 22.4% to 406.3 billion transactions and cards issued increased by 10.4% to 13.2 billion cards during the same period. General purpose cards include the major card network brands such as MasterCard, Visa, UnionPay and American Express. In South Africa, we operate the largest bank-independent transaction processing service through EasyPay, where we have developed a suite of value-added services such as bill payment, airtime top-up, gift card, money transfer and prepaid utility purchases that we offer as a complete solution to merchants and retailers. In South Korea, through KSNET, we are one of the largest Value-added network, or VAN, processors, and we provide card processing, banking value-added services and payment gateway functionality to more than 223,000 retailers. IPG operates as an established end-to-end provider of issuing, acquiring, and processing, particularly for small merchants or those with significant cross-border operations. Another key differentiator of IPG is its extensive catalog of licenses and regulated entities, including some within the fast-growing fields of cryptocurrencies and blockchain. IPG is ably supported by Bank Frick.

            Mobile payments: The rapid growth of online commerce and the emergence of mobile devices as the preferred access channel for transacting online has created a global opportunity for the provision of secure payment services to online retailers and service providers. Our MVC technology focuses on card-not-present transactions and enables interoperability between closed or semi-closed networks, and has been deployed in South Africa, India and the United States. Additionally, through ZappGroup Africa, one of our strategic investments, we are able to provide QR technology to emerging countries in Africa, allowing them leapfrog the 50+ year old card technology and go straight to mobile, as many countries like China, India, Nigeria, Ghana and Kenya have done.

            Despite lacking access to formal financial services, large proportions of the under-banked customer segment own and utilize mobile phones. The World Bank’s research has confirmed the rising popularity of using mobile phones to transfer money and for banking that often does not require setting up an account at a brick-and-mortar bank. The World Bank has stated that mobile banking, which allows account holders to pay bills, make deposits or conduct other transactions via text messaging, has rapidly expanded in Sub-Saharan Africa, where traditional banking has been hampered by transportation and other infrastructure problems. The 2017 Global Findex Database: Measuring Financial Inclusion and the Fintech Revolution states that 21% of adults in Sub-Saharan Africa have a mobile-money account – nearly twice the percentage compared to 2014. In developing economies, 19% of adults reported making at least one direct payment using a mobile money account, a mobile phone, or the internet.

            Mobile phones are therefore increasingly viewed as a channel through which this underserved population can gain access to formal financial and other services. Our UEPS, MVC and QR code solutions are enabled to run on the SIM cards in or as applications on mobile phones and provide our users with secure payment and banking functionality.

Our Strategy

            Our core purpose is to improve people’s lives by bringing financial inclusion to the world’s under-banked customers and helping small businesses access the financial services they need to prosper. We achieve this through our unique ability to efficiently digitize or tokenize the expensive and difficult to achieve last mile of financial inclusion.

            Our strategy varies by geography and service, and accordingly our approach is based on four pillars which are supplemented by our strategic investments:

            South Africa—we own or control most of the components of the vertical chain in South Africa, from core banking to lending and insurance to payments, processing and value-added services as well as a significant last mile distribution network. Our focus remains squarely on the underbanked population who are low-wage earners or those receiving welfare grants, as well as any customers accessing our payment infrastructure, ATMs and bill payment platforms.

            Our EPE banking product provides our target market with an affordable all-inclusive transactional bank account with access to financially inclusive services such as microloans, life insurance, remittances, value added services such as prepaid utilities and bill payments through their mobile phones and our national network of ATMs and POS devices. At June 30, 2019, we had approximately 1.1 million active EPE customers. Going forward, we will also work more closely with Finbond Group Limited, or Finbond, a South African bank in which we have a significant strategic investment, to issue new and expanded banking and financial services offerings. Additionally, our combined branch, point-of-sale and ATM network with Finbond, would make us the second largest bank in South Africa from a distribution and coverage perspective.

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            We are also one of the leading independent transaction processors, and have deployed the most extensive distribution network comprising of mobile and fixed ATM’s and POS devices to the country’s large unbanked and under-banked population, we are the largest third-party processor of retail merchant transactions, bill payments and third-party payroll payments. We believe that our large cardholder base, specialized technology and payment infrastructure, together with our strong business relationships, position us at the epicenter of commerce in the country. Through our national distribution platform and relationships with a number of leading companies across multiple industries, we believe that we can provide many of the services consumed by our cardholders who would normally not have access to these services or would otherwise have to rely on the informal sector. We have a network of mobile ATMs to provide services to our cardholders, and we have established a national fixed ATM and POS network.

            We aim to increase the adoption of our existing services by expanding our cardholder base and our transacting network, and increase our service offerings by developing new products and distribution networks and by forging partnerships with industry participants who share our vision and can accelerate the implementation of our business plan.

            Africa—Depending on the country, only 10% to 30% of the adult populations have access to financial services and thus the deployment of cloud-based bank-in-a-box and mobile-based solutions, together with strong local partners, remains a substantial opportunity for us. Today we are operational in nine African countries through our Virtual Top Up, or VTU, offerings in partnership with MTN, UEPS is deployed as the national payment system in Ghana and extensively used in Namibia and Botswana, a rapidly growing digital consumer finance business in Nigeria through OneFi, and our relatively new QR-based payment initiatives through ZappGroup Africa. We also intend to increase cooperation across our operations in various African countries to build a substantial continent-wide fintech platform that is home to a billion people.

            Our mobile-first approach is predicated on the belief that mobile payments, mobile wallets and the related applications should be a critical component of a payment processor’s future strategy and we have dedicated a significant portion of our research and development and business development resources to ensure that we remain at the forefront of this rapidly evolving technological space.

            Europe and Asia (ex-Korea)—This opportunity is driven by IPG and focuses primarily on the SME market as well as solutions utilizing blockchain and cryptocurrencies. IPG was created by combining a number of regional assets and licenses to form a comprehensive international payments business providing issuing, acquiring and processing, supported by Bank Frick in Europe. IPG has developed new, state-of-the-art issuing and acquiring platforms that have now been certified by Visa and MasterCard.

            In India, we own an interest in MobiKwik, one of the largest digital financial services platforms in India with over 80 million users. MobiKwik helps us gain entry to a large and complex market and we have already deployed our MVC technology, allowing their wallet to become interoperable and offering an effective disbursement tool for their loan products.

            South Korea—KSNET in Korea is one of the largest VANs in the country with 223,000 merchants and over 359,000 POS deployed. It processed in excess of 1.7 billion transactions in fiscal 2019. KSNET is also the only one of the large VANs that provides Card VAN, Banking VAN and payment gateway, or PG, services. Banking VAN and payment gateway markets are faster growing and are an area of focus for KSNET. We are introducing new products such as working capital finance to leverage their high-fixed cost infrastructure.

Our Businesses

            Our company is organized into the following business lines:

            South African Banking and Financial Services

            We have developed a suite of financial services that is offered to customers utilizing our payment solutions. We are able to provide our UEPS/EMV cardholders with competitive transacting accounts, microfinance, life insurance and money transfer products based on our understanding of their risk profiles, demographics and lifestyle requirements. Our financial services offerings are designed on the principles of simplicity and cost-efficiency as they bring financial inclusion to our millions of cardholders who were previously unable to access any formal financial services in a convenient or cost-effective manner. Our banking product, EPE, provides our target market with an affordable all-inclusive transactional bank account with unfettered access to financial services such as microloans, life insurance, remittances, value added services such as prepaid utilities and bill payments through their mobile phones and our national network of ATMs and POS devices.

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            Our largest financial services offering is the provision of short-term microloans to our South African UEPS/EMV cardholders, where we provide the loans using our surplus cash reserves and earn revenue from the service fees charged on these loans. We believe our loans are the most affordable form of credit available to our target market as, unlike our competitors, we do not charge interest or credit life insurance premiums on our loans. We also offer our customer base affordable insurance products relevant to this market segment, focusing on group life and funeral insurance policies.

            This business unit has been allocated to our South African transaction processing and financial inclusion and applied technologies reporting segments.

                     EasyPay

            Our EasyPay business unit operates the largest bank-independent financial switch in South Africa and is based in Cape Town, South Africa. EasyPay focuses on the provision of high-volume, secure and convenient payment, prepayment and value-added services to the South African market. EasyPay’s infrastructure connects into all major South African banks and switches both debit and credit card EFT transactions for some of South Africa’s leading retailers and petroleum companies. It is a South African Reserve Bank, or SARB, approved third-party payment processor. In addition to its core transaction processing and switching operations, EasyPay provides a complete end-to-end reconciliation and settlement service to its customers.

            This business unit has been allocated to our South African transaction processing reporting segment.

                     KSNET

            Our KSNET business unit is based in Seoul, South Korea, and is a national payment solutions provider. KSNET has one of the broadest product offerings in the South Korean payment solutions market, a base of approximately 223,000 merchants and an extensive direct and indirect sales network. The merchant base is predominantly serviced via a network of independent agents. KSNET’s core operations comprise three primary product offerings, namely card VAN, PG, and Banking VAN. KSNET is able to realize significant synergies across these core operations because it is the only payment solutions provider that offers all three of these offerings in South Korea. Approximately 78% of KSNET’s revenue comes from the provision of payment processing services to merchants and card issuers through its card VAN. KSNET has also started providing working capital financing to those merchants where we provide payment processing services.

            This business unit has been allocated to our International transaction processing reporting segment.

                     International Payments Group

            IPG is based out of Hong Kong, China, and is an end-to-end payment service provider. IPG includes our processing business based in Munich, Germany, and holds e-money licenses in the United Kingdom and in Europe, and provides debit and credit card acquiring in Europe, the UK, and Asia including China. Additionally, IPG provides Automated Clearing House, or ACH, processing in the United States, and card acquiring services for cryptocurrency exchanges such as Bitstamp and Bitpanda.

            In collaboration with Bank Frick, IPG provides a number of banking and processing services to small merchants. Through a joint, collaborative approach, IPG and Bank Frick have established a blockchain development division to create new, first-to market differentiated solutions to harness the capabilities of a bank and a processor.

            This business unit has been allocated to our International transaction processing reporting segment.

                     Applied Technology

            Our Applied Technology business unit is managed from Johannesburg, South Africa, and is responsible for various individual lines of business:

• Payment Infrastructure—The deployment of our South African ATM and POS network and the sale of biometric and POS solutions to various South African banks, retailers and financial services providers. Our biometrically-enabled ATM network is fully EMV-compliant and integrated into the South African national payment system. We deploy our ATMs in areas where our UEPS/EMV cardholders have limited access to the national payment system, or where the cost of accessing the national payment system through other service providers is prohibitive for our cardholders.
• Chip & SIM—Through our partnerships with MNOs as well as card and semiconductor manufacturers, we provide a strong lineup of feature rich chip and SIM solutions. All of these offerings include our wide range of GSM Masks and custom software that enables mobile telephony, transactions and on-chip VAS. We support the above chip and SIM developments with dedicated chip-card based commerce frameworks. These incorporate POS, terminal and interbank transaction switching and clearance aimed at national government, petroleum and retail industries.

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• Cryptography—Our Cryptography business line focuses on security-orientated products which include our range of PIN encryption devices, card acceptance modules and hardware security modules. These focus on financial, retail, cryptocurrency, telecommunications, utilities and petroleum sectors. In order to constantly enhance and improve our product offerings, special attention is placed on the development of security initiatives including Triple Data Encryption Algorithm, also known as TDES, EMV and Payment Card Industry, or PCI. We are a member of the STS Association, actively participating in developing new and improved standards that address the needs of the modern cryptographic market.

            This business unit has been allocated to our financial inclusion and applied technologies reporting segments.

                     Corporate

            The Corporate unit provides global support services to our business units, joint ventures and investments for the following activities:

• Group executive—Responsible for the overall company management, defining our global strategy, investor relations and corporate finance activities.
• Finance and administration—Provides company-wide support in the areas of accounting, treasury, human resources, administration, legal, secretarial, taxation, compliance and internal audit.
• Group information technology—Defines our overall IT strategy and the overall systems architecture and is responsible for the identification and management of the group’s research and development activities.
• Joint ventures and investments unit—Provides governance support to our joint ventures and assists with the evaluation of new investment opportunities.

Competition

            In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing payment systems and the providers of financial services, there are a number of other products that use smart card technology in connection with a funds transfer system. While it is impossible for us to estimate the total number of competitors in the global payments marketplace, we believe that the most competitive product in this marketplace is EMV, a system that is promoted by most of the major card companies such as Visa, MasterCard, JCB and American Express. The competitive advantage of our UEPS offering is that our technology can operate real-time, but in an off-line environment, using biometric identification instead of the standard PIN methodology employed by our competitors. We have enhanced our competitive advantage through the development of our latest version of the UEPS technology that has been certified by EMV, which facilitates our traditionally proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled point of sale terminal or ATM. The UEPS/EMV technology has been deployed on an extensive scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our unbanked and underbanked cardholders.

            We further intend to differentiate our value proposition for our end users by offering bundled lifestyle products to include affordable telephony solutions in addition to banking and finance, as well as the development of new payment technologies specifically for mobile phones. We estimate that we process less than 1% of all global payment transactions in the international marketplace.

            In South Africa, and specifically in the payment of salaries and wages and our affordable EPE transactional account and our financial services offering, our competitors include the local traditional and digital banks, insurance companies, micro-lenders and other transaction processors. The South African banks and South African Post Office, or SAPO, also offer low cost bank accounts that enable account holders to receive their salaries, wages or social grants through the formal banking payment networks.

            EasyPay’s competitors include BankservAfrica, UCS, eCentric and Transaction Junction. BankservAfrica is the largest transaction processor in South Africa, which processes all transactions on behalf of the South African banks and processes more than 2.5 billion transactions per annum.

            In the South African ATM network market, we compete against the South African banks, ATM Solutions and Spark ATM Systems, who collectively have a market share in excess of 90%.

            We have identified 13 major card VAN companies in South Korea, of which KSNET is one of the largest. The other two large VAN companies are NICE Information & Telecommunication Inc. and Korea Information & Communications Company, Inc. Entities operating in the VAN industry in South Korea compete on pricing and customer service.

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            IPG competitors typically include local or regional issuers, acquirers and processors as well as a few large multinational companies such as Wirecard and WorldPay. A number of new fintech entrants and neo-banks, usually locally or occasionally regionally such as Stripe, Revolut, N26, Klarna, Transferwise, and Digibank are also rapidly establishing their market presence.

            In addition to our traditional competitors, we expect that we will increasingly compete with a number of emerging entities in the mobile payments industry. While the industry is still rapidly evolving, a number of entities are establishing their presence in this space. Specifically identified entities include traditional payment networks such as Visa, MasterCard and American Express; commercial banks such as Barclays and Citigroup; established technology companies such as Apple, Google, Facebook, Samsung and PayPal; local and global fintech companies; as well as companies specifically focused on mobile payments such as Ant Financial, WeChat, M-Pesa and Square.

Intellectual Property

            Our success depends in part on our ability to develop, maintain and protect our intellectual property. We rely on a combination of patents, copyrights, trademarks and trade secret laws, as well as non-disclosure agreements to protect our intellectual property. We seek to protect new intellectual property developed by us by filing new patents worldwide. We hold a number of trademarks in various countries.

Financial Information about Geographical Areas and Operating Segments

            Note 21 to our audited consolidated financial statements included in this annual report contains detailed financial information about our operating segments for fiscal 2019, 2018 and 2017. Revenues based on the geographic location from which the sale originated and geographic location where long-lived assets are held for the years ended June 30, are presented in the table below:

            (R) Long-lived assets as of June 30, 2018 and 2017, restated to correct the misstatement discussed in Note 1 to the audited consolidated financial statements. Long-lived assets as of June 30, 2018 and 2017, decreased by $2.0 million and 1.9 million, respectively, following the restatement.

Employees

            Our number of employees allocated on a segmental basis as of the years ended June 30, are presented in the table below:

            (1) Fiscal 2018 number of employees includes 2,651 DNI employees, of which 51 are included in management and 2,600 are included in Financial inclusion and applied technologies. We sold our controlling interest in DNI during fiscal 2019.
            (2) Financial inclusion and applied technologies includes employees allocated to corporate/ eliminations activities.

            On a functional basis, five of our employees were part of executive management, 148 were employed in sales and marketing, 181 were employed in finance and administration, 271 were employed in information technology and 2,541 were employed in operations. Our staffing levels have reduced significantly from fiscal 2018 following the expiration of our SASSA contract in September 2018 and the deconsolidation of DNI in March 2019.

            As of June 30, 2019, approximately 195 of the 257 employees we have in South Korea who perform international transaction-based activities were members of a union in Korea. We believe that we have a good relationship with our employees and these unions.

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Corporate history

            Net1 was incorporated in Florida in May 1997. In 2004, Net1 acquired Net1 Applied Technology Holdings Limited, or Aplitec, a public company listed on the Johannesburg Stock Exchange, or JSE. In 2005, Net1 completed an initial public offering and listed on the Nasdaq Stock Market. In 2008, Net1 listed on the JSE in a secondary listing, which enabled the former Aplitec shareholders (as well as South African residents generally) to hold Net1 common stock directly.

Available information

            We maintain a website at www.net1.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the “SEC filings” portion of our website, as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. The information contained on, or accessible through, our website is not incorporated into this Annual Report on Form 10-K.

Executive Officers of the Registrant

            The table below presents our executive officers, their ages and their titles:

            Herman Kotzé has been our Chief Executive Officer since May 2017 and was our Chief Financial Officer, Secretary and Treasurer from June 2004 to February 2018. From January 2000 until June 2004, he served on the board of Aplitec as Group Financial Director. Mr. Kotzé joined Aplitec in November 1998 as a strategic financial analyst. Prior to joining Aplitec, Mr. Kotzé was a business analyst at the Industrial Development Corporation of South Africa. Mr. Kotzé has a bachelor of commerce honors degree, a post graduate diploma in treasury management, a higher diploma in taxation, completed his articles at KPMG, and is a member of the South African Institute of Chartered Accountants.

            Alex M.R. Smith has been our Chief Financial Officer, Treasurer and Secretary since March 2018. Mr. Smith joined Allied Electronics Corporation Limited, or Altron, a JSE-listed company in 2006 and from August 2008 until February 2018, Mr. Smith served as a director and its Chief Financial Officer. Prior to joining Altron, Mr. Smith worked in various positions at PricewaterhouseCoopers in Edinburgh, Scotland and Johannesburg from 1991 to 2005. Mr. Smith holds a bachelor of law (honours) degree from the University of Edinburgh and is a member of the Institute of Chartered Accountants of Scotland.

            Philip Meyer has been the Managing Director of IPG since February 2018 and also serves as the Managing Director of Transact24 Limited since he founded the company in 2006. Mr. Meyer has worked in the payments industry for over 20 years. Prior to incorporating Transact24, he was employed by Naspers, a global media group, as its Chief Executive: Information Technology and New Media and was responsible for all existing and new technology and media for Naspers. Mr. Meyer is a qualified engineer with a masters degree in engineering (electronic) and has a postgraduate diploma in strategic management. Mr. Meyer is registered with the Engineering Counsel of South Africa, is a member of the South Africa Institute of Electrical Engineers and is also a member of the Digital, Information & Telecommunications Committee and Asia & Africa Committee, Hong Kong General Chamber of Commerce.

            Phil-Hyun Oh has served as Chief Executive Officer and President of KSNET since 2007. He is the Chairman of the VAN Association in South Korea. Prior to that, he was the Managing Partner at Dasan Accounting Firm and was the Head of the Investment Banking Division at Daewoo Securities. Mr. Oh is responsible for the day to day operations of KSNET and as its Chief Executive Officer and President is instrumental in setting and implementing its strategy and objectives.

            Nanda Pillay joined us in May 2000 and is responsible for our Southern African operations, including Financial Services, EasyPay, and SmartSwitch Botswana.

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ITEM 1A. RISK FACTORS

            OUR OPERATIONS AND FINANCIAL RESULTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW, THAT COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS, AND THE TRADING PRICE OF OUR COMMON STOCK

Risks Relating to Our Business

            Management has identified certain conditions or events, which, considered in the aggregate, could raise  substantial doubt about our ability to continue as a going concern and our auditors have drawn attention to this uncertainty in their report on our consolidated financial statements. Management has developed a plan to mitigate our going concern risk. If we are unable to execute our plan, it is possible that we will exhaust our resources and will be unable to continue operations. If we cannot continue as a viable entity, our shareholders would likely lose most or all of their investment in us.

            Our audited consolidated financial statements were prepared under the assumption that we would continue our operations as a going concern. Our independent registered public accounting firm included an explanatory paragraph regarding a going concern uncertainty in its report on our consolidated financial statements as of, and for the year ended, June 30, 2019, indicating that, as discussed in Note 1 to such audited consolidated financial statements, we are experiencing difficulty in generating sufficient cash flow to meet our obligations and sustain our operations, which raises substantial doubt about our ability to continue as a going concern. Continued operations and our ability to continue as a going concern are dependent on our ability to execute our plan described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Consideration of Going Concern,” and there are no assurances that we will be able to execute such plan. Uncertainty concerning our ability to continue as a going concern may also hinder our ability to obtain future financing.

            Our audited consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we are unable to execute our plan, it is possible that we will exhaust our resources and will be unable to continue operations. If we cannot continue as a viable entity, our shareholders would likely lose most or all of their investment in us. See also “—Our ability to return to profitability and positive cash flow is substantially dependent on our ability to execute our strategic plan in South Africa” and “—Ongoing losses and cash demands may place the group under liquidity pressure, particularly if various asset realizations are not concluded.

            SASSA’s migration of EPE customers to the SAPO account during the first half of fiscal 2019 resulted in the loss of a significant portion of our EPE customer base. Unless we are able to maintain our EPE customer base, our South African financial services business will likely become unsustainable and result in the closure of most or all of that business.

            During September and October 2018, SASSA migrated those of our EPE customers who had not submitted to SASSA a signed Annexure C form and failed to process many of the Annexure C forms submitted by our potential customers. As a result, we experienced a decline in the EPE customer base to under 1.1 million EPE accounts receiving grants during December 2018 and January 2019. These same factors have had an adverse impact on our ability to sign up new customers to the EPE product and, as a result, we have experienced very low levels of gross new EPE accounts. As described under “Item 3.—Legal Proceedings—Legal proceedings against SASSA in respect of transfer of grant payments from EPE to SAPO accounts”, we commenced legal proceedings against SASSA challenging its actions but, in late January 2019, the High Court ruled that SASSA may pay grants into SAPO accounts unless the grant recipient has delivered a signed Annexure C form to SASSA.

            While our EPE customer base has been relatively stable since November 2018, any decision by SASSA to migrate more of our EPE customers to SAPO accounts would threaten our entire South African financial services business and materially and adversely affect our business, results of operations, financial condition and cash flows.

            Even if we are able to maintain a sufficient EPE customer base, we may still face challenges in transforming our South African operations to a business-to-consumer model through our EPE bank account and ATM infrastructure.

            Following the conclusion of the SASSA contract on September 30, 2018, we refocused our resources and technology on the provision of financial inclusion services to our target market. In particular we enabled our mobile ATM payment infrastructure to become part of the South African National Payment System and concentrated on taking our ATMs to the rural populations of South Africa so that they have the same access to financial inclusion as they had during the tenure of our contract, without the many inconveniences and inefficiencies of SASSA’s new payment model.

            While we believe that our financial services offerings are convenient and cost-effective, the success of our strategy will depend on the extent to which South African customers continue to use our financial products and services on a widespread basis.

            As discussed in the risk factor immediately above, SASSA’s unilateral decision to move EPE customers to the SASSA account and the subsequent judgment that has limited our ability to oppose SASSA’s actions, will likely make it more difficult for us to attract and retain as many EPE customers as we had previously planned.

            Even if we continue to maintain our current EPE customer base, to the extent where such business remains viable, other factors may prevent us from successfully operating and growing our South African financial services business include, but are not limited to:

• reduced adoption and utilization of our EPE accounts and related products and services;
• insufficient utilization of our ATM infrastructure, especially our mobile ATM infrastructure;
• inability to access sufficient funding for our ATM infrastructure;
• competition in the marketplace;
• restrictions imposed by SASSA or government on the manner in which recipients may transact;
• additional and/ or protracted legal proceedings with SASSA or other parties;
• political interference;
• changes in the regulatory environment;
• dependence on existing suppliers to provide the hardware (such as ATMs, cards and POS devices) we require to execute our rollout as anticipated;
• logistical and communications challenges; and
• loss of key technical and operations staff.

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            Our ability to return to profitability and positive cash flow is substantially dependent on our ability to execute our strategic plan in South Africa.

            No assurance can be provided that, if we fail to effectively execute our strategic plan in South Africa, we will be able to return to profitability and, even if we do return to profitability, extended periods of profitability and net income do not assure positive cash flows. Future periods of net losses from operations could result in negative cash flow and may hamper ongoing operations and prevent us from sustaining or expanding our business. We cannot assure you that we will achieve, sustain or increase profitability on a quarterly or annual basis in the future. If we do not achieve, sustain or increase profitability, our business will be materially and adversely affected and our share price may decline.

            Ongoing losses and cash demands may place the group under liquidity pressure, particularly if various asset realizations are not concluded.

            During the last twelve months, we have seen a significant decline in our cash balances due to significant operating losses, which were attributed primarily to the significant losses we incurred during the six-month extension of the SASSA contract and the exceptional bad debt write-offs caused by the migration of EPE customers to SAPO accounts by SASSA. While we have taken significant actions in the last six months to reduce the debt on our balance sheet, should our operating performance not improve, or if various adverse events occur, then our liquidity may come under significant pressure. This would have a material adverse effect on our business, cash flows, results of operations and financial condition.

            Our ability to operate effectively and efficiently in South Africa in the future will be adversely impacted if we are unable to communicate persuasively that our business practices comply with South African law and are fair to the customers who purchase our financial services products.

            The South African public, media, non-governmental organizations and political parties have utilized a number of platforms, including social media, to criticize SASSA over its failure to implement the orders of the Constitutional Court over the last two years and express their dissatisfaction with the state of affairs. Among the criticisms, we have been accused of being responsible for SASSA’s inability to bring the payment service in-house. In addition, we were publicly accused of illegally providing our services and defrauding social welfare grant recipients. We have publicly denied these accusations and believe they have no merit.

            Our reputation in South Africa has been tarnished as a result of these accusations. We have attempted to refute the allegations made against us and have appointed a public relations firm to assist us in communicating effectively to the public and our stakeholders that our business practices comply with South African law and are fair to the social welfare grant recipients who purchase the financial services products that we offer. It is difficult to quantify to what extent we have been successful in effectively repudiating these unsubstantiated allegations against us. If we are unable to communicate persuasively that our business practices comply with South African law and are fair to the customers who purchase our financial services products, our ability to operate effectively and efficiently in South Africa in the future will be adversely impacted, and our results of operations, financial position and cash flows would be adversely affected.

            We have been ordered by the Supreme Court to repay to SASSA certain reimbursed implementation costs. We are analyzing the ruling in order to determine our next course of action, but if we are ultimately required to repay substantial monies to SASSA, such repayment would adversely affect our results of operations, financial position and cash flows.

            In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced a legal proceeding in the High Court seeking an order by the Court to review and set aside the decision of SASSA’s Chief Executive Officer to approve a payment to us of ZAR 317.0 million (approximately ZAR 277 million, excluding VAT) and directed us to repay the aforesaid amount, plus interest. Corruption Watch claimed that there was no lawful basis to make the payment to us, and that the decision was unreasonable and irrational and did not comply with South African legislation. We were named as a respondent in this legal proceeding.

            On February 22, 2018, the matter was heard by the Gauteng Division, Pretoria of the High Court of South Africa. On March 23, 2018, the High Court ordered that the June 15, 2012 variation agreement between SASSA and CPS be reviewed and set aside. CPS was ordered to refund ZAR 317.0 million to SASSA, plus interest from June 2014 to date of payment. On April 4, 2018, we filed an application seeking leave to appeal the whole order and judgment of the High Court because we believed that the High Court erred in its application of the law and/or in fact in its findings. On April 25, 2018, the High Court rejected the application seeking leave to appeal. CPS filed an application seeking leave to appeal the whole order and judgment of the High Court with the Supreme Court of Appeal. In September 2018, CPS received notification from the Supreme Court that its petition seeking leave to appeal had been granted. The matter was heard on September 10, 2019.

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            On September 30, 2019 the Supreme Court dismissed our appeal and ordered us to pay Corruption Watch’s costs. We are analyzing the ruling in order to determine our next course of action. We have recorded a liability of $34.0 million (ZAR 479.4 million, translated at exchange rates applicable as of June 30, 2019, comprising the refund of ZAR 317.0 million, accrued interest of ZAR 161.0 million and estimated costs of ZAR 1.4 million) in our audited consolidated balance sheet as of June 30, 2019 in the caption other payables.

            In addition, in an April 2014 ruling, the Constitutional Court ordered SASSA to re-run the tender process and required us to file with the Court, after completion of our SASSA contract in March 2017, an audited statement of our expenses, income and net profit under the contract. The March 2018 Constitutional Court order contains a similar requirement that we file an audited statement of our expenses, income and net profit within 30 days of the completion of the contract. We have filed the required independently audited information with the Constitutional Court as ordered and the auditors expressed an unqualified opinion with an emphasis of matter regarding the basis of preparation and restriction as to use. The Constitutional Court also ordered SASSA to audit the audited information filed with the Constitutional Court and SASSA appointed an independent firm to audit our submission. The independent audit is currently underway and we understand that the independent firm is due to file its report by October 31, 2019. Parties to the March 2018 court proceedings also requested the Constitutional Court to consider further orders, including the repayment of any profits derived by CPS under its SASSA contract. The Constitutional Court did not provide for this in its March 2018 order; however, one or more third parties may in the future institute litigation challenging our right to retain a portion of the amounts we will have received from SASSA under our contract. We cannot predict whether any such litigation will be instituted, or if it is, whether it would be successful.

            Any successful challenge to our right to receive and retain payments from SASSA that requires substantial repayments would adversely affect our results of operations, financial position and cash flows.

            The pricing recommended by National Treasury to the Constitutional Court for our services provided at pay points for the period from April 1, 2018 through September 30, 2018, has not yet been paid and we have commenced legal action for payment against SASSA. If we are not paid, or if the amount ultimately paid to us is not commercially reasonable, our results of operations, financial position and cash flows would be adversely affected.

            Under the Constitutional Court order of March 23, 2018, related to the extension of the SASSA contract to September 30, 2018 in respect of the recipients paid at cash pay points, we were granted permission to approach National Treasury to request revised pricing of the contract. National Treasury provided a recommendation to the Constitutional Court in compliance with their order at a price per recipient of R51.00 (VAT inclusive) per month. Although we offered to accept this amount in respect of the three months ended June 30, 2018 when the number of recipients paid approximated two million per month, we asked the Constitutional Court to reconsider the last three months of the contract. In line with SASSA’s public statements, there was a material reduction in the number of recipients paid at the pay points during July, August and September 2018.

            In December 2018, we received correspondence from the Constitutional Court informing the parties that it believes that “nothing prevents the parties from coming to an agreement on increased payments without court sanction, and if they do not, normal legal processes in other courts must be filed to determine the effects.” We engaged SASSA directly in order to resolve this matter however we were not able to reach an amicable agreement and have commenced legal action as described under “Item 3.—Legal Proceedings—Dispute with SASSA regarding payment of fees for the last six months of the contract”. If we do not receive payment from SASSA, our results of operations, financial position and cash flows would be adversely affected.

            We may undertake acquisitions or make strategic investments that could increase our costs or liabilities or be disruptive to our business.

            Acquisitions and strategic investments are an integral part of our long-term growth strategy as we seek to grow our business internationally and to deploy our technologies in new markets both inside and outside South Africa. However, we may not be able to locate suitable acquisition or investment candidates at prices that we consider appropriate. If we do identify an appropriate acquisition or investment candidate, we may not be able to successfully negotiate the terms of the transaction, finance it or, if the transaction occurs, integrate the new business into our existing business. These transactions may require debt financing or additional equity financing, resulting in additional leverage or dilution of ownership. For instance, in July 2017, we invested in Cell C Proprietary Limited, or Cell C, utilizing a combination of existing cash reserves and external debt from South African banks.

            Acquisitions of businesses or other material operations and the integration of these acquisitions or their businesses will require significant attention from our senior management which may divert their attention from our day to day business. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not be able to retain key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits that we anticipated when selecting our acquisition candidates.

            In addition, we may need to record write-downs from future impairments of goodwill or other intangible assets, which could reduce our future reported earnings. For instance, in December 2018, we recorded an impairment loss of $7.0 million related to goodwill identified in the T24 acquisition and in March 2019, we recorded an impairment loss of $5.3 million related to the certain intangible assets identified in the DNI acquisition.

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            In March 2018, we recorded an impairment loss of $19.9 million related to the goodwill identified in the Masterpayment and Masterpayment Financial Services acquisitions. Finally, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition.

            We have not achieved the expected benefits from our Cell C and DNI investments and may incur further losses related to these investments.

            We invested more than $240 million, in aggregate, to acquire a 15% interest in Cell C and a 55% controlling interest in DNI. At the time of each investment, we believed that there were potential synergies that we could derive from each of these transactions, including the integration of certain of our service offerings with those of Cell C and DNI. However, we have not yet realized some of the synergies that we had anticipated to achieve by now, and it is possible that we may not realize such synergies at all.

            Attempting to integrate these service offerings may be disruptive to us, and we may not be able to integrate these offerings successfully. Even if we are able to achieve this integration, our customers may not use these services to the extent that we expect they will. Any such failure could adversely impact our business or the businesses of Cell C and DNI, which could, in turn, reduce the value of our investments in them. Additionally, attempting to integrate Cell C’s and DNI’s offerings with our own may adversely impact our other business and operational relationships. Our inability to achieve the expected synergies from the Cell C and DNI transactions may have a material adverse effect on our business, results of operations or financial condition.

            In addition, Cell C and DNI may not be able to successfully execute their respective business plans, which may adversely affect, or impair, the carrying value of our investments in them. As an example, during the year ended June 30, 2019, we recorded a loss related to the change in fair value for Cell C of $167.5 million which adversely impacted our results of operations and financial position. Our investments in Cell C and Cedar Cellular Investment 1 (RF) (Pty) Ltd, or Cedar Cellular, 8.625% notes were carried at $0 as of June 30, 2019, refer to Notes 7 and 9 to our audited consolidated financial statements for additional information regarding these investments. We also incurred a loss of $5.8 million during the year ended June 30, 2019, related to the reduction in our investment in DNI from 55% to 30%.

            We have granted a call option to DNI to acquire our remaining 30% interest in DNI in order to improve our liquidity. If we are unable to dispose of our entire, or a partial interest in DNI, in the short-term our financial position and cash flows may be adversely affected.

            We have determined to sell all or a portion of our remaining investment in DNI in order to generate additional liquidity to fund certain of our other businesses. On May 3, 2019, our wholly owned subsidiary, Net1 Applied Technologies South Africa Proprietary Limited, or Net1 SA, entered into an agreement pursuant to which it granted a call option to DNI to acquire Net1 SA’s remaining 30% interest in DNI. The option expires on December 31, 2019, but may be exercised at any time prior to expiration. The option strike price is calculated as ZAR 2.827 billion ($200.8 million, translated at exchange rates applicable as of June 30, 2019) less any special distribution made by DNI multiplied by Net1 SA’s retained interest (i.e. assuming no special distribution, the strike price for the 30% retained interest is ZAR 859.3 million, or $61.0 million, translated at exchange rates applicable as of June 30, 2019). The call option may be split into smaller denominations, but Net1 SA cannot be left with less than 20% unless the whole remaining interest is disposed of. DNI may nominate another party to exercise the call option in the place of DNI, provided that the nominated party acquires call options representing at least 1.0% of DNI’s voting and participation interests.

            If we are unable to dispose of our entire, or a partial interest in DNI, in the short-term our financial position and cash flows may be adversely affected.

            DNI generates most of its revenue by providing services to or on behalf of Cell C, principally through the sale of mobile phone starter packs. Our results of operations, financial condition and cash flow would suffer materially if DNI were to lose its contractual relationships with Cell C.

            DNI’s business comprises of a number of separate entities that are primarily involved in the distribution of mobile phone starter packs, mainly on behalf of Cell C. DNI also provides funding for the expansion of Cell C’s mobile telecommunications infrastructure.

            If Cell C were to terminate any of these contractual relationships that have multi-year notice periods, it would have a material adverse effect on our results of operations, financial condition and cash flow as a consequence of the impact on DNI. In particular our remaining 30% interest in DNI is likely to be worth less in the event that these contractual relationships are terminated.

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            We have indebtedness that requires us to comply with restrictive and financial covenants. If we are unable to comply with these covenants, we could default on this debt, which would have a material adverse effect on our business and financial condition.

            We have credit facilities from Rand Merchant Bank, a division of FirstRand Bank Limited, or RMB, and Nedbank Limited, South African banks. The facilities are secured by intercompany cross-guarantees, a guarantee from Net1 and a pledge by Net1 SA of its entire equity interests in Cell C, DNI and FIHRST. The terms of the lending arrangement contain covenants that require Net1 SA to maintain certain asset cover ratios and restrict the ability of Net1 SA, and certain of its subsidiaries to make certain distributions with respect to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make investment above specified levels, engage in certain business combinations and engage in other corporate activities without the approval of the lenders.

            In addition, DNI has a three year revolving credit facility of ZAR 200 million ($14.2 million, translated at exchange rates applicable as of June 30, 2019) from RMB to expand its operations. We are a reversionary guarantor of this credit facility as a result of our shareholding in DNI. The revolving credit facility is secured by intercompany cross-guarantees within the DNI group and a pledge by DNI of its entire equity interests in its subsidiaries. The terms of the lending arrangement contain customary covenants that require DNI to remain in accordance with specified net senior debt to EBITDA and EBITDA to net senior interest ratios and restrict the ability of DNI, and certain of its subsidiaries to make certain distributions with respect to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make investment above specified levels, engage in certain business combinations and engage in other corporate activities without the approval of the lenders.

            These security arrangements and covenants may reduce our operating flexibility or our ability to engage in other transactions that may be beneficial to us. If we are unable to comply with the covenants in South Africa, we could be in default and the indebtedness could be accelerated. If this were to occur, we might not be able to obtain waivers of default or to refinance the debt with another lender and as a result, our business and financial condition would suffer.

            We may be unable to secure the necessary facilities that will enable us to maintain the cash requirements for our ATM network

            The expansion of our fixed and mobile ATM network, along with an increase in our consumer banking client base, necessitates access to large amounts of cash to stock the ATMs and maintain uninterrupted service levels. We currently utilize debt facilities that expire in September 2020 to fund these ATMs. Any adverse change to the terms of these credit facilities, a significant reduction in the amounts available under these credit facilities, or our failure to increase our facilities if required, will have an adverse impact on our ability to continue uninterrupted operation of our ATM network and our revenues from this business. We will also suffer reputational damage if our service levels are negatively impacted due to the unavailability of cash.

            We face competition from the incumbent retail banks in South Africa and SAPO in the unbanked market segment, which could limit our growth.

            Certain South African banks have also developed their own low-cost banking products targeted at the unbanked and under-banked market segment. According to the 2018 FinScope SA 2018 Fact Sheet, a survey conducted by the FinMark Trust, a nonprofit independent trust, 80% of South Africans are banked. As the competition to bank the unbanked in South Africa intensifies, we may not be successful in marketing our low-cost products to our target population. Moreover, as our product offerings increase, gain market acceptance and pose a competitive threat in South Africa, especially our UEPS/EMV product with biometric verification and our financial services offerings, the banks and SAPO may seek governmental or other regulatory intervention if they view us as disrupting their transactional or other businesses.

            Our microlending loan book exposes us to credit risk and our allowance for doubtful finance loans receivable may not be sufficient to absorb future write-offs.

            All of these microfinance loans made are for a period of six months or less. We have created an allowance for doubtful finance loans receivable related to this book. Management has considered factors including the period of the finance loan outstanding, creditworthiness of the customers and the past payment history of the borrower when creating the allowance. We consider this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns.

            However, additional allowances may be required should the ability of our customers to make payments when due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these finance loan receivables, including on-going evaluation of the creditworthiness of each customer.

            Furthermore, as a result of SASSA’s migration of customers to SAPO during the first half of fiscal 2019, we saw a significant increase in the number of our customers no longer receiving their grant income into their EPE bank account. This resulted in a very significant increase in unrecoverable amounts and a significant bad debt expense.

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            As EPE accounts have remained largely stable since November 2018, we have seen our recoverability risk return to levels consistent with our previous experience. Nevertheless, these events have increased our recoverability risk and the risk that our allowance is insufficient.

            Our working capital financing and supply chain solutions receivables expose us to credit risk and our allowance for doubtful working capital finance loans receivable may not be sufficient to absorb future write-offs.

            We have created an allowance for doubtful working capital finance receivables related to our Korean lending activities and previously to our Mastertrading business. We have considered factors including the period of the working capital receivable outstanding, creditworthiness of the customers and the past payment history of the borrower when creating the allowance. A significant amount of judgment is required to assess the ultimate recoverability of these and other working capital finance receivables because these are new offerings and we continue to refine and improve our processes, including the maximum amount of exposure per customer that we are willing to accept and the on-going evaluation of the creditworthiness of each customer.

            A determination that requires a change in our allowance for doubtful working capital finance receivables, or a failure by one or more of our customers to pay a significant portion of outstanding working capital finance receivables, could have a negative impact on our business, operating results, cash flows and financial condition.

            We may face competition from other companies that offer innovative payment technologies and payment processing, which could result in the loss of our existing business and adversely impact our ability to successfully market additional products and services.

            Our primary competitors in the payment processing market include other independent processors, as well as financial institutions, independent sales organizations, new digital and fintech entrants and, potentially card networks. Many of our competitors are companies who are larger than we are and have greater financial and operational resources than we have. These factors may allow them to offer better pricing terms or incentives to customers, which could result in a loss of our potential or current customers or could force us to lower our prices as well. Either of these actions could have a significant effect on our revenues and earnings.

            In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing payment systems and the providers of financial services and low cost bank accounts, there are a number of other products that use smart card technology in connection with a funds transfer system. During the past several years, smart card technology has become increasingly prevalent. We believe that the most competitive product in this marketplace is EMV, a system that is promoted by most of the major card companies such as Visa, MasterCard, JCB and American Express. Also, governments and financial institutions are, to an increasing extent, implementing general-purpose reloadable prepaid cards as a low-cost alternative to provide financial services to the unbanked population. Moreover, as the acceptance of using a mobile phone to facilitate financial services has increased exponentially, other companies have introduced such services to the marketplace successfully and customers may prefer those services to ours, based on technology, price or other factors.

            A prolonged economic slowdown or lengthy or severe recession in South Africa or elsewhere could harm our operations.

            A prolonged economic downturn or recession could materially impact our results from operations. Also, economic confidence in South Africa, our main operating environment, is currently low and as a result the risk of an economic downturn is inflated. A recessionary economic environment could have a negative impact on mobile phone operators, our cardholders and retailers and could reduce the level of transactions we process, the sales of mobile phone starter packs, the take-up of the financial services we offer and the ability of our customers to repay our microloans or to pay their insurance premiums, which would, in turn, negatively impact our financial results. If financial institutions and retailers experience decreased demand for their products and services our hardware, software and related technology sales will reduce, resulting in lower revenue.

            The loss of the services of certain of our executive officers would adversely affect our business.

            Our future financial and operational performance depends, in large part, on the continued contributions of our senior management, in particular, Mr. Herman Kotzé, our Chief Executive Officer, and Mr. Alex Smith, our Chief Financial Officer. Many of our key responsibilities in South Africa are currently performed by Messrs. Kotzé and Smith, as well as by Mr. Nanda Pillay, our Managing Director: Southern Africa. The loss of the services of any of these executives would disrupt our development efforts or business relationships and our ability to continue to innovate and to meet customers’ needs, which could have a material adverse effect on our business and financial performance.

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            The success of our KSNET business depends heavily on the continued services of its president, Phil-Hyun Oh and the other senior members of the KSNET management team. In addition, the growth and future profitability of IPG is reliant on Mr. Philip Meyer’s leadership, industry knowledge and contacts. We do not maintain any “key person” life insurance policies.

            We face a highly competitive employment market and may not be successful in attracting and retaining a sufficient number of skilled employees, particularly in the technical and sales areas and senior management.

            Our future success depends on our ability to continue to develop new products and to market these products to our targeted users. In order to succeed in our product development and marketing efforts, we need to identify, attract, motivate and retain sufficient numbers of qualified technical and sales personnel. An inability to hire and retain such technical personnel would adversely affect our ability to enhance our existing intellectual property, to introduce new generations of technology and to keep abreast of current developments in technology. Demand for personnel with the range of capabilities and experience we require is high and there is no assurance that we will be successful in attracting and retaining these employees. The risk exists that our technical skills and sales base may be depleted over time because of natural attrition. Furthermore, social and economic factors in South Africa have led, and continue to lead, to numerous qualified individuals leaving the country, thus depleting the availability of qualified personnel in South Africa. In addition, our multi-country strategy will also require us to hire and retain highly qualified managerial personnel in each of these markets. If we cannot recruit and retain people with the appropriate capabilities and experience and effectively integrate these people into our business, it could negatively affect our product development and marketing activities.

            System failures, including breaches in the security of our system, could harm our business.

            We may experience system failures from time to time, and any lengthy interruption in the availability of our back-end system computer could harm our revenues and profits, and could subject us to the scrutiny of our customers. Frequent or persistent interruptions in our services could cause current or potential customers and users to believe that our systems are unreliable, leading them to avoid our technology altogether, and could permanently harm our reputation and brands. These interruptions would increase the burden on our engineering staff, which, in turn, could delay our introduction of new applications and services. Finally, because our customers may use our products for critical transactions, any system failures could result in damage to our customers’ businesses. These customers could seek significant compensation from us for their losses. Even if unsuccessful, this type of claim could be time consuming and costly for us to address.

            Although our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks and similar events. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities.

            Protection against fraud is of key importance to the purchasers and end users of our solutions. We incorporate security features, including encryption software, biometric identification and secure hardware, into our solutions to protect against fraud in electronic transactions and to provide for the privacy and integrity of card holder data. Our solutions may be vulnerable to breaches in security due to defects in the security mechanisms, the operating system and applications or the hardware platform. Security vulnerabilities could jeopardize the security of information transmitted using our solutions. If the security of our solutions is compromised, our reputation and marketplace acceptance of our solutions will be adversely affected, which would cause our business to suffer, and we may become subject to damage claims. We have not yet experienced any significant security breaches affecting our business.

            Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems with our system could result in lengthy interruptions in our services. Our current business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.

            Our proprietary rights may not adequately protect our technologies.

            Our success depends in part on our obtaining and maintaining patent, trade secret, copyright and trademark protection of our technologies in the United States and other jurisdictions as well as successfully enforcing this intellectual property and defending this intellectual property against third-party challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable intellectual property protections, such as patents or trade secrets, cover them. In particular, we place considerable emphasis on obtaining patent and trade secret protection for significant new technologies, products and processes. Furthermore, the degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.

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            We cannot predict the breadth of claims that may be allowed or enforced in our patents. For example, we might not have been the first to make the inventions covered by each of our patents and patent applications or to file patent applications and it is possible that none of our pending patent applications will result in issued patents. It is possible that others may independently develop similar or alternative technologies. Also, our issued patents may not provide a basis for commercially viable products, or may not provide us with any competitive advantages or may be challenged, invalidated or circumvented by third parties.

            We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. We have confidentiality agreements with employees, and consultants to protect our trade secrets and proprietary know-how. These agreements may be breached and or may not have adequate remedies for such breach. While we use reasonable efforts to protect our trade secrets, our employees, consultants or others may unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the outcome would be unpredictable. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it will be more difficult for us to enforce our rights and our business could be harmed. If we are not able to defend the patent or trade secret protection position of our technologies, then we will not be able to exclude competitors from developing or marketing competing technologies.

            We also rely on trademarks to establish a market identity for some of our products. To maintain the value of our trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or dilutive of our registered or unregistered trademarks. Also, we might not obtain registrations for our pending trademark applications, and might have to defend our registered trademark and pending trademark applications from challenge by third parties.

            Defending our intellectual property rights or defending ourselves in infringement suits that may be brought against us is expensive and time-consuming and may not be successful.

            Litigation to enforce our patents, trademarks or other intellectual property rights or to protect our trade secrets could result in substantial costs and may not be successful. Any loss of, or inability to protect, intellectual property in our technology could diminish our competitive advantage and also seriously harm our business. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws in countries where we currently have patent protection. Our means of protecting our intellectual property rights in countries where we currently have patent or trademark protection, or any other country in which we operate, may not be adequate to fully protect our intellectual property rights. Similarly, if third parties claim that we infringe their intellectual property rights, we may be required to incur significant costs and devote substantial resources to the defense of such claims. We may be required to discontinue using and selling any infringing technology and services, to expend resources to develop non-infringing technology or to purchase licenses or pay royalties for other technology. In addition, if we are unsuccessful in defending any such third-party claims, we could suffer costly judgments and injunctions that could materially adversely affect our business, results of operations or financial condition.

            Our strategy of partnering with companies outside South Africa may not be successful.

            In order for us to expand our operations into foreign markets, it may be necessary for us to establish partnering arrangements with companies outside South Africa, such as the one we have co-established in Namibia and Mauritius (in V2 Limited) and our non-controlling investments in Nigeria, Liechtenstein and India. The success of these endeavors is, however, subject to a number of factors over which we have little or no control, such as finding suitable partners with the appropriate financial, business and technical backing and continued governmental support for planned implementations. In some countries, finding suitable partners and obtaining the appropriate support from the government involved may take a number of years before we can commence implementation. Some of these partnering arrangements may take the form of joint ventures in which we receive a non-controlling interest. Non-controlling ownership carries with it numerous risks, including dependence on partners to provide knowledge of local market conditions and to facilitate the acquisition of any necessary licenses and permits, as well as the inability to control the joint venture vehicle and to direct its policies and strategies.

            Such a lack of control could result in the loss of all or part of our investment in such entities. In addition, our foreign partners may have different business methods and customs which may be unfamiliar to us and with which we disagree. Our joint venture partners may not be able to implement our business model in new areas as efficiently and quickly as we have been able to do in South Africa. Furthermore, limitations imposed on our South African subsidiaries by South African exchange control regulations, as well as limitations imposed on us by the Investment Company Act of 1940, may limit our ability to establish partnerships or entities in which we do not obtain a controlling interest.

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            We pre-fund certain merchant and customer payments in South Africa and South Korea and a significant level of payment defaults by these merchants or customers would adversely affect us.

            We pre-fund the settlement of funds to certain merchants and customers in South African and South Korea. These pre-funding obligations expose us to the risk of default by these merchants and customers. Although we have not experienced any material defaults by merchants or customers in the return of pre-funded amounts to us, we cannot guarantee that material defaults will not occur in the future. A material level of merchant or customer defaults could have a material adverse effect on us, our financial position and results of operations.

            We may incur material losses in connection with our distribution of cash through our payment infrastructure in South Africa.

            Many cardholders use our services to access cash using their debit cards. We use armored vehicles and our own fixed ATM infrastructure to deliver large amounts of cash to rural areas across South Africa to enable these cardholders to receive this cash. In some cases, we also store the cash that will be delivered by the armored vehicles in depots overnight or over the weekend to facilitate delivery to these rural areas. We cannot insure against certain risks of loss or theft of cash from our delivery vehicles, ATMs or depots and we will therefore bear the full cost of certain uninsured losses or theft in connection with the cash handling process, and such losses could materially and adversely affect our financial condition, cash flows and results of operations. We have not incurred any material losses resulting from cash distribution in recent years, but there is no assurance that we will not incur material losses in the future.

            We depend upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.

            We obtain our smart cards, ATMs, POS devices and the other hardware we use in our business from a limited number of suppliers, and do not manufacture this equipment ourselves. We generally do not have long-term agreements with our manufacturers or component suppliers. If our suppliers become unwilling or unable to provide us with adequate supplies of parts or products when we need them, or if they increase their prices, we may not be able to find alternative sources in a timely manner and could be faced with a critical shortage. This could harm our ability to implement new systems and cause our revenues to decline. Even if we are able to secure alternative sources in a timely manner, our costs could increase. A supply interruption or an increase in demand beyond current suppliers’ capabilities could harm our ability to distribute our equipment and thus, to acquire a new source of customers who use our UEPS technology. Any interruption in the supply of the hardware necessary to operate our technology, or our inability to obtain substitute equipment at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.

            Our Smart Life business exposes us to risks typically experienced by life assurance companies.

            Smart Life is a life insurance company and exposes us to risks typically experienced by life assurance companies. Some of these risks include the extent to which we are able to continue to reinsure our risks at acceptable costs, reinsurer counterparty risk, maintaining regulatory capital adequacy, solvency and liquidity requirements, our ability to price our insurance products appropriately, the risk that actual claims experience may exceed our estimates, the ability to recover policy premiums from our customers and the competitiveness of the South African insurance market. If we are unable to maintain our desired level of reinsurance at prices that we consider acceptable, we would have to either accept an increase in our exposure risk or reduce our insurance writings. If our reinsurers are unable to meet their commitments to us in a timely manner, or at all, we may be unable to discharge our obligations under our insurance contracts. As such, we are exposed to counterparty, including credit, risk of these reinsurers. Our product pricing includes long-term assumptions regarding investment returns, mortality, morbidity, persistency and operating costs and expenses of the business. Using the wrong assumptions to price our insurance products could materially and adversely affect our financial position, results of operations and cash flows.

            If our actual claims experience is higher than our estimates, our financial position, results of operations and cash flows could be adversely affected. Finally, the South African insurance industry is highly competitive. Many of our competitors are well-established, represented nationally and market similar products and we may not be able to effectively penetrate the South African insurance market.

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Risks Relating to Operating in South Africa and Other Foreign Markets

            If we do not achieve applicable broad-based black economic empowerment objectives in our South African businesses, we risk losing our government and/or private contracts and/or risk not being in compliance with any government and/or private contracts which we have already entered into. In addition, it is possible that we may be required to increase the black shareholding of our company in a manner that could dilute your ownership and/or change the companies from which we purchase goods or procure services (to companies with a better BEE Contributor Status Level).

            The legislative framework for the promotion of broad-based black economic empowerment, or BEE, in South Africa has been established through the Broad-Based Black Economic Empowerment Act, No. 53 of 2003, as amended from time to time, and the Amended BEE Codes of Good Practice, 2013, or BEE Codes, and any sector-specific codes of good practice, or Sector Codes, published pursuant thereto. Sector Codes are fully binding between and among businesses operating in a sector for which a Sector Code has been published. Achievement of BEE objectives is measured by a scorecard which establishes a weighting for the various elements. Save for certain instances where entities are only required to obtain an affidavit (for example, exempted micro enterprises and a qualifying small enterprise that is 51% Black Owned or 100% Black Owned (as defined in the BEE Codes and/or Sector Codes)), scorecards are independently reviewed by accredited BEE verification agencies which issue a certificate that presents an entity’s BEE Contributor Status Level.

            Certain of our South African businesses are subject to either the Information, Communications and Technology Sector Code, or ICT Sector Code, or the Financial Services Sector Code. The ICT Sector Code has been amended and aligned with the new BEE Codes, and was promulgated on November 7, 2016. Likewise, the Financial Services Sector Code has been amended and aligned with the new BEE Codes, and was promulgated on December 1, 2017.

            We have taken a number of actions as a company to increase empowerment of black (as defined under applicable regulations) South Africans. However, it is possible that these actions may not be sufficient to enable us to achieve applicable BEE objectives. In that event, in order to avoid risking the loss of our government and private contracts, we may have to seek to comply through other means, including by selling or placing additional shares of Net1 or of our South African subsidiaries to black South Africans (either directly or indirectly). Such sales or placements of shares could have a dilutive impact on your ownership interest, which could cause the market price of our stock to decline.

            We expect that our BEE Contributor Status Level will be important for us in order to remain competitive in the South African marketplace and we continually seek ways to improve our BEE Contributor Status Level, especially the ownership (so-called “equity element”) element thereof. We have entered into various BEE transactions in the past in an effort to improve our score, including transactions in which we issued equity to BEE partners.

            It is possible that we may find it necessary to issue additional shares to improve our BEE Contributor Status Level. If we enter into further BEE transactions that involve the issuance of equity, we cannot predict what the dilutive effect of such a transaction would be on your ownership or how it would affect the market price of our stock.

            Fluctuations in the value of the South African rand have had, and will continue to have, a significant impact on our reported results of operations, which may make it difficult to evaluate our business performance between reporting periods and may also adversely affect our stock price.

            The South African rand, or ZAR, is the primary operating currency for our business operations while our financial results are reported in U.S. dollars. This means that as long as the ZAR remains our primary operating currency, depreciation in the ZAR against the U.S. dollar, and to a lesser extent, the South Korean won against the U.S. dollar, would negatively impact our reported revenue and net income, while a strengthening of the ZAR and the South Korean won would have the opposite effect. Depreciation in the ZAR may negatively impact the prices at which our stock trades. The U.S. dollar/ZAR exchange rate has historically been volatile and we expect this volatility to continue. We provide detailed information about historical exchange rates in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Currency Exchange Rate Information.”

            Due to the significant fluctuation in the value of the ZAR and its impact on our reported results, you may find it difficult to compare our results of operations between financial reporting periods even though we provide supplemental information about our results of operations determined on a ZAR basis. This difficulty may increase as we expand our business internationally and record additional revenue and expenses in the euro and other currencies. It may also have a negative impact on our stock price.

            We generally do not engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations, other than economic hedging relating to our inventory purchases which are settled in U.S. dollars or euros.

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            We have used forward contracts in order to hedge our economic exposure to the ZAR/U.S. dollar and ZAR/euro exchange rate fluctuations from these foreign currency transactions. We cannot guarantee that we will enter into hedging transactions in the future or, if we do, that these transactions will successfully protect us against currency fluctuations.

            South Africa’s high levels of poverty, unemployment and crime may increase our costs and impair our ability to maintain a qualified workforce

            While South Africa has a highly developed financial and legal infrastructure, it also has high levels of crime and unemployment, relative to peer countries in Africa and other emerging economies, and there are significant differences in the level of economic and social development among its people, with large parts of the population, particularly in the rural areas, having limited access to adequate education, healthcare, housing and other basic services, including water and electricity. In addition, South Africa has a high prevalence of HIV/AIDS and tuberculosis. Government policies aimed at alleviating and redressing the disadvantages suffered by the majority of citizens under previous governments may increase our costs and reduce our profitability, all of which could negatively affect our business. These problems may prompt emigration of skilled workers, hinder investment into South Africa and impede economic growth. As a result, we may have difficulties attracting and retaining qualified employees.

            We may not be able to effectively and efficiently manage the electricity supply disruptions in South Africa, which could adversely affect our results of operations, financial position, cash flows and future growth.

            Our businesses in South Africa are dependent on electricity generated and supplied by the state-owned utility, Eskom, in order to operate. In recent years, Eskom has been unable to generate and supply the amount of electricity required by South Africans, and the entire country experienced significant and often unpredictable electricity supply disruptions. Eskom has implemented a number of short- and long-term mitigation plans to correct these issues and the number of supply disruptions has decreased since calendar 2016, but there was a brief reoccurrence in early calendar 2019. Eskom requires significant funding from the South African government in order to continue to operate.

            As part of our business continuity programs, we have installed back-up diesel generators in order for us to continue to operate our core data processing facilities in Cape Town and Johannesburg in the event of intermittent disruptions to our electricity supply. We have to perform regular monitoring and maintenance of these generators as well as sourcing and managing diesel fuel levels. We may also be required to replace these generators on a more frequent basis due to the additional burden placed on them.

            Our results of operations, financial position, cash flows and future growth could be adversely affected if Eskom is unable raise sufficient funding to operate and/ or to commission new electricity-generating power stations in accordance with its plans, or at all, or if we are unable to effectively and efficiently test, maintain, source fuel for and replace our generators.

            The economy of South Africa is exposed to high inflation, interest rates and rates of corporate tax, which could increase our operating costs and thereby reduce our profitability. Furthermore, the South African government requires additional income to fund future government expenditures and may be required, among other things, to increase existing income taxes rates, including the corporate income tax rate, amend existing tax legislation or introduce additional taxes.

            The economy of South Africa in the past has been, and in the future may continue to be, characterized by rates of inflation and interest rates that are substantially higher than those prevailing in the United States and other highly developed economies. High rates of inflation could increase our South African-based costs and decrease our operating margins. Higher interest rates increase the cost of our debt financing, though conversely they also increase the amount of income we earn on any cash balances. The South corporate income tax rate, of 28%, is higher than the Federal income tax rate, of 21%, as a result of changes to U.S. tax legislation following the enactment of the Tax Cuts and Jobs Act in December 2017.

            The South African government has announced a number of new programs and initiatives that may require funding from a variety of sources, including from an increase existing income taxes rates, including the corporate income tax rate; amendments to existing South African tax legislation; or through the introduction of additional taxes. An increase in the effective South African corporate income tax rate will adversely impact our profitability and cash flow generation.

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            South African exchange control regulations could hinder our ability to make foreign investments and obtain foreign-denominated financing.

            South Africa’s exchange control regulations restrict the export of capital from South Africa, the Republic of Namibia and the Kingdoms of Lesotho and Swaziland, known collectively as the Common Monetary Area, without the prior approval of SARB. While the South African government has relaxed exchange controls in recent years, it is difficult to predict whether or how it will further relax or abolish exchange control measures in the foreseeable future.

            Although Net1 is a U.S. corporation and is not itself subject to South African exchange control regulations, these regulations do restrict the ability of our South African subsidiaries to raise and deploy capital outside the Common Monetary Area, to borrow money in currencies other than the South African rand and to hold foreign currency. Exchange control restrictions may also affect the ability of these subsidiaries to pay dividends to Net1 unless the affected subsidiary can show that any payment of such dividend will not place it in an over-borrowed position. As of June 30, 2019, approximately 29% of our cash and cash equivalents (excluding restricted cash) were held by our South African subsidiaries. Exchange control regulations could make it difficult for our South African subsidiaries to: (i) export capital from South Africa; (ii) hold foreign currency or incur indebtedness denominated in foreign currencies without the approval of SARB; (iii) acquire an interest in a foreign venture without the approval of SARB and first having complied with the investment criteria of SARB; or (iv) repatriate to South Africa profits of foreign operations. These regulations could also limit our ability to utilize profits of one foreign business to finance operations of a different foreign business.

            Under current exchange control regulations, SARB approval would be required for any acquisition of our company which would involve payment to our South African shareholders of any consideration other than South African rand. This restriction could limit our management in its ability to consider strategic options and thus, our shareholders may not be able to realize the premium over the current trading price of our shares.

            Operating in South Africa and other emerging markets subjects us to greater risks than those we would face if we operated in more developed markets.

            Emerging markets such as South Africa, as well as some of the other markets into which we have recently begun to expand, including African countries outside South Africa, South and Southeast Asia and Central Europe, are subject to greater risks than more developed markets. While we focus our business primarily on emerging markets because that is where we perceive to be the greatest opportunities to market our products and services successfully, the political, economic and market conditions in many of these markets present risks that could make it more difficult to operate our business successfully.

            Some of these risks include:

            Many of these countries and regions are in various stages of developing institutions and political, legal and regulatory systems that are characteristic of democracies. However, institutions in these countries and regions may not yet be as firmly established as they are in democracies in the developed world. Many of these countries and regions are also in the process of transitioning to a market economy and, as a result, are experiencing changes in their economies and their government policies that can affect our investments in these countries and regions. Moreover, the procedural safeguards of the new legal and regulatory regimes in these countries and regions are still being developed and, therefore, existing laws and regulations may be applied inconsistently. In some circumstances, it may not be possible to obtain the legal remedies provided under those laws and regulations in a timely manner.

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            As the political, economic and legal environments remain subject to continuous development, investors in these countries and regions face uncertainty as to the security of their investments. Any unexpected changes in the political or economic conditions in these or neighboring countries or others in the region may have a material adverse effect on the international investments that we have made or may make in the future, which may in turn have a material adverse effect on our business, operating results, cash flows and financial condition.

            Our KSNET operations may be adversely affected by tension in the Korean peninsula.

            Our KSNET operations contributed $138.4 million and $9.7 million of our revenue and operating income, respectively, for our 2019 fiscal year. In the last few years, tension in the Korean peninsula has increased because of concern about potential acts of military aggression or cyber-attacks. KSNET is a transaction processor and its operations are dependent on continuing high levels of consumer activity and the availability of data communication infrastructure. Acts of military aggression in the Korean peninsula, other hostile acts or economic weakness that reduces spending by South Korean consumers is likely to materially and adversely impact our KSNET operations as well as our business, operating results, cash flows and financial condition.

Risks Relating to Government Regulation

            The South African National Credit Regulator has applied to cancel the registration of our subsidiary, Moneyline Financial Services (Pty) Ltd, as a credit provider. If the registration is cancelled, we will not be able to provide loans to our customers, which would harm our business.

            Moneyline provides microloans to our EPE cardholders. Moneyline is a registered credit provider under the South African National Credit Act, or NCA, and is required to comply with the NCA in the operation of its lending business. In September 2014, the South African National Credit Regulator, or NCR, applied to the National Consumer Tribunal to cancel Moneyline’s registration, based on an investigation concluded by the NCR.

            The NCR has alleged, among other things, that Moneyline contravened the NCA by including child support grants and foster child grants in the affordability assessments performed by Moneyline prior to granting credit to these borrowers, and that the procedures followed and documentation maintained by Moneyline are not in accordance with the NCA. We believe that Moneyline has conducted its business in compliance with NCA and we are opposing the NCR’s application. However, if the NCR’s application is successful, Moneyline would be prohibited from operating its microlending business, which could have a material adverse effect on our results of operations and cash flows.

            We are required to comply with certain U.S. laws and regulations, including economic and trade sanctions, which could adversely impact our future growth.

            We are subject to U.S. and other trade controls, economic sanctions and similar laws and regulations, including those in the jurisdictions where we operate. Our failure to comply with these laws and regulations could subject us to civil, criminal and administrative penalties and harm our reputation. Doing business on a worldwide basis requires us to comply with the laws and regulations of various foreign jurisdictions. These laws and regulations place restrictions on our operations, trade practices, partners and investment decisions. In particular, our operations are subject to U.S. and foreign trade control laws and regulations, including various export controls and economic sanctions programs, such as those administered by OFAC, as well as European sanctions. We monitor compliance in accordance with the 10 principles as set out in the United Nations Global Compact Principles, the Organisation for Economic Co-operation and Development recommendations relating to corruption, and the International Labor Organization Protocol in terms of certain of the items to be monitored. As a result of doing business in foreign countries and with foreign partners, we are exposed to a heightened risk of violating trade control laws as well as sanctions regulations.

            Economic sanctions programs restrict our business dealings with certain sanctioned countries, persons and entities. In addition, because we act through dealers and distributors, we face the risk that our dealers, distributors and customers might further distribute our products to a sanctioned person or entity, or an ultimate end-user in a sanctioned country, which might subject us to an investigation concerning compliance with OFAC or other sanctions regulations.

            Violations of trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. We have developed policies and procedures as part of a company-wide compliance program that is designed to assist our compliance with applicable U.S. and international trade control laws and regulations, including trade controls and sanctions programs administered by OFAC, and provide regular training to our employees to comply with these laws and regulations. However, there can be no assurance that all of our employees, consultants, partners, agents or other associated persons will not take actions in violation of our policies and these laws and regulations, or that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, or provide a defense to any alleged violation.

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            However, there can be no assurance that all of our employees, consultants, partners, agents or other associated persons will not take actions in violation of our policies and these laws and regulations, or that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our local, strategic or joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could materially and adversely affect our reputation, business, results of operations and financial condition. Our continued international expansion, including in developing countries, and our development of new partnerships and joint venture relationships worldwide, could increase the risk of OFAC violations in the future.

            We are required to comply with anti-corruption laws and regulations, including the FCPA and UK Bribery Act, in the jurisdictions in which we operate our business, which could adversely impact our future growth

            The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining business, or securing any improper business advantage. It also requires us to keep books and records that accurately and fairly reflect our transactions. As part of our business, we may deal with state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA.

            In addition, we have to comply with the UK Bribery Act which includes provisions that extend beyond bribery of foreign public officials and also apply to transactions with individuals not employed by a government. The provisions of the UK Bribery Act are also more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Some of the international locations in which we operate, lack a developed legal system and have higher than normal levels of corruption.

            Any failure by us to adopt appropriate compliance procedures and ensure that our employees, agents and business partners comply with the FCPA could subject us to substantial penalties. In addition, the requirement that we comply with the FCPA could put us at a competitive disadvantage with companies that are not required to comply with the FCPA or could otherwise harm our business. For example, in many emerging markets, there may be significant levels of official corruption, and thus, bribery of public officials may be a commonly accepted cost of doing business. Our refusal to engage in illegal behavior, such as paying bribes, may result in us not being able to obtain business that we might otherwise have been able to secure or possibly even result in unlawful, selective or arbitrary action being taken against us by foreign officials.

            Our current and potential competitors may use U.S. laws and regulations, including the FCPA, to disrupt our business operations and harm our reputation in the territories in which we operate or in which we intend to expand into. For instance, as we have previously reported, in November 2012, the U.S. Department of Justice commenced an investigation into whether we violated the FCPA and other U.S. federal criminal laws by engaging in a scheme to make corrupt payments to officials of the South Africa government in connection with securing our 2012 SASSA contract and whether we violated federal securities laws in connection with statements made by us in our SEC filings regarding this contract. The investigations commenced as a result of reports made to the relevant U.S. authorities by a losing bidder to the 2012 SASSA contract. While these investigations have all been concluded with no adverse findings against us, during the course of the investigations, management’s time was diverted from other matters relating to our business and we suffered harm to our business reputation. Furthermore, in fiscal 2013, the FSB suspended Smart Life’s insurance license. Our management has to spend a disproportionate amount of time explaining the circumstances surrounding, and the result of the investigations, when engaging new business partners, shareholders or regulators.

            Violations of anti-corruption laws and regulations are punishable by civil penalties, including fines, as well as criminal fines and imprisonment. We have developed policies and procedures as part of a company-wide compliance program that is designed to assist our compliance with applicable U.S. and international anti-corruption laws and regulations, and provide regular training to our employees to comply with these laws and regulations. However, there can be no assurance that all of our employees, consultants, partners, agents or other associated persons will not take actions in violation of our policies and these laws and regulations, or that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our local, strategic or joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could materially and adversely affect our reputation, business, results of operations and financial condition.

            Since less developed countries present some of the best opportunities for us to expand our business internationally, restrictions against entering into transactions with those foreign countries, as well as with certain entities and individuals in those countries, can adversely affect our ability to grow our business.

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            We do not have a South African banking license and, therefore, we provide our EPE solution through an arrangement with a third-party bank, which limits our control over this business and the economic benefit we derive from it. If this arrangement were to terminate, we would not be able to operate our EPE business without alternate means of access to a banking license.

            The South African retail banking market is highly regulated. Under current law and regulations, our EPE business activities requires us to be registered as a bank in South Africa or to have access to an existing banking license.

            We are not currently so registered, but we have an agreement with Grindrod Bank that enables us to implement our EPE solution in compliance with the relevant laws and regulations. If the agreement were to be terminated, we would not be able to operate these services unless we were able to obtain access to a banking license through alternate means. We are also dependent on Grindrod Bank to defend us against attacks from the other South African banks who may regard the rapid market acceptance of our UEPS/EMV product with biometric verification as disruptive to their funds transfer or other businesses and may seek governmental or other regulatory intervention. Furthermore, we have to comply with the strict anti-money laundering and customer identification regulations of the SARB when we open new bank accounts for our customers and when they transact. Failure to effectively implement and monitor these regulations may result in significant fines or prosecution of Grindrod Bank and ourselves.

            We have recently commenced issuing consumer banking products through our relationship with Finbond, in the form of our Kanako and Infinity products, with Finbond taking the place of Grindrod in respect of these products. However, it would not be readily achievable to transfer our EPE solution from Grindrod to Finbond.

            In addition, the South African Financial Advisory and Intermediary Services Act, 2002, requires persons who act as intermediaries between financial product suppliers and consumers in South Africa to register as financial service providers. Smart Life was granted an Authorized Financial Service Provider, or FSP, license on June 9, 2015, and Moneyline Financial Services (Pty) Ltd and Net1 Mobile Solutions (Pty) Ltd were each granted FSP licenses on July 11, 2017. If our FSP licenses are cancelled, we may be stopped from continuing our financial services businesses in South Africa.

            Our payment processing businesses are subject to substantial governmental regulation and may be adversely affected by liability under, or any future inability to comply with, existing or future regulations or requirements.

            Our payment processing activities are subject to extensive regulation. Compliance with the requirements under the various regulatory regimes may cause us to incur significant additional costs and failure to comply with such requirements could result in the shutdown of the non-complying facility, the imposition of liens, fines and/or civil or criminal liability.

            We may be subject to regulations regarding privacy, data use and/or security, which could adversely affect our business.

            We are subject to regulations in a number of the countries in which we operate relating to the collection, use, retention, security and transfer of personally identifiable information about the people who use our products and services, in particular, “Know Your Customer” and personal financial information. New laws in this area, such as GDPR, have been passed by several jurisdictions, and other jurisdictions are considering imposing additional restrictions. The interpretation and application of user data protection laws are in a state of flux. These laws may be interpreted and applied inconsistently from country to country and our current data protection policies and practices may not be consistent with those interpretations and applications. Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

            The General Data Protection Regulation, or GDPR, took effect on May 25, 2018, in the European Union and introduced direct compliance obligations for data controllers and data processors. National Data Protection Agencies, or NDPAs, are now able to impose fines for violations ranging from 2% to 4% of annual worldwide turnover, or 10 million to 20 million euro, whichever is greater. NDPAs have the power to carry out audits, request information, and obtain access to premises. Businesses must be able to demonstrate that the personal data of any data subject can be lawfully processed on one of the six specified grounds. The GDPR adopts a risk-based approach to compliance, under which businesses bear responsibility for assessing the degree of risk that their processing activities pose to data subjects. Businesses are required to perform data protection impact assessments before any processing that uses new technology and is likely to result in a high risk to data subjects. The GDPR requires businesses to maintain records of their processing activities. Clear rules around data breach notifications and the processing of personal data in such a manner that the personal data can no longer be attributed to a specific individual have been set out by the GDPR. In addition, under the GDPR, data subjects have new rights, for example, the right to request that businesses delete their personal data (the right to be forgotten); to object to their personal data being processed; and to obtain a copy of their personal data within a set time frame.

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            Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Any failure, or perceived failure, by us to comply with any regulatory requirements or international privacy or consumer protection-related laws and regulations could result in proceedings or actions against us by governmental entities or others, subject us to significant penalties and negative publicity and adversely affect us. In addition, as noted above, we are subject to the possibility of security breaches, which themselves may result in a violation of these laws.

            Amendments to the NCA were signed into law in South Africa in August 2019. There is general consensus in the financial services community in South Africa that the debt-relief bill will restrict the ability of financial services providers to provide lending products to certain low-income earners and will increase the cost of credit to these consumers. Compliance with these amendments may adversely impact our micro-lending operations in South Africa.

            In August 2019, the National Credit Amendment Bill, or debt-relief bill, was signed into law in South Africa. The effective date of the debt-relief bill has not yet been announced. There is general consensus in the financial services community in South Africa that the debt-relief bill will restrict the ability of financial services providers to provide lending products to certain low-income earners and will increase the cost of credit to these consumers. Compliance with the debt-relief bill may adversely impact our micro-lending operations in South Africa.

            The debt-relief bill is a debt-relief intervention that forms part of an amendment to the NCA and is intended to assist over-indebted individuals who earn less than a prescribed monthly minimum, currently ZAR 7,500, and have unsecured debt of no more than ZAR 50,000. Individuals that have not commenced a debt counseling process, have not been sequestrated and are not subject to an administration order may seek debt relief under the debt-relief bill. Applications for debt relief are expected to be processed by the NCR and will then be submitted to the National Consumer Tribunal, or NCT.

            The NCR will first assess whether an applicant can meet its debt obligations by paying a lower installment over an extended period of no more than five years, a so called debt re-arrangement. This process is similar to the debt counseling provisions in existing legislation, except the applicant would not pay for the debt counselor and therefore does not enjoy the services of the counselor. If the applicant has no income, the NCR will recommend that the applicant’s debts be suspended for 24 months in the hopes that the applicant’s circumstances improve in order to service the debt over time. During this period, interest and fees under the debt arrangement will cease and the applicant is required to attend a financial literacy program provided by the NCR. If the applicant’s circumstances improve during this period, and the applicant is able to meet its debt obligations, the NCR will recommend a debt re-arrangement to the NCT. If the applicant’s circumstances do not improve after 24 months, the NCR will apply to the NCT for the debt to be written off.

            A credit provider may not enforce any rights under a credit agreement if the associated debt is written off. All or part of a credit agreement will be deemed reckless under the NCA if a credit provider enters into a credit agreement (other than a consolidated loan) with an applicant while under debt relief. An applicant furnishing false information when applying for debt relief may be fined or imprisoned for not longer than two years, or both, and is permanently prohibited from applying for debt relief.

            We expect that it will take us, and other financial services providers, some time to fully understand, interpret and implement this new legislation in our lending processes and practices. Non-compliance with the provision of this new legislation may result in financial loss and penalties, reputational loss or other administrative punishment.

Risks Relating to our Common Stock

            Our stock price has been and may continue to be volatile.

            Our stock price has experienced recent significant volatility. During the 2019 fiscal year, our stock price ranged from a low of $2.78 to a high of $9.66. We expect that the trading price of our common stock may continue to be volatile as a result of a number of factors, including, but not limited to the following:

• any adverse developments in litigation or regulatory actions in which we are involved;
• fluctuations in currency exchange rates, particularly the U.S. dollar/ZAR exchange rate;
• announcement of additional BEE transactions, especially one involving the issuance or potential issuance of equity securities or dilution or sale of our existing business in South Africa;
• quarterly variations in our operating results, especially if our operating results fall below the expectations of securities analysts and investors;
• significant fair value adjustments in respect of investments;
• announcements of acquisitions, disposals or impairments of intangible assets;
• the timing of or delays in the commencement, implementation or completion of investments or major projects;
• large purchases or sales of our common stock;

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• general conditions in the markets in which we operate; and
• economic and financial conditions.

            The put right we have agreed to grant to the IFC Investors on the occurrence of certain triggering events may have adverse impacts on us.

            In May 2016, we issued an aggregate of 9,984,311 shares of our common stock to the IFC Investors. We granted the IFC Investors certain rights, including the right to require us to repurchase any shares we have sold to the IFC Investors upon the occurrence of specified triggering events, which we refer to as a “put right.” Events triggering the put right relate to (1) us being the subject of a governmental complaint alleging, a court judgment finding or an indictment alleging that we (a) engaged in specified corrupt, fraudulent, coercive, collusive or obstructive practices; (b) entered into transactions with targets of economic sanctions; or (c) failed to operate our business in compliance with anti-money laundering or anti-terrorism laws; or (2) we reject a bona fide offer to acquire all of our outstanding shares at a time when we have in place or implement a shareholder rights plan, or adopt a shareholder rights plan triggered by a beneficial ownership threshold of less than twenty percent. The put price per share will be the higher of the price per share paid to us by the IFC Investors and the volume-weighted average price per share prevailing for the 60 trading days preceding the triggering event, except that with respect to a put right triggered by rejection of a bona fide offer, the put price per share will be the highest price offered by the offeror. If a put triggering event occurs, it could adversely impact our liquidity and capital resources. In addition, the existence of the put right could also affect whether or on what terms a third party might in the future offer to purchase our company. Our response to any such offer could also be complicated, delayed or otherwise influenced by the existence of the put right.

            Approximately 39% of our outstanding common stock is owned by three shareholders. The interests of these shareholders may conflict with those of our other shareholders.

            There is a concentration of ownership of our outstanding common stock because approximately 38% of our outstanding common stock is owned by three shareholders. Based on their most recent SEC filings disclosing ownership of our shares, IFC Investors, International Value Advisers, LLC, or IVA, and Prescott Group Management, LLC, beneficially owned approximately 18%, 14% and 8% of our outstanding common stock, respectively.

            The interests of the IFC Investors, IVA and Prescott, may be different from or conflict with the interests of our other shareholders. As a result of the ownership by the IFC Investors, IVA and Prescott, they will be able, if they act together, to significantly influence our management and affairs and all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change of control of our company, thus depriving shareholders of a premium for their shares, or facilitating a change of control that other shareholders may oppose.

            We may seek to raise additional financing by issuing new securities with terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock.

            We may require additional financing to fund future operations, including expansion in current and new markets, programming development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies, or to fund acquisitions. Because of the exposure to market risks associated with economies in emerging markets, we may not be able to obtain financing on favorable terms or at all.

            If we raise additional funds by issuing equity securities, the percentage ownership of our current shareholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common stock, which could adversely affect the market price and voting power of shares of common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us.

            We may have difficulty raising necessary capital to fund operations or acquisitions as a result of market price volatility for our shares of common stock.

            In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performance, underlying asset values or prospects of such companies. For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies, to expand into new markets and to make acquisitions, all of which may be dependent upon our ability to obtain financing through debt and equity or other means.

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            Issuances of significant amounts of stock in the future could potentially dilute your equity ownership and adversely affect the price of our common stock.

            We believe that it is necessary to maintain a sufficient number of available authorized shares of our common stock in order to provide us with the flexibility to issue shares for business purposes that may arise from time to time. For example, we could sell additional shares to raise capital to fund our operations or to acquire other businesses, issue shares in a BEE transaction, issue additional shares under our stock incentive plan or declare a stock dividend. Our board may authorize the issuance of additional shares of common stock without notice to, or further action by, our shareholders, unless shareholder approval is required by law or the rules of the NASDAQ Stock Market. The issuance of additional shares could dilute the equity ownership of our current shareholders. In addition, additional shares that we issue would likely be freely tradable which could adversely affect the trading price of our common stock.

            We have identified a material weakness in our internal control over financial reporting that, if not remediated, could result in additional material misstatements in our financial statements.

            Under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes, we are required to furnish a management certification and auditor attestation regarding the effectiveness of our internal control over financial reporting. We are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal control that materially affect, or are reasonably likely to materially affect, internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

            The requirement to evaluate and report on our internal control also applies to companies that we acquire. Some of these companies may not be required to comply with Sarbanes prior to the time we acquire them. The integration of these acquired companies into our internal control over financial reporting could require significant time and resources from our management and other personnel and may increase our compliance costs. If we fail to successfully integrate the operations of these acquired companies into our internal control over financial reporting, our internal control over financial reporting may not be effective.

            We identified a material weakness in our internal control over financial reporting where the control over the review of the accounting for non-routine complex transactions did not operate effectively. As a result, the control did not operate effectively in determining the correct classification in the statement of operations of the $34.0 million accrual for the implementation costs to be refunded to SASSA following the September 30, 2019 Supreme Court ruling. Accordingly, the material weakness remains unremediated as of June 30, 2019.

            Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2019, due to the material weakness in internal control over financial reporting as described above.

            We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weakness in our internal control over financial reporting or that they will prevent potential future material weaknesses. While we continue to dedicate resources and management time to ensuring that we have effective internal control over financial reporting, failure to achieve and maintain an effective internal control environment could have a material adverse effect on the market's perception of our business and our stock price.

            You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions based upon U.S. laws, including the federal securities laws or other foreign laws, against us or certain of our directors and officers and experts.

            While Net1 is incorporated in the state of Florida, United States, the company is headquartered in Johannesburg, South Africa and substantially all of the company’s assets are located outside the United States. In addition, the majority of Net1’s directors and all its officers reside outside of the United States and the majority of our experts, including our independent registered public accountants, are based in South Africa.

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            As a result, even though you could effect service of legal process upon Net1, as a Florida corporation, in the United States, you may not be able to collect any judgment obtained against Net1 in the United States, including any judgment based on the civil liability provisions of the U.S. federal securities laws, because substantially all of our assets are located outside the United States. Moreover, it may not be possible for you to effect service of legal process upon the majority of our directors and officers or upon our experts within the United States or elsewhere outside South Africa and any judgment obtained against any of our foreign directors, officers and experts in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by a South African court.

            South Africa is not a party to any treaties regarding the enforcement of foreign commercial judgments, as opposed to foreign arbitral awards. Accordingly, a foreign judgment is not directly enforceable in South Africa, but constitutes a cause of action which may be enforced by South African courts provided that:

• the court which pronounced the judgment had international jurisdiction and competence to entertain the case according to the principles recognized by South African law with reference to the jurisdiction of foreign courts;
• the judgment is final and conclusive (that is, it cannot be altered by the court which pronounced it);
• the judgment has not lapsed;
• the recognition and enforcement of the judgment by South African courts would not be contrary to public policy in South Africa, including observance of the rules of natural justice which require that no award is enforceable unless the defendant was duly served with documents initiating proceedings, that he was given a fair opportunity to be heard and that he enjoyed the right to be legally represented in a free and fair trial before an impartial tribunal;
• the judgment was not obtained by improper or fraudulent means;
• the judgment does not involve the enforcement of a penal or foreign revenue law or any award of multiple or punitive damages; and
• the enforcement of the judgment is not otherwise precluded by the provisions of the Protection of Business Act 99 of 1978 (as amended), of the Republic of South Africa.

            It has been the policy of South African courts to award compensation for the loss or damage actually sustained by the person to whom the compensation is awarded. South African courts have awarded compensation to shareholders who have suffered damages as a result of a diminution in the value of their shares based on various actions by the corporation and its management. Although the award of punitive damages is generally unknown to the South African legal system, that does not mean that such awards are necessarily contrary to public policy.

            Whether a judgment was contrary to public policy depends on the facts of each case. Exorbitant, unconscionable, or excessive awards will generally be contrary to public policy. South African courts cannot enter into the merits of a foreign judgment and cannot act as a court of appeal or review over the foreign court. Further, if a foreign judgment is enforced by a South African court, it will be payable in South African currency. Also, under South Africa’s exchange control laws, the approval of SARB is required before a defendant resident in South Africa may pay money to a non-resident plaintiff in satisfaction of a foreign judgment enforced by a court in South Africa.

            It is doubtful whether an original action based on United States federal securities laws may be brought before South African courts. A plaintiff who is not resident in South Africa may be required to provide security for costs in the event of proceedings being initiated in South Africa. Furthermore, the Rules of the High Court of South Africa require that documents executed outside South Africa must be authenticated for the purpose of use in South African courts. In reaching the foregoing conclusions in respect of South Africa, we consulted with our South African legal counsel, Cliffe Dekker Hofmeyr Inc.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

            None.

ITEM 2.    PROPERTIES

            We lease our corporate headquarters facility which consists of approximately 93,000 square feet in Johannesburg, South Africa. We also lease properties throughout South Africa, including a 12,088 square foot manufacturing facility in Lazer Park, Johannesburg, 224 financial services branches, 98 financial service express stores and 40 depot facilities. We also lease additional office space in Johannesburg, Cape Town and Durban, South Africa; London, United Kingdom; Seoul, South Korea; Hong Kong; Mumbai, India; Pietà Malta and Black River, Mauritius. These leases expire at various dates through 2022. We own land and buildings in Ahnsung, Kyung-gi, South Korea, that is used for the storage of business documents. We believe that we have adequate facilities for our current business operations.

ITEM 3.    LEGAL PROCEEDINGS

            Legal proceedings against SASSA in respect of transfer of grant payments from EPE to SAPO accounts

            On November 13, 2018, a number of grant beneficiaries and Moneyline Financial Service Proprietary Limited, or Moneyline, one of our subsidiaries, filed an urgent application with the Gauteng Division of the High Court of South Africa seeking among other things, an order (1) declaring that biometric consent for the transfer of grant payments to EPE accounts conforms with the requirements of the Social Assistance Regulations, (2) prohibiting SASSA from stopping the payment of social grants into EPE accounts that were opened with biometric consent prior to January 1, 2018, when SASSA issued a new directive that completion by recipients of a SASSA-prescribed “Annexure C” form would be required in order for those recipients to have their grant payments deposited into their private bank accounts (as opposed to SAPO bank accounts), (3) directing SASSA to process all Annexure C forms within two weeks of submission and (4) directing SASSA to make all grant payments in accordance with duly completed and submitted Annexure C forms.

            On November 28, 2018, the High Court issued an interim order directing SASSA to pay the social grants of those EPE clients who had previously provided biometric consent and elected to receive their social grants into their EPE accounts, pending the issuance of a final judgment. SASSA was also ordered to process any Annexure C forms within two weeks of the submission of such forms.

            On January 29, 2019, the High Court handed down its final judgment, reversing the portion of its November 28, 2018, interim order that directed SASSA to pay grants into the EPE accounts of recipients who made those biometric elections without submitting the Annexure C forms. The effect of the final judgment is that while SASSA is required to promptly pay social grants into EPE accounts of those recipients who have signed the Annexure C forms electing to have their grants paid that way, SASSA is not required to pay grants into the EPE accounts of those recipients who have not submitted the Annexure C forms, despite having provided their previous biometric consent and may continue to auto-migrate those grants to SAPO accounts. The court did not award costs.

            On February 13, 2019, we applied for leave to appeal the order granted on January 29, 2019 and were granted leave on March 12, 2019. We filed the record on July 10, 2019 and the Supreme Court directed the parties to file their respective heads of argument. Once the directive has been complied with, the Supreme Court will allocate a hearing date for the appeal. We cannot predict how the Supreme Court will rule on the matter.

            On February 8, 2019, Moneyline launched an application to interdict SASSA from taking any steps of its own volition to direct payment of the social grants of the grants recipients, who received payment of their grants into their EPE accounts in January, 2019, into any accounts other than their EPE accounts into which SASSA had made payments in January 2019. The application was heard on February 28, 2019 and the High Court handed down an order directing Moneyline to provide SASSA with a list of the 696,246 individuals who opened EPE accounts in 2018 and who were not paid by SASSA into those accounts in January 2019. SASSA was ordered to verify the information provided by Moneyline within 14 days and to file an affidavit within a further 15 days, with the outcome of the verification process and detailing procedures followed by it, including a description of how SASSA administered the migration of beneficiaries to SAPO. The High Court furthermore ordered that any party is entitled to approach it for appropriate relief thereafter. SASSA filed its supplementary affidavit on April 23, 2019. On May 16, 2019, Moneyline filed a replying affidavit to SASSA’s supplementary affidavit. SASSA’s attorneys have indicated that SASSA undertook to file a further supplementary affidavit, but to date we have not received same. Moneyline will, after consultation with its legal counsel, decide whether to seek any further relief from the High Court.

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            Constitutional Court order regarding extension of contract with SASSA for six months for cash payments

                     March 2017 Constitutional Court order

            On March 17, 2017, the Constitutional Court delivered its order regarding the continued payment of social grants upon the expiration of the contract between our subsidiary, CPS, and SASSA on March 31, 2017, or the March 2017 order. The Constitutional Court ordered that SASSA and CPS were under a constitutional obligation to ensure payment of social welfare grants from April 1, 2017 and ordered CPS and SASSA to ensure payment of grants, for a period of 12-months, on the same terms and conditions as those included in the expiring contract plus additional requirements to (i) adequately safeguard personal data obtained during the payment process and ensure that it remains private and may not be used for any purpose other than the payment of grants, and (ii) preclude anyone from inviting beneficiaries to “opt-in” to the sharing of confidential information for the marketing of goods and services. The Constitutional Court also ordered that CPS may request National Treasury to investigate and make a recommendation regarding the price charged by CPS in the extension contract and stated that National Treasury must file a report with the Constitutional Court stating its findings in this regard.

            The March 2017 order also included public accountability provisions that directly impacted CPS. These provisions are similar to those included in the Constitutional Court’s April 2014 order, and require CPS to provide the Constitutional Court with an audited statement of expenses incurred, income received and net profit earned under the 12-month extension contract ending March 31, 2018. CPS duly complied with the order in that it filed the previously mentioned statements for the period ended March 31, 2017 on May 30, 2017. SASSA was also required to obtain an independent audit of the audited information provided by CPS. Furthermore, the Constitutional Court has instructed SASSA to send this audited information to National Treasury for its approval prior to submission to the Constitutional Court.

            The Constitutional Court included additional public accountability provisions that impact the Minister of Social Development and SASSA. These provisions required the Minister and SASSA to file reports, on affidavit, with the Constitutional Court every three months, commencing on June 19, 2017, setting out how they planned to ensure the payment of social grants after the end of the 12-month contract extension period, details of the steps taken in that regard, what further steps they would take, and when they would take each future step, so as to ensure that the payment of all social grants is made when due after the expiry of the 12-month period. The Constitutional Court also directed that these reports must include the applicable time-frames for the various deliverables which formed part of the plan, whether the time frames have been complied with, and if not, why that is the case and what will be done to remedy the situation. The Minister and SASSA were also required to immediately report to the Constitutional Court and explain the reasons for and consequences of any material changes to the circumstances included in the reports previously submitted to the Constitutional Court.

            The Constitutional Court also ordered SASSA to ensure that any new payment method would (i) adequately safeguard personal data obtained during the payment process and ensure that such data remain private and may not be used for any purpose other than the payment of grants; and (ii) preclude a contracting party from inviting beneficiaries to “opt-in” to the sharing of confidential information for the marketing of goods and services.

            The Constitutional Court order also invited parties involved in the Constitutional Court proceedings to provide the name and consent of independent legal practitioners and technical experts, together with the Auditor-General of South Africa, to oversee the implementation of the payment of social welfare grants during the period to March 31, 2018, as well as oversee SASSA’s conduct to appoint a new service provider from April 1, 2018, or to perform the grant distribution service in-house. The Constitutional Court appointed a panel of ten such experts on June 6, 2017.

                     March 2018 Constitutional Court order

            Further to the March 2017 order, SASSA and certain other parties, including the independent panel of experts appointed by the Constitutional Court, have made various submissions to the Constitution Court. Argument was heard on March 6, 2018 and on March 23, 2018, the Constitutional Court issued an order reiterating that SASSA and CPS have a constitutional obligation to pay social welfare grants and that the contract between SASSA and CPS, for the payment of social grants to beneficiaries who are paid in cash (i.e. those grant recipients who receive their grants at pay points), be extended for a further six months to September 30, 2018, or March 2018 order. The Constitutional Court’s order provides for the payment of these grants under the extended contract’s terms and conditions. The Constitutional Court permitted CPS to request National Treasury to evaluate and recommend the price to be charged by CPS for the payment of grants in cash under the extended contract. National Treasury submitted its recommendations to the Constitutional Court on April 30, 2018, proposing fee levels that were materially lower than CPS had requested, but significantly higher than the current fee levels. We submitted a responding affidavit to the Constitutional Court on May 11, 2018, in which we requested the Constitutional Court to direct that the matter be referred back to Treasury to recommend a minimum monthly fee. In December 2018, we received correspondence from the Constitutional Court informing the parties that it believes that “nothing prevents the parties from coming to an agreement on increased payments without court sanction, and if they do not, normal legal processes in other courts must be filed to determine the effects.” We decided not to enter into further negotiations with SASSA and invoiced it in accordance with Treasury’s recommendations. SASSA only paid us a portion of the amount invoiced and refuses to pay the balance. On June 6, 2019, we instituted legal action against SASSA for the outstanding fees of ZAR 358.2 million.

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            The Constitutional Court included public accountability provisions in its March 2018 order that directly impact CPS. These provisions are similar to those included in the Constitutional Court’s April 2014 and March 2017 orders and require CPS to provide SASSA with an independently audited statement of expenses incurred, income received and profit earned under the contract. We have filed the required independently audited information with the Constitutional Court as ordered for the period ended September 30, 2018, on November 8, 2018, and the auditors expressed an unqualified opinion with an emphasis of matter regarding the basis of preparation and restriction as to use. The Constitutional Court also ordered SASSA to audit the audited information filed with the Constitutional Court and SASSA appointed an independent firm to audit our submission. The independent audit is currently underway and the independent firm is due to file its report by October 10, 2019. Furthermore, the Constitutional Court directed SASSA to send this audited information to National Treasury for its approval prior to submission to the Constitutional Court.

            The Constitutional Court also included public accountability provisions in its March 2018 order that impact the Minister of Social Development and SASSA. These provisions are similar to those included in the March 2017 order and require the Minister and SASSA to file reports with the Constitutional Court at the end of every month, commencing in April 2018 and ending in August 2018, regarding the implementation of the Constitutional Court’s order. The Minister and SASSA are also required to immediately report and explain any material changes, and the consequences of such changes, to the circumstances included in the reports previously submitted to the Constitutional Court.

            The Constitutional Court also ordered SASSA to ensure that the payment method determined by it must (i) adequately safeguard beneficiaries’ personal data obtained during the payment process and ensure that such data remains private and not used for any purpose other than the payment of grants; and (ii) preclude a contracting party from inviting beneficiaries to “opt-in” to share confidential information for the marketing of goods and services.

            The independent panel of experts, appointed by the Constitutional Court, was directed to (i) evaluate the implementation of the cash payment of social grants from the date of the order until September 2018, (ii) evaluate the steps proposed and taken by SASSA for any competitive bidding process or any other processes aimed at the appointment of a new contract or contracts for the cash payment of social grants by SASSA, (iii) evaluate the steps proposed or taken by SASSA for SASSA itself to administer and pay grants in the future, and (iv) file reports with the Constitutional Court, by the 15th of each month from May 2018 to September 2018, relating to the period from April 1, 2018 to the date of each report, describing the steps that the panel has taken to evaluate the matters referred to in (i) through (iii) above, the results of their evaluation and any recommendations.

            On August 31, 2018, SASSA and its Chief Executive Officer, in her official capacity, were ordered by the Constitutional Court to pay the costs related to the March 2018 Order.

            Dispute with SASSA regarding payment of fees for the last six months of the contract

            Following the March 23, 2018 Constitutional Court order for a six-month extension of our contract with SASSA for payment of grants in cash at pay points only, we were allowed to charge our monthly fee based on the previously contracted rate of ZAR 16.44 (including VAT) per cash pay point recipient. Given that we only serviced the highest-cost beneficiaries, the Constitutional Court allowed us to approach the National Treasury in order for them to make a fair determination of the price we should be paid for services rendered. National Treasury recommended a rate of ZAR 51.00 (including VAT) per cash pay point recipient per month to the Constitutional Court. Contrary to SASSA’s stance, the Constitutional Court on December 5, 2018, ruled that they are not required to ratify the Treasury recommended rate, and that CPS and SASSA must agree on the pricing. To date we have not reached an agreement with SASSA on the pricing and have issued summons to commence legal proceedings to record an amount in accordance with National Treasury recommendation. We cannot predict whether we will be successful in these legal proceedings, if the matter will be heard or how the Court will rule on the matter if it is heard.

            Litigation Regarding Legality of Debit Orders under Social Assistance Act Regulations

            On June 3, 2016, we filed for a declaratory order with the High Court of the Republic of South Africa Gauteng Division, Pretoria, or Pretoria High Court, to provide certainty to us, as well as other industry stakeholders, on the interpretation of the Social Assistance Act and recent regulations promulgated in terms thereof, or the Regulations. The Regulations sought to restrict deductions from social grants paid to beneficiaries to direct deductions only. We interpret the meaning of the word “deductions” to be specific to the practice of deducting amounts, historically limited to life insurance premiums from grants, before the grants are paid to social welfare beneficiaries’ bank accounts, and are of the opinion that the legislature did not intend to curtail the rights of beneficiaries to transact freely after the money is deposited into their bank accounts.

            We brought the application for a declaratory order because SASSA sought to lend a broader interpretation to the meaning of the term “deductions” to include any debit orders, EFT debits, purchase transactions, or fund transfers that are effected after the transfer of social grants to beneficiaries’ bank accounts. If SASSA’s interpretation were to prevail, debit transactions could no longer be used as a method for beneficiaries to make payments for financial services such as insurance premiums, loan repayments, electricity and other purchases, money transfers or any other electronic payments.

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            We believe that SASSA’s broad interpretation of the Regulations is flawed and inaccurate for a number of reasons, including but not limited to, the following:

            Several other industry participants launched similar proceedings, and the SARB also filed an affidavit in which it sets out its position.

            The matter was heard on October 17 and 18, 2016 and on May 9, 2017, the Pretoria High Court issued a declaratory order that the Social Assistance Act and Regulations do not restrict social grant recipients in the operation of their bank accounts. The order clarified that recipients may continue to initiate debit order instructions with any service provider, including our subsidiaries, against their bank accounts for the payment of goods and services. SASSA, its Chief Executive Officer and the Minister of Social Development were ordered to pay the costs of the application. The Pretoria High Court also refused the Black Sash Trust’s, or Black Sash, application to intervene in the matter. In support of its application, the Black Sash made several allegations of “illegal deductions” which we denied in our answering affidavits.

            On June 20, 2017, the Pretoria High Court refused the Minister of Social Development, SASSA and Black Sash’s applications for leave to appeal the Pretoria High Court’s May 9, 2017, declaratory order. SASSA, its Chief Executive Officer and the Minister of Social Development were ordered to pay the costs of the application for the leave to appeal.

            On July 19, 2017, SASSA and the Black Sash served applications petitioning the Supreme Court to grant them leave to appeal to either the Supreme Court or to a full bench of the Pretoria High Court. On September 29, 2017, the Supreme Court referred the petitions to oral argument. The oral argument in respect of the petitions was heard on August 16 and 17, 2018. The matter was heard on August 16, 2018, by the Supreme Court. The Supreme Court granted the Black Sash the right to intervene but dismissed the application for leave to appeal with costs.

            Challenge to Payment by SASSA of Additional Implementation Costs

            As previously disclosed, in June 2014, we received approximately ZAR 277.0 million, excluding VAT, from SASSA, related to the recovery of additional implementation costs we incurred during the beneficiary re-registration process in fiscal 2012 and 2013. After the award of the tender, SASSA requested that CPS biometrically register all social grant beneficiaries (including child grant beneficiaries) and collect additional information for each child grant recipient. CPS agreed to SASSA’s request and, as a result, performed approximately 11.0 million additional registrations beyond those that CPS tendered for the quoted service fee. Accordingly, we sought reimbursement from SASSA, supported by a factual findings certificate from an independent auditing firm. SASSA agreed to pay us the ZAR 277.0 million as full settlement of the additional costs we incurred.

            In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced legal proceedings in the Pretoria High Court of South Africa seeking an order by the Pretoria High Court to review and set aside the decision of SASSA’s Chief Executive Officer to approve payment to us of ZAR 317.0 million (approximately ZAR 277 million, excluding VAT) and directing us to repay the aforesaid amount, plus interest. Corruption Watch claimed that there was no lawful basis to make the payment to us, and that the decision was unreasonable and irrational and did not comply with South African legislation. CPS was named as a respondent in this legal proceeding.

            On February 22, 2018, the matter was heard by the Pretoria High Court. On March 23, 2018, the Pretoria High Court ordered that the June 15, 2012 variation agreement between SASSA and CPS be reviewed and set aside. CPS was ordered to refund ZAR 317.0 million to SASSA, plus interest from June 2014 to date of payment. On April 4, 2018, we filed an application seeking leave to appeal the whole order and judgment of the Pretoria High Court with the Pretoria High Court because we believed that it erred in its application of the law and/or in fact in its findings. On April 25, 2018, the Pretoria High Court refused the application seeking leave to appeal.

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            On May 23, 2018, CPS delivered its petition seeking leave to appeal the whole order and judgment of the Pretoria High Court with the Supreme Court. On June 21, 2018, Corruption Watch delivered a responding affidavit and, on July 4, 2018, CPS delivered its replying affidavit. In September 2018, CPS received notification from the Supreme Court that its petition seeking leave to appeal had been granted. The matter was heard on September 10, 2019. On September 30, 2019, the Supreme Court dismissed the appeal and ordered us to pay Corruption Watch’s costs, including that of two counsel. We are discussing further legal steps with our counsel.

            On July 9, 2019, the Supreme Court issued correspondence demanding an explanation from SASSA as to why it decided to abandon its defense in the matter and instructed SASSA to be legally represented at the hearing on September 10, 2019. SASSA filed its explanatory affidavit on August 2, 2019.

            NCR application for the cancelation of Moneyline’s registration as a credit provider

             In September 2014, the NCR applied to the South African National Consumer Tribunal, or Tribunal, to cancel the registration of our subsidiary, Moneyline, for breach of the NCA based on an investigation concluded by it. Pursuant to the investigation, the NCA also issued two Compliance Notices – one to CPS and one to Moneyline. The Compliance Notice issued to Moneyline accused it of “having access into the Grindrod Bank Accounts of social grant beneficiaries which enables them (sic) to see the spending patterns of beneficiaries and deposit loan amounts into such accounts.” The Compliance Notice issued to CPS accused it of providing “information about social grant beneficiaries” to Moneyline in breach of section 68(1) of the NCA. The Compliance Notices demanded that both CPS and Moneyline take the appropriate steps to address the alleged non-compliance with the NCA and to report in writing to the NCR, along with an independent audit report, that they were no longer non-compliant as alleged by the Compliance Notices.

            We objected to the Compliance Notices and the Tribunal set both Compliance Notices aside.

            Regarding the NCR’s application to cancel the registration of Moneyline, we raised a number of procedural points in defense and argument on these points was heard on November 27, 2015, before three tribunal members. Two ruled against us and one upheld our points. We are appealing the majority ruling to the High Court. This matter was heard on December 4, 2018, by a full bench of the Pretoria High Court. We still await judgment. If we are successful, it will dispose of the application. If we do not prevail, then the NCR’s application will be set down before the Consumer Tribunal for argument on the main issues raised by the NCR, as dealt with above. We cannot predict the outcome of this litigation.

            Initiation of legal proceedings against a PG Purchasing customer regarding non-payment of working capital finance loans receivable

            In January 2019, we filed a Petition with the District Court of Dallas County, Texas (“Texas district court lawsuit”), naming Permian Crude Transport, LP, f/k/a Permian Crude Transport, LLC, d/b/a Permian Transport & Trading (“PCT”), and Centurion Marketing, LLC d/b/a Jupiter Marketing & Trading, LLC (“Centurion” and collectively with PCT, “PCT/Centurion”) as defendants regarding the recovery of working capital finance loans receivable made to PCT/Centurion by our wholly owned subsidiary, PG Purchasing. This lawsuit was in its initial stages. Trial was set for December 2, 2019. However, the Texas district court lawsuit was administratively closed following PCT’s filing for bankruptcy in June 2019 and Centurion’s filing for bankruptcy in July 2019 (“PCT/Centurion bankruptcy matters”). The Texas district court lawsuit may be re-opened if the PCT/Centurion bankruptcy matters are lifted.

            We cannot predict if the Texas district court lawsuit will be re-opened, and if it is re-opened, the outcome of the matter. Also, we cannot predict the outcome of the PCT/Centurion bankruptcy matters.

            There are no other material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject.

ITEM 4.      MINE SAFETY DISCLOSURES

            Not applicable.

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PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

            Market information

            Our common stock is listed on The Nasdaq Global Select Market, or Nasdaq, in the United States under the symbol “UEPS” and on the JSE in South Africa under the symbol “NT1.” The Nasdaq is our principal market for the trading of our common stock.

            Our transfer agent in the United States is Computershare Shareowner Services LLC, 480 Washington Blvd, Jersey City, New Jersey, 07310. According to the records of our transfer agent, as of September 12, 2019, there were 12 shareholders of record of our common stock. A substantially greater number of holders of our common stock are beneficial holders whose shareholders of record are banks, brokers, and other financial institutions (i.e. “street name”). Our transfer agent in South Africa is Link Market Services South Africa (Pty) Ltd, 13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein, 2001, South Africa.

            Dividends

            We have not paid any dividends on our shares of common stock during our last two fiscal years and presently intend to retain future earnings finance the expansion of the business. We do not anticipate paying any cash dividends in the foreseeable future. The future dividend policy will depend on our earnings, capital requirements, debt commitments, expansion plans, financial condition and other relevant factors.

            Issuer purchases of equity securities

            On February 3, 2016, our board of directors approved the replenishment of our existing share repurchase authorization to repurchase up to an aggregate of $100 million of common stock and, as of June 30, 2019, we had utilized approximately $47.5 million of this authorization and approximately $52.5 million remains available. The authorization has no expiration date. We did not repurchase any shares of our common stock during fiscal 2019.

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            Share performance graph

            The chart below compares the five-year cumulative return, assuming the reinvestment of dividends, where applicable, on our common stock with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph assumes $100 was invested on June 30, 2014, in each of our common stock, the companies in the S&P 500 Index, and the companies in the NASDAQ Industrial Index.

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ITEM 6.    SELECTED FINANCIAL DATA

            The following selected historical consolidated financial data should be read together with Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8—“Financial Statements and Supplementary Data.” The following selected historical financial data as of June 30, 2019 and 2018, and for the three years ended June 30, 2019, have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial data presented below as of June 30, 2017, 2016 and 2015 and for the years ended June 30, 2016 and 2015, have been derived from our consolidated financial statements, which are not included herein, and have been restated as noted below, which is unaudited. The selected historical financial data as of each date and for each period presented have been prepared in accordance with U.S. GAAP. These historical results are not necessarily indicative of results to be expected in any future period.

            As discussed in the Note 1 to our audited consolidated financial statements included in Item 8—“Financial Statements and Supplementary Data.”, our historic consolidated financial statements have been corrected to give effect to the restatement. Accordingly, certain of the selected consolidated financial data presented in the table below has been corrected to give effect to the restatement as indicated.

Consolidated Statements of Operations Data
(in thousands, except per share data)

(R) Income tax expense, net income attributable to Net1 and Income from continuing operations per share: Basic and Diluted for the years ended June 30, 2018 and 2017, restated to correct the misstatement discussed in Note 1 to the audited consolidated financial statements. Year ended June 30, 2016, restated as follows: Income tax expense (decreased by 0.1 million), net income attributable to Net1 (decreased by 0.2 million) and Income from continuing operations per share: Basic (unchanged) and Diluted (unchanged).
(1) Impacted by expiration of SASSA contract in September 2018. Also impacted by inclusion of DNI for the first nine months of fiscal 2019 – refer to Note 3 to the audited consolidated financial statements, which also includes discontinued operation disclosures related to DNI.
(2) Revenue for the year ended June 30, 2019, includes revenue that has been reversed of $19.7 million (ZAR 277.6 million) as a result of the Supreme Court ruling discussed in Note 13 to our audited consolidated financial statements, and selling, general and administrative includes $14.3 million (ZAR 201.8 million) related to the Supreme Court ruling.
(3) Includes an allowance for doubtful financial loans receivable of $28.8 million in 2019 and separation payment of $8.0 million paid to our former chief executive officer in 2017.
 

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Additional Operating Data:
(in thousands, except percentages)

(1) Cash flows provided by (used in) investing activities include movements in settlement assets and cash flows (used in) provided by financing activities include movement in settlement liabilities.
(2) Fiscal 2019 operating loss margin was (14%) before retrenchment costs, the impact of the SASSA implementation costs accrual (refer to Note 13 of our audited consolidated financial statements), and impairment losses (refer to Note 10 of our audited consolidated financial statements for a full description of the impairment losses). Fiscal 2018 operating income margin was 13% before the impairment loss (Refer to Note 10 of our audited consolidated financial statements for a full description of the impairment loss). Fiscal 2017 operating income margin was 18% before the separation payment of $8.0 million paid to our former chief executive officer

Consolidated Balance Sheet Data:
(in thousands)

^(R) Total assets and total equity as of June 30, 2018, restated to correct the misstatement discussed in Note 1 to the audited consolidated financial statements. As of June 30, 2017, 2016 and 2015, restated as follows: total assets (2017 and 2016: decreased by 1.9 million; 2015: decreased by 1.8 million) and total equity (2017: decreased by 1.5 million; 2016 and 2015: decreased by 1.4 million).

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

            The following discussion and analysis should be read in conjunction with Item 6—“Selected Financial Data” and Item 8—“Financial Statements and Supplementary Data.” In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See Item 1A— “Risk Factors” and “Forward Looking Statements.”

Overview

            We are a leading provider of financial technology, or fintech, products and services to the unbanked and underbanked in a number of emerging and developed economies. In emerging economies these customers are typically individuals, while in developed countries, they are primarily small businesses. We have developed and own most of our payment technologies, and where possible, utilize this technology to provide financial and value-added services to our customers.

Sources of Revenue

            We generate our revenues by charging transaction fees to merchants, financial service providers, utility providers, bill issuers, employers, and cardholders; by providing loans and insurance products and by selling hardware, licensing software and providing related technology services.

            We have structured our business and our business development efforts around four related but separate approaches to deploying our technology. In our most basic approach, we act as a supplier, selling our equipment, software, and related technology to a customer. The revenue and costs associated with this approach are reflected in our Financial inclusion and applied technologies segment. We have found that we have greater revenue and profit opportunities, however, by acting as a service provider instead of a supplier. In this approach we own and operate the UEPS ourselves, charging one-time and ongoing fees for the use of the system either on a fixed or ad valorem basis. This is the case in South Africa, where we provide bank accounts on a monthly fee basis, and charge fees on an ad valorem basis for goods and services purchased using our smart card. The revenue and costs associated with this approach are reflected in our South African transaction processing and Financial inclusion and applied technologies segments.

            Because our smart cards are designed to enable the delivery of more advanced services and products, we are also willing to supply those services and products directly where the business case is compelling. For instance, we provide short-term loans to our smart card holders. Here we can act as the principal in operating a business that can be better delivered through our UEPS. The revenue and costs are reflected in our Financial inclusion and applied technologies segment.

            In South Africa, we also generate fees from debit and credit card transaction processing, the provision of value-added services such as bill payments, mobile top-up and prepaid utility sales, and from providing a payroll transaction management service. The revenue and costs associated with these services are reflected in our South African transaction processing and Financial inclusion and applied technologies segments.

            Through KSNET, we earn most of our revenue from payment processing services we provide to approximately 223,000 merchants and to card issuers in South Korea through our value-added-network. Through IPG we generate fee revenue through the provision of payment service provider and card issuing and acquiring services in primarily Europe, China and the U.S. The revenue and costs at of all of these businesses are reflected in our International transaction processing segment.

            Finally, we have investments, business partnerships or joint ventures to provide us with an opportunity to introduce our financial technology solutions to markets such as Bank Frick in Europe, Finbond in South Africa and North America, OneFi in Nigeria, V2 in sub-Sahara Africa, and MobiKwik in India. In these situations, we take an equity position in the business while also acting as a supplier of technology. In evaluating these types of opportunities, we seek to maintain a highly disciplined approach, carefully selecting partners, participating closely in the development of the business plan and remaining actively engaged in the management of the new business. In most instances, the joint venture or partnership has a license to use our proprietary technologies in the specific territory, including the back-end system.

            We believe that this flexible approach enables us to drive adoption of our solution while capturing the value created by the implementation of our technology.

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Developments during Fiscal 2019

            Restructuring of South African operations and strategy for financial inclusion initiatives in South Africa

            Following the auto-migration of a substantial portion of our EPE customers in fiscal 2019, we faced a significant reduction in the number of accounts, transactions, fees, and consumption of financial and value-added services. In addition, customers who had loans or insurance policies and had been migrated, unwittingly defaulted on their regular payments. Our rural-South African distribution business has a high-fixed cost structure with physical locations, assets and employees. The decline in revenue coupled with the high-fixed costs resulted in significant operating losses for the company over the past year. Beginning in late January, we commenced an aggressive restructuring initiative to reduce our physical infrastructure and headcount in order to right size the business given the current level of business activity. We have made meaningful progress in this regard and achieved our target of reaching a breakeven EBITDA on a monthly basis for the month of July 2019, one month later than originally expected.

            Restructuring of South African operations – In late January 2019, we commenced with an extensive cost reduction exercise, which included a reduction of over 2,500 employees (being close to 50% of our original staff complement), a reduction in the availability of our mobile ATM infrastructure, and the termination of certain leases. During the second half of 2019, we incurred retrenchment costs of $6.3 million related to the reduction of personnel both in the field and at the head office level.

            Increasing collaboration with Finbond - We have actively worked with the Finbond teams to identify synergies between our organizations in order to address the market opportunity for the millions of unbanked and under-banked South Africans. Finbond has been certified to become an issuer of UEPS/EMV cards, and in early Q4 2019, we initiated a pilot using our biometrically-enabled UEPS/EMV cards. We expect to commercially launch this initiative during Q2 2020, at which point we believe we can once again start growing our customer base.

            Stabilization of financial services - Our lending and insurance businesses have stabilized in the second half of fiscal 2019 due to a steadier base of active EPE accounts. This stability now provides us with the opportunity to re-direct our efforts to growing these business lines, although this will be done cautiously to manage the risk of any potential future auto-migration of customers. We have begun discussions with other financial services providers, including Finbond, to use our EPE base as a distribution channel for their own lending products.

            Our loan book increased slightly in the fourth quarter of fiscal 2019 and, following the write off of the loans that were provided against in Q2 2019, we have seen the level of non-performing loans return broadly to historical levels. For insurance, the number of policies paid up has also stabilized and the lapses related to the increased non-payment returned to more normal levels in the fourth quarter of fiscal 2019.

            SASSA Contract Expiration

            Although we have not been involved operationally with SASSA since September 30, 2018, we have been actively trying to resolve all legal and legacy outstanding items that would allow us to focus on our core business.

            Settlement of payment of fees due for the last six months of the SASSA contract – Following the March 23, 2018 Constitutional Court order for a six-month extension of our contract with SASSA for payment of grants in cash at pay points only, we were allowed to charge our monthly fee based on the previously contracted rate of ZAR 16.44 (including VAT) per cash pay point recipient. Given that we only serviced the highest-cost beneficiaries, the Constitutional Court allowed us to approach the National Treasury in order for them to make a fair determination of the price we should be paid for services rendered. National Treasury recommended a rate of ZAR 51.00 (including VAT) per cash pay point recipient per month to the Constitutional Court. Contrary to SASSA’s stance, the Constitutional Court on December 5, 2018, ruled that they are not required to ratify the Treasury recommended rate, and that CPS and SASSA must agree on the pricing. To date we have not reached an agreement with SASSA on the pricing and have commenced legal proceedings to receive an amount in accordance with National Treasury recommendation.

            Auto-migration of EPE customers to SAPO – As part of SASSA’s migration to SAPO, a number of EPE customers were auto-migrated by SASSA between August and October 2018, where post office accounts were unilaterally opened for beneficiaries by SASSA, often without the customer’s consent. We initiated a legal process to halt this migration and to try and recover some of our EPE customers who had been migrated despite completing the mandatory documentation for electing to be paid in a private bank account. On January 29, 2019, we received an adverse order in that the court declined to reverse the auto-migration process. Following this order, we followed a multi-faceted approach to try and address the auto-migration issue. First, we were granted leave to appeal the order, which we are pursuing. Second, the court granted an order requiring SASSA to account for the process to auto-migrate approximately 700,000 of the EPE accounts who had submitted Annexure C forms to SAPO. Third, we are considering taking the decision of the minister for administrative review.

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            While the first and third actions are longer processes, we are currently reviewing SASSA’s response to the second action and will determine if there is any further action that can be taken as a result. The risk of our remaining EPE customers being auto-migrated still exists, but there has been no further auto-migration since November 2018.

            We are relieved that we have finally concluded our contract with SASSA on September 30, 2018. We are extremely proud of our achievements of uninterrupted grant delivery to 11.0 million social grant recipients since the inception of our contract in April 2012, and the annual saving of more than ZAR 2.0 billion that our biometric payment technology realized for government due to the elimination of fraudulent grants.

            Progress on various corporate activities

            As part of the extensive strategic review of all of our businesses and investments, we have made progress on multiple fronts:

            Disposal of DNI – We have concluded two transactions to reduce our investment in DNI. First, in March 2019, we reduced our holding in DNI from 55% to 38% through the sale of 17% in DNI for ZAR 400 million. We utilized the proceeds from this sale to settle the contingent purchase consideration of ZAR 400 million, which related to the achievement of certain performance targets by DNI. Second, in May 2019, we sold an additional 8% of DNI to RMB, and used the proceeds to early-settle the majority of our outstanding long-term borrowings. Third, also in May 2019, we granted DNI a call option to acquire our remaining 30% interest in DNI at a strike price of ZAR 859 million, or $61.0 million translated at exchange rates applicable as of June 30, 2019, in order to monetize our remaining investment in DNI. We expect the call option to be exercised prior to the expiry on December 31, 2019.

            Early repayment of long-term debt – We utilized ZAR 15.0 million of our cash reserves and the proceeds from the sale of an 8% interest in DNI to early-settle our ZAR 230.0 million long-term borrowings in full. This has strengthened our balance sheet and improved our liquidity profile in South Africa as we reposition the business.

            Progress in Korea – Our advisors assisting with improving the growth and profitability in Korea completed the first phase of their project during our third quarter of 2019, which consisted of the identification of actionable items. In phase two, which commenced at the end of our fourth quarter of 2019, they are working with management to implement the near-term action items identified in the first phase. We expect the overall exercise to take another 6-12 months before we see meaningful improvements in operating performance. In parallel, our board is reviewing the strategic alternatives for this business and we appointed a financial advisor, FT Partners, to assist us in evaluating such alternatives.

            Cell C – Cell C has had a difficult six months and has come under increasing pressure on its liquidity due to its high level of debt and the associated servicing costs. During the third quarter of fiscal 2019, Cell C signed a term sheet with the Buffet consortium, but the implementation of this capitalization has been delayed. As a result, Cell C requested shareholder support and in September 2019, we agreed to provide up to ZAR 300 million of support to the company through the purchase of prepaid airtime. This, along with support from Blue Label Telecoms and Cell C’s debt providers, should provide a liquidity platform to Cell C to enable it to conclude revised commercial arrangements with MTN, as well as a recapitalization of the business. Our investments in Cell C and Cedar Cellular notes were carried at $0 as of June 30, 2019, refer to Notes 7 and 9 to our audited consolidated financial statements for additional information regarding these investments.

            International Activities

            IPG – The restructuring and re-organization of IPG is now complete with Malta having become the centralized operation of our international activities. IPG’s new card issuing and merchant acquiring platforms have been certified. As part of Visa’s merger with Visa Europe, Bank Frick is required to undergo recertification with Visa, which is currently underway and expected to be completed during calendar 2019. Once completed, IPG is expected to begin the deployment of its new products to the European SME market. During fiscal 2019, IPG also secured approval from the Mauritian regulators to become a principal member of China UnionPay for international issuing and acquiring. This approval has been shared with UnionPay, and we are awaiting their acceptance of the same. Our beta prototype crypto-asset storage product is now ready, and we believe we will begin commercially rolling out this market-leading product with Bank Frick in the first half of fiscal 2020.

            Bank Frick – Bank Frick continues to develop its capacity and expertise in relation to cryptocurrency and blockchain technology. It has expanded its headcount; however, its performance was slightly lower than anticipated, which was largely due to investments in expanding headcount and improving systems. Bank Frick continues to work closely with IPG regarding our acquiring, processing and cryptocurrency storage solution initiatives.

            On October 2, 2019, we exercised an option to acquire an additional 35% interest in Bank Frick from the Kuno Frick Family Foundation. We will pay an amount, the “Option Price Consideration”, for the additional 35% interest in Bank Frick, which represents the higher of CHF 46.4 million ($46.5 million at exchange rates on October 2, 2019) or 35% of 15 times the average annual normalized net income of the Bank over the two years ended December 31, 2018.

            The shares will only transfer on payment of the Option Price Consideration, which shall occur on the later of (i) 180 days after the date of exercise of the option; (ii) in the event of any regulatory approvals being required, 10 days after receipt of approval (either unconditionally or on terms acceptable to both parties); and (iii) 10 days after the date on which the Option Price Consideration is agreed or finally determined.

            ZappGroup – Our new Africa-focused investment, ZappGroup, made significant strides in its first year of existence. During Q2 2019, ZappGroup signed up the largest bank in Ghana and went live with a beta product. During the third quarter of fiscal 2019, ZappGroup progressed its live testing and also signed up two of the three largest mobile operators in Ghana.

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            ZappGroup has also integrated with the largest merchant network (allowing it to reach many more merchants) and is expecting to achieve commercial launch in the second quarter of fiscal 2020. ZappGroup also commenced activities to sign customer contracts in Nigeria and is working closely with us and OneFi.

            OneFi – Given the success of it digital lending product, Pay-Later, in fiscal 2019, OneFi has rebranded as Carbon, expanding its offering as a full-fledged digital financial services platform that offers bill payments, fund transfers and savings, in addition to loans. OneFi is currently disbursing approximately 50,000 new loans per month.

            India – We have deployed our virtual card technology with MobiKwik to its users. In fiscal 2019, MobiKwik applied for direct membership with Visa and became an associate member in Q4 2019. Given this is the first time a non-bank has been approved as a Visa member in India, the Visa/MobiKwik application has been submitted to the central bank for approval. Once approved, it is expected to allow MobiKwik to expand issuing virtual cards to its millions of customers. MobiKwik itself has performed ahead of expectations, primarily due to its successful transition to being a digital financial services provider. In June 2019, MobiKwik recorded unaudited annualized revenue of $55 million, up from $17 million in June 2018. It has been contribution margin positive since October 2018 and was close to EBITDA breakeven at the end of June 2019. Digital financial services now account for approximately 25% of MobiKwik’s total monthly revenue, compared to zero during the previous fiscal year and it is currently disbursing in excess of 70,000 new loans per month.

Critical Accounting Policies

            Our audited consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires management’s judgment based on a variety of assumptions and other determinants such as historical experience, current and expected market conditions and certain scientific evaluation techniques. Management believes that the following accounting policies are critical due to the degree of estimation required and the impact of these policies on the understanding of the results of our operations and financial condition.

            Valuation of investment in Cell C

            We have elected to measure our investment in Cell C, an unlisted equity security, at fair value using the fair value option. Changes in the fair value of this equity security are recognized in the caption change in fair value of equity securities in our audited consolidated statements of operations. The tax impact related to the change in fair value of equity securities is included in income tax expense in our audited consolidated statements of operation. The determination of the fair value of this equity security requires us to make significant judgments and estimates. We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Refer to Note 7 of our audited consolidated financial statements regarding the valuation inputs and sensitivity related to our investment in Cell C.

            We used a discounted cash flow model to determine the fair value of our investment in Cell C as of June 30, 2019, and valued Cell C at $0.0 (zero) at June 30, 2019. We have changed our valuation methodology from an EV/ EBITDA model to a discounted cash flow approach due to anticipated changes in Cell C’s business model and the current challenges faced by the business, which would not have been captured by the previous valuation approach. We utilized the latest business plan provided by Cell C management for the period ending December 31, 2024, and the following key valuation inputs were used:

            (1) translated from ZAR to U.S. dollars at exchange rates applicable as of June 30, 2019.

            We believe the Cell C business plan is reasonable based on the current performance and the expected changes in the business model.

            We used an adjusted EV/ EBITDA model to determine the fair value of our investment in Cell C for the first, second and third quarter of fiscal 2019 and for fiscal 2018, and we considered Cell C’s adjusted earnings before interest, taxation, depreciation and amortization, or EBITDA, and its historical net debt position. We were also required to select an appropriate EBITDA multiple based on Cell C’s peer group, which comprises various African and emerging market mobile telecommunications operators and the appropriate marketability discount related to the investment in order to determine its fair value.

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            Business Combinations and the Recoverability of Goodwill

            A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations. The purchase price of an acquired business is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair value at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill. In determining the fair value of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods, including present value modeling. Further, we make assumptions using certain valuation techniques, including discount rates and timing of future cash flows.

            We review the carrying value of goodwill annually or more frequently if circumstances indicate impairment may have occurred. In performing this review, we are required to estimate the fair value of goodwill that is implied from a valuation of the reporting unit to which the goodwill has been allocated after deducting the fair values of all the identifiable assets and liabilities that form part of the reporting unit.

            The determination of the fair value of a reporting unit requires us to make significant judgments and estimates. In determining the fair value of reporting units, we consider the earnings before interest, taxation, depreciation and amortization, or EBITDA, and the EBITDA multiples applicable to peer and industry comparables of the reporting units. We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. In addition, we make judgments and assumptions in allocating assets and liabilities to each of our reporting units. The results of our impairment tests during fiscal 2019 indicated that the fair value of our reporting units exceeded their carrying values, with the exception of the $14.4 million of goodwill impaired during fiscal 2019, as discussed in Note 10 to our audited consolidated financial statements.

            Intangible Assets Acquired Through Acquisitions

            The fair values of the identifiable intangible assets acquired through acquisitions were determined by management using the purchase method of accounting. We completed acquisitions during fiscal 2018 and 2017 where we identified and recognized intangible assets. We have used the relief from royalty method, the multi-period excess earnings method, the income approach and the cost approach to value acquisition-related intangible assets. In so doing, we made assumptions regarding expected future revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates, exchange rates, cash tax charges and useful lives.

            The valuations were based on information available at the time of the acquisition and the expectations and assumptions that have been deemed reasonable by us. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows. To the extent actual cash flows vary, revisions to the useful life or impairment of intangible assets may be necessary. For instance, in fiscal 2019, we recorded an impairment loss of $5.3 million related to intangible assets acquired (customer relationships) in the DNI acquisition as a result of Cell C entering into a roaming arrangement with another South African mobile telecommunications network provider which extended Cell C’s network coverage. This arrangement impacted the identified customer relationship recognized.

            Deferred Taxation

            We estimate our tax liability through the calculations done for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are disclosed on our balance sheet.

            Management then has to assess the likelihood that deferred tax assets are more likely than not to be realized in the foreseeable future. A valuation allowance is created if it is determined that a deferred tax asset will not be realized in the foreseeable future. Any change to the valuation allowance would be charged or credited to income in the period such determination is made. In assessing the need for a valuation allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered. During fiscal 2019, fiscal 2018 and 2017, respectively, we recorded a net increase of $68.6 million, $9.6 million and $0.1 million to our valuation allowance. As of June 30, 2019 and 2018, the valuation allowance related to deferred tax assets was $116.4 million and $48.7 million, respectively.

            Stock-based Compensation

            Management is required to make estimates and assumptions related to our valuation and recording of stock-based compensation charges under current accounting standards. These standards require all share-based compensation to employees to be recognized in the statement of operations based on their respective grant date fair values over the requisite service periods and also requires an estimation of forfeitures when calculating compensation expense.

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            We utilize the Cox Ross Rubinstein binomial model to measure the fair value of stock options granted to employees and directors. We have also utilized a bespoke adjusted Monte Carlo simulation discounted cash flow model to measure the fair value of restricted stock with market conditions granted to employees and directors. The stock-based compensation cost related to these valuations has been recognized on a straight line basis. These valuation models require estimates of a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. Our management has estimated forfeitures based on historic employee behavior under similar compensation plans. The fair value of stock options is affected by the assumptions selected. Net stock-based compensation expense from continuing operations was $0.4 million, $2.6 million and $2.0 million for fiscal 2019, 2018 and 2017, respectively.

            Accounts Receivable and Allowance for Doubtful Accounts Receivable

            We maintain an allowance for doubtful accounts receivable related to our Financial inclusion and applied technologies and International transaction-based activities segments with respect to sales or rental of hardware, support and maintenance services provided; or sale of licenses to customers; or the provision of transaction processing services to our customers; or our working capital financing provided.

            Our policy is to regularly review the aging of outstanding amounts due from customers and adjust the provision based on management’s estimate of the recoverability of the amounts outstanding.

            Management considers factors including period outstanding, creditworthiness of the customers, past payment history and the results of discussions by our credit department with the customer. We consider this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. Additional provisions may be required should the ability of our customers to make payments when due deteriorate in the future. Judgment is required to assess the ultimate recoverability of these receivables, including on-going evaluation of the creditworthiness of each customer.

                     Microlending

            We maintain an allowance for doubtful finance loans receivable related to our Financial inclusion and applied technologies segment with respect to microlending loans provided to our customers. Our policy is to regularly review the ageing of outstanding amounts due from borrowers and adjust the provision based on management’s estimate of the recoverability of finance loans receivable. We write off microlending loans and related service fees if a borrower is in arrears with repayments for more than three months or dies.

            Management considers factors including the period of the microlending loan outstanding, creditworthiness of the customers and the past payment history and trends of its established microlending book. We consider this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. Additional allowances may be required should the ability of our customers to make payments when due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these finance loan receivables, including on-going evaluation of the creditworthiness of each customer.

Accounting for transactions following September 2019 Supreme Court ruling

            As discussed under Item 3-"Legal Proceedings- Challenge to Payment by SASSA of Additional Implementation Costs" the Supreme Court denied our appeal and we have recorded a liability of $34.0 million as of June 30, 2019, comprising a revenue refund of $19.7 million (ZAR 277.6 million), and other expenses totaling $14.3 million (ZAR 201.8 million).

Other payables - accrual of implementation costs to be refunded to SASSA

            On September 30, 2019, the Supreme Court delivered its ruling in the matter, declining CPS' appeal and awarding costs against CPS. CPS is liable to repay SASSA ZAR 317.0 million, plus interest from June 2014 to date of payment. As a result, we have recorded the liability at June 30, 2019, of $34.0 million (ZAR 479.4 million, translated at exchange rates applicable as of June 30, 2019, comprising a revenue refund of $19.7 million (ZAR 277.6 million), accrued interest of $11.4 million (ZAR 161.0 million), unclaimed indirect taxes of $2.8 million (ZAR 39.4 million) and estimated costs of $0.1 million (ZAR 1.4 million)).
 
            We are discussing further legal steps with our counsel. Management does not agree with the findings of the Supreme Court and may appeal the matter with the Constitutional Court. While management believes that its arguments in defense of the matter have merit, it has had to apply its judgment, including the fact that both the High Court and the Supreme Court have ruled against CPS, to determine whether to record a liability as of June 30, 2019. If management determines to further appeal the matter, it is unable to predict (a) whether the Constitutional Court will hear the matter, or (b) if they do hear the matter, the outcome of those additional proceedings.

            While management does not agree with the Supreme Court ruling, we respect the rule of law in South Africa, and will discharge our legal obligations as mandated under South African law as they fall due once all available legal process available to us have been exhausted. We considered the High Court and Supreme Court rulings and the uncertainty regarding the further appeal process in our assessment that it is probable that an amount will need to be refunded to SASSA, although this is not an admission that our legal arguments do not have merit. This, taken together with the rulings that specify a quantifiable amount payable to SASSA, formed the basis for the accrual of the liability of $34.0 million as of June 30, 2019.

Revenue - variation in transaction price following September 2019 Supreme Court ruling

            Management considers a component of the $34.0 million to be refunded to SASSA, specifically the ZAR 277.6 million ($19.7 million) of revenue recorded in fiscal 2014 related to a June 2012 agreement, to be a variation in the price charged to SASSA under our February 2012 SASSA contract. Even though it is an involuntary refund to be paid to SASSA, the Supreme Court ruled that we were not entitled to charge SASSA for the additional enrolments performed because, in the courts view, the February 2012 contract contained all the performance obligations and pricing parameters related to the enrolment of all beneficiaries, and not just cardholder recipients, and we should not have sought a recovery of implementation costs in fiscal 2014 from SASSA for the additional enrolment services provided under the June 2012 agreement. As noted above, management does not agree with the findings of the courts and has had to exercise its judgment in determining whether the reversal of revenue represents a price variation (accounted for as a reduction in revenue in fiscal 2019) or a nonreciprocal transfer.

Recent Accounting Pronouncements

            Recent accounting pronouncements adopted

            Refer to Note 2 of our audited consolidated financial statements for a full description of recent accounting pronouncements, including the dates of adoption and effects on financial condition, results of operations and cash flows.

            Recent accounting pronouncements not yet adopted as of June 30, 2019

            Refer to Note 2 of our audited consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of June 30, 2019, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.

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Currency Exchange Rate Information

            Actual Exchange Rates

            The actual exchange rates for and at the end of the periods presented were as follows:

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            Translation Exchange Rates

            We are required to translate our results of operations from ZAR to U.S. dollars on a monthly basis. Thus, the average rates used to translate this data for the years ended June 30, 2019, 2018 and 2017, vary slightly from the averages shown in the table above. The translation rates we use in presenting our results of operations are the rates shown in the following table:

Results of Operations

            The discussion of our consolidated overall results of operations is based on amounts as reflected in our audited consolidated financial statements which are prepared in accordance with U.S. GAAP. We analyze our results of operations both in U.S. dollars, as presented in the audited consolidated financial statements, and supplementally in ZAR, because ZAR is the functional currency of the entities which contribute the majority of our results and is the currency in which the majority of our transactions are initially incurred and measured. Due to the significant impact of currency fluctuations between the U.S. dollar and ZAR on our reported results and because we use the U.S. dollar as our reporting currency, we believe that the supplemental presentation of our results of operations in ZAR is useful to investors to understand the changes in the underlying trends of our business.

            Our operating segment revenue presented in “—Results of operations by operating segment” represents total revenue per operating segment before intercompany eliminations. A reconciliation between total operating segment revenue and revenue presented in our audited consolidated financial statements is included in Note 21 to those statements.

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            We consolidated DNI for the first nine months of fiscal 2019 and accounted for it using the equity method from April 1, 2019. DNI is accounted for as an equity-accounted investment for 11 months of fiscal 2018. Fiscal 2017 includes Masterpayment Financial Services Limited, or Ceevo FS, from November 1, 2016 and Pros Software from October 1, 2016. Refer also to Note 3 to the audited consolidated financial statements.

            Fiscal 2019 Compared to Fiscal 2018

            The following factors had an influence on our results of operations during fiscal 2019 as compared with the same period in the prior year:

• Decline in revenue: Our revenues declined 30% in ZAR primarily due to the expiration of our SASSA contract, a significant decline in EPE account numbers driven by SASSA’s auto-migration of accounts to SAPO, a reduction in EPE-related financial and value-added services and transaction fees due to a smaller customer base, and lower contribution from KSNET, but partially offset by the inclusion of DNI for three quarters;
• Significant operating losses: Lower revenue, coupled with a high-fixed cost infrastructure and write-downs due to limited recoverability of dues from customers, resulted in a significant operating loss. During February 2019, we accelerated a restructuring of our South African operations to bring our cost structure in-line with our current customer base and were successful in reaching EBITDA breakeven in the month of July 2019. We incurred $6.3 million in retrenchment costs during fiscal 2019;
• Interest expense: Net interest expense increased due to lower average cash balances and higher short-term borrowing to fund ATMs, partially offset by the early settlement of long-term debt in May 2019;
• Non-cash losses, impairments and fair-value adjustments: We incurred a $5.8 million non-cash loss on our partial disposal of DNI, impairment losses of $19.7 million, a fair value adjustment loss of $167.5 million for Cell C and a $12.8 million impairment of our Cedar Cellular note;
• Implementation costs to be refunded to SASSA of $34.0 million: We recorded an accrual of $34.0 million related to the September 2019 Supreme Court ruling comprising a revenue refund of $19.7 million (ZAR 277.6 million), accrued interest of $11.4 million (ZAR 161.0 million), unclaimed indirect taxes of $2.8 million (ZAR 39.4 million) and estimated costs of $0.1 million (ZAR 1.4 million)); and
• Adverse foreign exchange movements: The U.S. dollar appreciated 12% against the ZAR and 4% against the KRW during fiscal 2019, which adversely impacted our reported results.

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                     Consolidated overall results of operations

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

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

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            The decrease in revenue was primarily due to lower contributions received from our South African operations as a result of the end of our CPS contract with SASSA, which also resulted in fewer SASSA Grindrod-account grant recipients using the South African National Payment System to access their grants; the reversal of revenue of $19.7 million (ZAR 277.6 million) following the September 2019 Supreme Court ruling; the loss of our EPE account holders resulting in lower transaction fees; fewer prepaid airtime and value-added services sales; decreases in our insurance and lending activities and lower revenue contributions from South Korea and IPG; which was partially offset by the inclusion of DNI and higher fee and transaction income from our ATM offerings.

            The decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer SASSA Grindrod-account grant recipients utilizing the South African National Payment System which resulted in lower transaction costs incurred by us and fewer prepaid airtime sales, which was partially offset by the inclusion of DNI and expenses to support and expand our EPE and ATM offerings. Our fiscal 2019 expense also included certain committed fixed and variable costs (including security, vehicle-related expenditures, banking fees and other transaction costs) that relate to the maintenance and expansion of our financial inclusion initiatives. SASSA’s actions to convert grant recipients to the new SAPO account, often unilaterally and without the recipient’s consent, resulted in us incurring certain expenses without any associated significant revenue generated from these activities. For instance, for a period during the year we deployed our mobile payment infrastructure into areas in which we believed that EPE accountholders would utilize our infrastructure, however these individuals did not use the infrastructure because they were auto-migrated to new SAPO accounts.

            In ZAR, the increase in selling, general and administration expense was primarily due to an increase in our allowance for doubtful finance loans receivable of approximately $28.8 million (ZAR 411.0 million), additional costs recorded related to the September 2019 Supreme Court ruling of $14.3 million (ZAR 201.8 million), the inclusion of DNI, payment of $6.3 million (ZAR 88.5 million) of retrenchment packages, an increase in costs at IPG as part of its restructuring and re-establishment initiatives. Fiscal 2019 expenses also included committed fixed and variable costs (including premises and staff costs) that related to the maintenance and expansion of our financial inclusion initiatives. Fiscal 2018 included the impact of an allowance for doubtful Mastertrading working capital finance receivables of $7.8 million and a $4.6 million non-cash loss on re-measurement of the previously held equity interest in DNI upon acquisition.

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            Depreciation and amortization increased primarily due to the amortization of acquired intangible assets related to the DNI acquisition, partially offset by an increase in the number of tangible assets that became fully depreciated.

            During fiscal 2019, we recognized an impairment loss of approximately $19.7 million, which included $7.0 million related to entire amount of IPG goodwill, $6.2 million primarily related to the impairment of goodwill recognized pursuant to the 2004 Aplitec transaction and $5.3 million related to DNI customer relationships. We reviewed and impaired goodwill allocated to T24 given the lower than expected revenues, profits and cash flows generated by T24 following the consolidation and restructuring of IPG over the period through December 2018, which resulted in several business lines being terminated or meaningfully reduced. We also reviewed certain customer relationships identified as part of our acquisition of DNI for impairment because Cell C recently entered into a roaming arrangement with another South African mobile telecommunications network provider which will extend Cell C’s network coverage and this arrangement impacted the identified customer relationship recognized. As a consequence, we recorded an impairment loss of $5.3 million related to a portion of the customer relationship. Refer to Notes 3 and 10 of our audited consolidated financial statements for additional information regarding the impairment losses.

            During fiscal 2018, we reviewed for impairment the goodwill identified and recognized pursuant to the Masterpayment and Masterpayment Financial Services acquisitions in April 2016 and November 2017, respectively, due to uncertainty surrounding the timing and amount of future net cash inflows following changes in the business strategy. As a consequence of this review, our 2018 impairment loss of $20.9 million included an impairment loss of approximately $19.9 million related to the entire carrying value of this goodwill acquired.

          Our operating (loss) income margin for fiscal 2019 and 2018 was (31.4%) and 9.6% respectively. We discuss the components of operating income margin under "-Results of operations by operating segment." Our fiscal 2019 operating loss margin resulted from lower revenue, the impact of the September 2019 Supreme Court ruling, an increase in our allowance for doubtful finance loans receivable, impairment losses and losses incurred running our financial inclusion infrastructure. Our fiscal 2019 operating loss margin was (14.0%) excluding the impact of the September 2019 Supreme Court ruling, the $19.7 million impairment losses and the $6.3 million in retrenchment costs incurred. Our fiscal 2018 operating margin was 14.6% excluding the $20.9 million impairment loss, the $7.8 million allowance for doubtful finance loans receivable, the $4.6 million DNI re-measurement and the $2.5 million South Korean indirect tax refund.

            The change in fair value of equity securities represents a non-cash fair value adjustment (loss) gain related to Cell C of $(167.5 million) and $32.5 million during fiscal 2019 and 2018, respectively. The fiscal 2019 adjustment was caused by current challenges faced by Cell C’s business. Refer to Note 7 of our audited consolidated financial statements for the methodology and inputs used in the fair value calculation.

            We recognized a non-cash loss of $5.8 million in fiscal 2019 related to the reduction in our equity holding in DNI from 55% to 30% during that year.

            Interest on surplus cash decreased to $7.3 million (ZAR 103.1 million) from $17.9 million (ZAR 227.1 million), due primarily to the lower average daily ZAR cash balances resulting from our significant investments over the last two years as well as cash utilized to fund operating losses in the South African operations during fiscal 2019.

            Interest expense increased to $10.7 million (ZAR 153.0 million) from $8.9 million (ZAR 113.5 million), due to increased borrowings which we obtained to partially fund our strategic investments and fund our ATMs, which was partially offset by a reduction in our long-term South African debt. Interest expense for fiscal 2018 included interest on our South Korean debt, which was fully repaid in October 2017.

            We recorded an impairment loss of $12.8 million related to our Cedar Cellular note as discussed in Note 9 of our audited consolidated financial statements.

            Fiscal 2019 tax expense was $3.7 million (ZAR 53.2 million) compared to $48.6 million (ZAR 616.9 million) in fiscal 2018. Our effective tax rate was adversely impacted by the valuation allowances created related to the deferred tax assets recognized in respect of net operating losses incurred by our South African businesses, the non-deductible impairment losses, the DNI disposal losses, and other non-deductible expenses, including transaction-related expenditure and non-deductible interest on our South African long-term debt facility. The deferred tax impact of the change in the fair value of our investment in Cell C also impacted the effective rate for fiscal 2019, as this amount is recorded at a lower rate (at a capital gains rate) than the South African statutory rate. During fiscal 2019, we reversed the entire deferred tax liability of approximately $6.1 million recorded as of June 30, 2018, as a result of decrease in the carrying value of Cell C to below the initial cost. In addition, the June 30, 2019, carrying value of our investment in Cell C is less than its initial cost which results in a capital gains tax benefit for tax purposes. However, we do not expect to realize any significant capital gains in the foreseeable future and have provided a valuation allowance of $31.7 million related to this capital gains tax benefit deferred tax asset. Our effective tax rate for fiscal 2018 was 48.4% and higher than the South African statutory rate as a result of an impairment loss, a valuation allowance related to an allowance for doubtful working capital finance receivables created, the DNI re-measurement loss on acquisition, non-deductible expenses (including transaction-related expenditure and non-deductible interest on our South African long-term facility) and the impact of the changes in U.S. federal statutory tax law.

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            DNI was consolidated during the first three quarters of fiscal 2019, which adversely impacted our (loss) earnings from equity-accounted investments during fiscal 2019 because the contribution from DNI was excluded from such line item during the majority of fiscal 2019. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first quarter and its annual results during our fourth quarter.

                     Results of operations by operating segment

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

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                     South African transaction processing

            The decrease in segment revenue and operating income was primarily due to the substantial decrease in the number of SASSA grant recipients paid under our SASSA contract as the contract expired at the end of the first quarter of fiscal 2019. Our revenue and operating income was also adversely impacted by the significant reduction in the number of SASSA grant recipients with SASSA-branded cards linked to Grindrod bank accounts as well as a lower number of EPE accounts. These decreases in revenue and operating income were partially offset by higher transaction revenue as a result of increased usage of our ATMs and EasyPay. Operating income for this operating segment for fiscal 2019 included a $1.1 million impairment loss and retrenchment costs of $4.7 million (ZAR 65.9 million).

            Our operating (loss) income margin for fiscal 2019 and 2018 was (32.0%) and 16.0%, respectively. Excluding the impairment loss of $1.1 million and restructuring costs of $4.7 million, the segment operating loss and operating loss margin for fiscal 2019 were $24.9 million and (26.0%), respectively.

                     International transaction-based activities

            Segment revenue was lower during fiscal 2019, primarily due to a contraction in IPG transactions processed, specifically meaningfully lower crypto-exchange and China processing activity, and lower KSNET revenue as a result of lower transaction values processed. Operating income during fiscal 2019 was adversely impacted by a $7.0 million impairment loss in respect of IPG. Operating income during fiscal 2018 was adversely impacted by a $19.9 million impairment loss, a Mastertrading allowance for doubtful working capital finance receivable of $7.8 million, and was positively impacted by an ad hoc refund of indirect taxes of $2.5 million in Korea. Excluding the combined impact of the impairment losses, the allowance for doubtful finance loans receivable and the ad hoc tax refund, operating income during fiscal 2019 was lower compared to fiscal 2018 due to a decrease in IPG revenues and ongoing losses at Masterpayment during fiscal 2019, but such decrease was partially offset by an improved contribution from KSNET primarily as a result of lower depreciation expense.

            IPG continues to work in close collaboration with Bank Frick and our other specialist departments to develop bespoke blockchain-based solutions, including a highly secure but easily accessible crypto-asset storage solution for crypto-asset investors and exchanges and incurred research and development expenses of approximately $1.4 million in fiscal 2019 related to this project.

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            Operating (loss) income margin for fiscal 2019 and 2018 was 1.9% and (6.9%), respectively. Excluding the goodwill impairment, segment operating income and margin for fiscal 2019 were $9.8 million and 6.6%, respectively. Excluding the impairment loss, the Mastertrading allowance for doubtful working capital finance receivables and the ad hoc tax refund, segment operating income and margin for fiscal 2018 were $12.6 million and 7.0%, respectively.

                     Financial inclusion and applied technologies

            Segment revenue decreased primarily due to fewer prepaid airtime and value-added services sales, lower lending and insurance revenues, and a decrease in inter-segment revenues, partially offset by the consolidation and inclusion of DNI for the nine months to March 31, 2019. We reported an operating loss in fiscal 2019 compared with fiscal 2018, primarily due to the allowance for doubtful finance loans receivable of $23.4 million recognized in the second quarter, a $6.3 million impairment loss and expenses incurred to maintain and expand our financial service infrastructure, partially offset by the contribution from DNI. Operating loss for this operating segment for fiscal 2019 included retrenchment costs of $1.6 million (ZAR 22.6 million).

            Operating (loss) income margin for the Financial inclusion and applied technologies segment was (10.1%) and 25.0% during fiscal 2019 and 2018, respectively. Excluding the impairment loss of $6.3 million and restructuring costs of $1.6 million, the segment operating loss and operating loss margin for fiscal 2019 were ($6.9) million and (4.7%), respectively.

                     Corporate/ Eliminations

            Our corporate expenses generally include acquisition-related intangible asset amortization; expenses incurred related to acquisitions and investments pursued; expenditure related to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors’ fees; executive bonuses; stock-based compensation; legal fees; audit fees; directors and officer’s insurance premiums; and elimination entries.

            Our corporate expenses increased primarily due to the accrual of $14.3 million related to the September 2019 Supreme Court ruling, a $5.3 million impairment loss as well as higher acquired intangible asset amortization, non-employee director expenses, transaction-related expenditures and external service provider fees, and were partially offset by the reversal of stock-based compensation charges of $1.9 million related to forfeiture of awards. Corporate/ Eliminations for fiscal 2019, also includes the impact of the reversal of revenue related to the September 2019 Supreme Court ruling. Our corporate expenses for fiscal 2018 include a $0.5 million profit related to the sale of XeoHealth and a $4.6 million non-cash loss on re-measurement of the previously held equity interest in DNI.

            Fiscal 2018 Compared to Fiscal 2017

            The following factors had an influence on our results of operations during fiscal 2018 as compared with the same period in the prior year:

• Decline in revenue: Our revenues declined 6% in ZAR primarily due to the payment of 82% fewer grant recipients during the fourth quarter of fiscal 2018, being only those recipients paid at cash pay points as per the Constitutional Court order of March 23, 2018, but partially offset by EPE revenue and operating income growth driven primarily by the expansion of our customer base and increased utilization of our ATM infrastructure and volume growth in our lending and insurance activities during fiscal 2018 coupled with operating efficiencies, which resulted in an improved contribution to our financial inclusion revenue and operating income;
• Decrease in operating income: Lower revenue, coupled with an increase in our allowance for doubtful working capital finance receivables, a non-cash loss on re-measurement of the previously held equity interest in DNI upon acquisition, the impact of October 2017 annual salary increases for our South African employees, an increase in our allowance for doubtful microlending finance loans receivable, and an increase in goods and services purchased from third parties, resulted in lower operating income compared with in fiscal 2017;
• Non-cash losses, impairments and fair-value adjustments: During fiscal 2018 we incurred impairment losses of $20.9 million related to the impairment of goodwill, an allowance for credit losses related to doubtful working capital finance receivables of $7.8 million, a $4.6 million non-cash loss on re-measurement of the previously held equity interest in DNI, and a fair value adjustment gain of $32.5 million for Cell C; and
• Adverse foreign exchange movements: The U.S. dollar depreciated by 7% against the ZAR and 4% against the KRW during fiscal 2018 compared with fiscal 2017, which positively impacted our reported results.

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                     Consolidated overall results of operations

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

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

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            In ZAR, the decrease in revenue was primarily due to lower prepaid airtime sales, a decline in the number of SASSA biometrically-enabled UEPS/EMV grant recipients paid and fewer ad hoc terminal sales, which was partially offset by higher revenue from Masterpayment and Transact 24, EPE and related ATM services, and growth in our insurance business. KSNET’s revenue contribution was flat compared with fiscal 2017 due to the ongoing impact of regulatory changes in South Korea.

            In ZAR, the decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer prepaid airtime and ad hoc terminal sales, which was partially offset by increases in goods and services purchased from third parties, higher expenses incurred due to increased usage of the South African National Payment System by beneficiaries, and inflationary pressures on the cost base.

            Our selling, general and administration expense increased primarily due to an increase in our allowance for doubtful working capital finance receivables of $7.8 million, a $4.6 million non-cash loss on re-measurement of the previously held equity interest in DNI upon acquisition, the impact of October 2017 annual salary increases for our South African employees, an increase in our allowance for doubtful microlending finance loans receivable, and an increase in goods and services purchased from third parties. These increases were partially offset by lower agent incentive costs paid in Korea due to weaker trading conditions in fiscal 2018, lower executive remuneration and fewer transaction related expenses in fiscal 2018. In fiscal 2017, our selling, general and administration expense included an $8.0 million separation payment to our former chief executive officer, a $3.8 million allowance for credit losses related to a specific customer, and a $1.8 million reversal of stock-based compensation charges related to awards of restricted stock with performance conditions.

            Our operating income margin for fiscal 2018 and 2017 was 9.6% and 15.9%, respectively. Our fiscal 2018 margin was 14.6% excluding the $20.9 million impairment loss, the $7.8 million allowance for doubtful finance loans receivable, the $4.6 million DNI re-measurement and the $2.5 million South Korean indirect tax refund. Our fiscal 2017 margin was 17.5% excluding the $8.0 million separation payment to our former chief executive officer, the $3.8 million allowance for doubtful finance loans receivable and the $1.8 million stock-based compensation reversal. We discuss the components of operating income margin under “—Results of operations by operating segment.”

            Depreciation and amortization decreased primarily due to lower overall amortization of intangible assets that are fully amortized and tangible assets that are fully depreciated.

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            The change in fair value of equity securities represents the change in fair value of Cell C recorded during the year ended June 30, 2018.

            Interest on surplus cash decreased to $17.9 million (ZAR 227.1 million) from $20.9 million (ZAR 284.6 million), due primarily to lower average daily ZAR cash balances, partially offset by interest earned on the loan to Finbond and the listed Cedar Cellular note.

            Interest expense increased to $8.9 million (ZAR 113.5 million) from $3.5 million (ZAR 47.4 million), largely due to interest on the South African facility we obtained to partially fund our investment in Cell C and DNI, somewhat offset by a lower average long-term debt balance on our South Korean debt and a lower interest rate.

            Fiscal 2018 tax expense was $48.6 million (ZAR 616.9 million) compared to $42.5 million (ZAR 578.9 million) in fiscal 2017. Our effective tax rate for fiscal 2018 was 48.4% and higher than the South African statutory rate as a result of an impairment loss, a valuation allowance related to an allowance for doubtful working capital finance receivables created, the DNI re-measurement loss on acquisition, non-deductible expenses (including transaction-related expenditure and non-deductible interest on our South African long-term facility) and the impact of the changes in U.S. federal statutory tax law. Our effective tax rate for the fiscal 2017 was 37.1% and higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees) and the tax attributable to distributions from our South African subsidiary.

            Earnings from equity-accounted investments increased primarily due to the inclusion of our portion of earnings from DNI and Bank Frick and an increase, in USD, in Finbond’s net income. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first half and its annual results during our fourth quarter. The table below presents the relative earnings (loss) from our equity accounted investments:

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                     Results of operations by operating segment

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

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                     South African transaction processing

            In ZAR, the increase in revenue from our South African transaction processing segment was primarily due to higher EPE related fee and transaction revenue and increased inter-segment transaction processing activities, partially offset by a decline in the number of social welfare grants distributed. The March 2018 Constitutional Court order extended our grant distribution service only for grant recipients that are paid at cash pay-points and, therefore, on April 1, 2018, we introduced a monthly fee to recipients who continued to utilize the SASSA Grindrod card that was issued to them under our 2012 SASSA contract.

            Our operating income margin decreased as a result of the fees earned from SASSA and grant recipients on current pricing terms not being sufficient to cover CPS’ fixed cost to maintain the majority of its cash pay-points, as well as increases in goods and services purchased from third parties and annual salary increases granted to our South African employees. During fiscal 2018, we also recognized a $1.1 million impairment loss related to goodwill allocated to a business that ceased trading during the year. Operating income margin in our South African transaction processing segment for fiscal 2018 and 2017 was 16.0% and 23.8%, respectively.

                     International transaction-based activities

            Segment revenue was higher during fiscal 2018 due to an increase in processing activities, particularly related to Masterpayment’s cryptocurrency processing launched in December 2017, partially offset by the ongoing impact of regulatory changes in South Korea on KSNET’s revenue. Operating income during fiscal 2018 was lower due to an impairment loss of $19.9 million in respect of Masterpayment, an increase in our allowance for doubtful working capital finance receivable of $7.8 million and a decrease in profitability at KSNET, partially offset by an ad hoc refund of indirect taxes of $2.5 million in Korea. Operating income during fiscal 2017 included an allowance for doubtful working capital finance receivable of $3.8 million and a refund of approximately $0.8 million that had been paid several years ago in connection with industry-wide litigation in Korea that was finalized.

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            Operating income margin for fiscal 2018 and 2017 was (6.9%) and 7.8%, respectively. Excluding the Mastertrading allowance for doubtful working capital finance receivables, the impairment loss and the indirect taxes refund received, segment operating income and margin for fiscal 2018 were $12.6 million and 7.0%, respectively. Excluding the Mastertrading allowance for doubtful working capital finance receivables and the refund received, segment operating income and margin for fiscal 2017 were $16.7 million and 9.4% respectively.

                     Financial inclusion and applied technologies

            Segment revenue decreased primarily due to fewer prepaid airtime and other value added service sales and lower lending fees, partially offset by the introduction of monthly account fees to our card holders, increased volume from our insurance business and an increase in inter-segment revenues. Operating income was also impacted by an increase in the allowance for doubtful finance loans receivable due to the increase in our lending book and higher risks associated with the transition to the new social grant payment arrangements.

            Operating income margin for the Financial inclusion and applied technologies segment for fiscal 2018 and 2017 was 25.0% and 24.5%, respectively, and was impacted by fewer low margin prepaid product sales, increased revenue from our insurance business, the introduction of a monthly account fee and an increase in inter-segment revenues, partially offset by annual salary increases granted to our South African employees and inflationary cost pressures.

                     Corporate/ Eliminations

            Our corporate expenses have decreased primarily due to lower executive compensation, fewer transaction-related expenditures and a $0.5 million profit related to the sale of XeoHealth, partially offset by a $4.6 million non-cash loss on remeasurement of the previously held equity interest in DNI, higher stock-based compensation charges (net of reversals), additional directors’ fees and a modest increase in U.S. dollar denominated goods and services purchased from third parties. Our corporate expenses for fiscal 2017, included an $8.0 million separation payment made to our former chief executive officer and a $1.9 million reversal of stock-based compensation charges.

Liquidity and Capital Resources

            At June 30, 2019, our cash and cash equivalents were $46.1 million and comprised of KRW-denominated balances of KRW 30.1 billion ($26.1 million), ZAR-denominated balances of ZAR 184.3 million ($13.1 million), U.S. dollar-denominated balances of $2.4 million, and other currency deposits, primarily Botswana pula, of $4.5 million, all amounts translated at exchange rates applicable as of June 30, 2019. The decrease in our unrestricted cash balances from June 30, 2018, was primarily due to significantly weaker trading activities, scheduled debt repayments, dividend payments to non-controlling interests and capital expenditures, which was partially offset by cash dividends received from DNI and a decrease in our South African lending book.

            We generally invest any surplus cash held by our South African operations in overnight call accounts that we maintain at South African banking institutions, and any surplus cash held by our non-South African companies in U.S. dollar denominated money market accounts. We have invested surplus cash in Korea in KRW-denominated short-term investment accounts at Korean banking institutions.

            Historically, we have financed most of our operations, research and development, working capital, and capital expenditures, as well as acquisitions and strategic investments, through internally generated cash and our financing facilities. When considering whether to borrow under our financing facilities, we consider the cost of capital, cost of financing, opportunity cost of utilizing surplus cash and availability of tax efficient structures to moderate financing costs. Recently, we have been required to utilize our short-term financing facilities to fund our daily cash requirements as we adapt to the expiration of the SASSA contract in September 2018 and the transition of our business model. The board is actively managing our liquidity in the light of the significant changes underway in our business.

            Consideration of going concern

            Accounting guidance requires our management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after our audited consolidated financial statements are issued. Our management has identified certain conditions or events, which, considered in the aggregate, could raise substantial doubt about our ability to continue as a going concern including the risk that we will be unable to:

• deliver all or a substantial part of the financial results forecast in our fiscal 2020 budget;
• retain our existing borrowings and facilities, as described below and in Note 12 of our audited consolidated financial statements, or obtain additional borrowings and facilities on commercially reasonable terms;
• arrive at a commercial settlement with SASSA, given the September 30, 2019, Supreme Court ruling regarding the repayment of the additional implementation costs received back to SASSA (refer Note 13 of our audited consolidated financial statements) and the ongoing dispute we have with SASSA over fees due for the six-month contract extension period in accordance with National Treasury’s recommendation (refer Note 2—Revenue recognition—Significant judgments and estimates of our audited consolidated financial statements);

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• dispose of all or a portion of our remaining 30% interest in DNI. DNI’s operations are also significantly dependent on Cell C because it is the largest distributor of Cell C starter packs in South Africa. Therefore, the inability of Cell C to continue to operate through the next 12 months could also have an adverse impact on DNI’s operations; or
• dispose of investments in order to realize sufficient cash flows.

            Our management has implemented a number of plans to alleviate the substantial doubt about our ability to continue as a going concern. These plans include disposing of certain non-core assets (refer to Note 3 of our audited consolidated financial statements for additional information regarding a call option granted to DNI), engaging FT Partners to advise on the KSNET business, and extending our existing borrowings used to fund our ATMs through September 2020. In addition, our management believes there are a number of mitigating actions it can pursue, including (i) limiting the expansion of our microlending finance loans receivable book in South Africa; (ii) implementing further cost cutting measures; (iii) commencing additional asset realizations; (iv) managing our capital expenditures; and (v) accessing alternative sources of capital (including through the issuance of additional shares of our common stock), in order to generate additional liquidity. Our management believes that these actions alleviate the substantial doubt referred to above and, therefore, has concluded that we remain a going concern.

            Available short-term borrowings

            We have a short-term South African credit facility with Nedbank of up to ZAR 450.0 million ($32.0 million), which is comprised of an overdraft facility of (i) up to ZAR 300 million ($21.3 million), which is further split into (a) a ZAR 250.0 million ($17.8 million) overdraft facility which may only be used to fund ATMs used at pay points and (b) a ZAR 50 million ($3.6 million) general banking facility and (ii) indirect and derivative facilities of up to ZAR 150 million ($10.7 million), which include letters of guarantee, letters of credit and forward exchange contracts. The ZAR 250.0 million component of the primary amount may only be used to fund ATMs and therefore this component of the primary amount utilized and converted to cash to fund our ATMs is considered restricted cash. As of June 30, 2019, the interest rate on the overdraft facility was 9.10%, and was reduced to 8.85% on July 19, 2019, following a reduction in the South African repo rate. As of June 30, 2019, we had utilized approximately ZAR 82.9 million ($5.9 million) of our ZAR 250 million overdraft facility to fund ATMs and utilized none of our ZAR 50 million general banking facility. As of June 30, 2019, we had utilized approximately ZAR 93.6 million ($6.6 million) of the indirect and derivative facilities to support guarantees issued by Nedbank to various third parties on our behalf.

            We also have a short-term South African credit facility with RMB of ZAR 1.2 billion ($85.2 million) which may only be used to fund our ATMs in South Africa. As of June 30, 2019, the interest rate on the facility was 10.25% (South African prime) and was reduced to 10.00% on July 19, 2019, following a reduction in the South African repo rate. As of June 30, 2019, we had utilized approximately ZAR 1.0 billion ($69.6 million) of this facility.

            We have a short-term U.S. dollar-denominated overdraft facility with Bank Frick of $20.0 million. As of June 30, 2019, we had utilized approximately $9.5 million of this facility. The interest rate on the facility is 4.50% plus 3-month US dollar LIBOR and interest is payable on a quarterly basis. The 3-month US dollar LIBOR rate was 2.31988% on June 30, 2019. The facility has no fixed term, however, it may be terminated by either party with six weeks written notice.

            We also have a one-year KRW 10 billion ($8.6 million) short-term overdraft facility from Hana Bank, a South Korean bank. The interest rate on the facilities is 1.984% plus 3-month CD rate. The CD rate as of June 30, 2019 was 1.780% . The facility expires in January 2020, however can be renewed. The facility is unsecured with no fixed repayment terms. As of June 30, 2019, we had not utilized this facility.

            Available long-term borrowings

            We have no available or outstanding long-term borrowings as of June 30, 2019.

            Restricted cash

            We have credit facilities with RMB and Nedbank in order to access cash to fund our ATMs in South Africa. Our cash, cash equivalents and restricted cash presented in our audited statement of cash flows as of June 30, 2019, includes restricted cash of approximately $75.4 million related to cash withdrawn from our various debt facilities to fund ATMs. This cash may only be used to fund ATMs and is considered restricted as to use and therefore is classified as restricted cash on our audited consolidated balance sheet.

            Settlement assets and settlement liabilities

            As a transaction processor we receive cash from:

            •        customers on whose behalf we process off-payroll payments that we will disburse to customer employees, payroll-related payees and other payees designated by the customer; and

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            •        credit card companies (as well as other types of payment services) which have business relationships with merchants selling goods and services via the internet in South Korea and through Transact24 that are our customers and on whose behalf we process the transactions between various parties and settle the funds from the credit card companies to our merchant customers.

            These funds do not represent cash that is available to us and we present these funds, and the associated liability, outside of our current assets and liabilities on our consolidated balance sheet. Movements in these cash balances are presented in investing activities and movements in the obligations are presented in financing activities in our consolidated statement of cash flows.

            Cash flows from operating activities

            Net cash used in operating activities during fiscal 2019 was $4.5 million (ZAR 63.6 million) compared to net cash provided by operating activities of $132.3 million (ZAR 1.7 billion) for fiscal 2018. The decrease in cash provided is primarily due to significantly weaker trading activity during fiscal 2019 compared to 2018. During fiscal 2019 and 2018, we paid interest of $2.9 million related to our South African long-term borrowings.

            Cash flows from operating activities for fiscal 2018 increased to $132.3 million (ZAR 1.7 billion) from $97.2 million (ZAR 1.3 billion) for fiscal 2017. Excluding the impact of interest received, interest paid on our Korean and South Africa debt and taxes presented in the table below, the increase relates primarily to the receipt of certain working capital loans outstanding, offset partially by the expansion of our South African lending book and weaker trading activity during fiscal 2018 compared to 2017. During fiscal 2018, we paid interest of $7.2 million and $0.4 million, respectively, under our South African and South Korean debt facilities.

            During fiscal 2019, we made a first provisional tax payment of $6.4 million (ZAR 92.0 million) and a second provisional tax payment of $0.8 million (ZAR 11.0 million) related to our 2019 tax year in South Africa. We also paid taxes totaling $4.7 million in other tax jurisdictions, primarily South Korea.

            During fiscal 2018, we made a first provisional tax payment of $17.7 million (ZAR 231.2 million) and a second provisional tax payment of $17.0 million (ZAR 225.9 million) related to our 2018 tax year in South Africa. We also paid taxes totaling $4.9 million in other tax jurisdictions, primarily South Korea.

            During fiscal 2017, we made a first provisional tax payment of $18.2 million (ZAR 252.0 million) and a second provisional tax payment of $17.2 million (ZAR 221.7 million) related to our 2017 tax year in South Africa. We paid dividend withholding taxes of $1.5 million (ZAR 21.3 million). We also paid taxes totaling $8.1 million in other tax jurisdictions, primarily South Korea.

            Taxes paid during fiscal 2019, 2018 and 2017 were as follows:

            We expect to pay additional provisional payments in South Africa of approximately $0.8 million (ZAR 11.6 million translated at exchange rates applicable as of June 30, 2019) related to our 2019 tax year in the first quarter of fiscal 2020.

            Cash flows from investing activities

            During fiscal 2019, we paid approximately $9.4 million (ZAR 134.5 million), related to capital expenditures, primarily related to the acquisition of ATMs in South Africa and the expansion of our branch network. We also paid $2.5 million for a 50% interest in V2 Limited, acquired customer bases in DNI for $1.4 million, made a further equity contribution of $1.1 million to MobiKwik and received $1.0 million from Finbond related to the settlement of a ZAR 15.0 million loan outstanding.

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            During fiscal 2018, we paid approximately $151.0 million (ZAR 2.0 billion) for a 15% interest in Cell C, $88.7 million (ZAR 1.2 billion) for a 55% interest in DNI, $51.9 million for a 35% interest in Bank Frick, and $9.0 million for a 7.625% interest in a listed note. Fiscal 2018 includes capital expenditure of $9.7 million (ZAR 124.7 million), primarily for the acquisition of payment processing terminals in Korea and ATMs in South Africa.

            During fiscal 2017, we paid approximately $25.8 million for an approximate 13.5% interest in MobiKwik; provided a $10.0 million loan to Finbond; provided a $2.0 million loan to OneFi and paid approximately $2.9 million and $1.7 million, respectively, net of cash received, to acquire 100% of each of Ceevo FS and Pros Software’s ordinary shares. Fiscal 2017 includes capital expenditure of $11.2 million (ZAR 152.5 million), primarily for the acquisition of payment processing terminals in Korea. Our Korean capital expenditures have declined due to regulatory changes in South Korea, which prohibit the provision of payment equipment to the majority of merchants.

            Cash flows from financing activities

            During fiscal 2019, we utilized approximately $822.8 million from our overdraft facilities, primarily to fund our ATMs, and repaid $741.0 million of these facilities. We also utilized approximately $14.6 million of DNI’s revolving credit facility to lend funds to Cell C to finance the acquisition and/or requisition of telecommunication towers and other specific uses pre-approved by the lender. We also made scheduled South African debt facility payments of $31.8 million, repaid $4.9 million under DNI’s revolving credit facility and paid non-refundable origination fees of approximately $0.4 million related to the credit facilities. We also paid dividends of approximately $4.1 million to certain of our non-controlling interests, principally in DNI.

            During fiscal 2018, we utilized approximately $113.2 million (ZAR 1.46 billion) of our South African facility to partially fund our investments in Cell C and DNI and utilized approximately $0.3 million of our Korean facility to pay a portion of our quarterly interest due. We made accumulated scheduled South African debt facility payments of $60.5 million (ZAR 776.3 million) and made a $16.6 million payment to settle our outstanding South Korean debt facility in full. We also utilized $44.9 million of our overdraft facilities and repaid $62.9 million of these facilities.

            During fiscal 2017, we sold 5 million shares of our common stock for $45.0 million and received approximately $2.9 million from the exercise of stock options. We also paid approximately $45.3 million to repurchase 4,407,360 shares of our common stock and also paid $0.5 million, on July 1, 2016, related to settlement of amounts outstanding related to the repurchases at the end of June 2016. We also made a $28.5 million unscheduled repayment of our Korean debt, made a scheduled $7.4 million Korean debt repayment, utilized approximately $0.8 million of our Korean borrowings to pay quarterly interest due and utilized approximately $16.2 million of our CHF facilities. In addition, we paid a guarantee fee of $1.1 million related to a guarantee issued by RMB and paid a dividend of approximately $2.1 million to certain of our non-controlling interests.

Contractual Obligations

            The following table sets forth our contractual obligations as of June 30, 2019:

Off-Balance Sheet Arrangements

            We have no off-balance sheet arrangements.

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Capital Expenditures

            Capital expenditures for the years ended June 30, 2019, 2018 and 2017 were as follows:

            Our capital expenditures for fiscal 2019, 2018 and 2017, are discussed under “—Liquidity and Capital Resources—Cash flows from investing activities.”

            All of our capital expenditures for the past three fiscal years were funded through internally-generated funds. We had outstanding capital commitments as of June 30, 2019, of $2.0 million related mainly to ATMs required to maintain and expand our operations. We expect to fund these expenditures through internally-generated funds. In addition to these capital expenditures, we expect that capital spending for fiscal 2020 will also primarily relate to expanding our operations in South Africa.

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            We seek to manage our exposure to currency exchange, translation, interest rate, customer concentration, credit, and equity price and liquidity risks as discussed below.

            Currency Exchange Risk

            We are subject to currency exchange risk because we purchase inventories that we are required to settle in other currencies, primarily the euro and U.S. dollar. We have used forward contracts to limit our exposure in these transactions to fluctuations in exchange rates between the ZAR, on the one hand, and the U.S. dollar and the euro, on the other hand. We had no outstanding foreign exchange contracts as of June 30, 2019 and 2018, respectively.

            Translation Risk

            Translation risk relates to the risk that our results of operations will vary significantly as the U.S. dollar is our reporting currency, but we earn most of our revenues and incur most of our expenses in ZAR. The U.S. dollar to ZAR exchange rate has fluctuated significantly over the past three years. As exchange rates are outside our control, there can be no assurance that future fluctuations will not adversely affect our results of operations and financial condition.

            Interest Rate Risk

            As a result of our normal borrowing and lending activities, our operating results are exposed to fluctuations in interest rates, which we manage primarily through our regular financing activities. We generally maintain limited investments in cash equivalents and have occasionally invested in marketable securities. The interest earned on our bank balances and short-term cash investments is dependent on the prevailing interest rates in the jurisdictions where our cash reserves are invested. During the year ended June 30, 2019, we repaid our long-term borrowings in full.

            We have short-term borrowings which attract interest at rates that fluctuate based on changes in benchmark interest rates such as the South Africa prime interest rate and LIBOR. The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of June 30, 2019, as a result of changes in the South African prime interest rate, assuming hypothetical short-term borrowings of ZAR 1.0 billion as of June 30, 2019. The effect of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in the South African prime interest rate as of June 30, 2019, are shown. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.