LESAKA TECHNOLOGIES INC - Quarter Report: 2019 September (Form 10-Q)

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from  _________________To _________________

Commission file number: 000-31203

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

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 (check one) :

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]

As of November 4, 2019 (the latest practicable date), 56,568,425 shares of the registrant’s common stock, par value $0.001 per share, net of treasury shares, were outstanding.

Form 10-Q

NET 1 UEPS TECHNOLOGIES, INC.

Table of Contents

1

Part I. Financial Information

Item 1. Financial Statements

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

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

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

(A) Refer to Note 21 for discontinued operations disclosures.

See Notes to Unaudited Condensed Consolidated Financial Statements

3

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

See Notes to Unaudited Condensed Consolidated Financial Statements

4

NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statement of Changes in Equity

See Notes to Unaudited Condensed Consolidated Financial Statements

5

NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statement of Changes in Equity

See Notes to Unaudited Condensed Consolidated Financial Statements

6

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

See Notes to Unaudited Condensed Consolidated Financial Statements
(1) Cash, cash equivalents and restricted cash as of September 30, 2019, includes restricted cash of approximately $68.8 million related to cash withdrawn from the Company’s various debt facilities to fund ATMs. This cash may only be used to fund ATMs and is considered restricted as to use and therefore is classified as restricted cash. Refer to Note 9 for additional information regarding the Company’s facilities.

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NET 1 UEPS TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
for the three months ended September 30, 2019 and 2018
(All amounts in tables stated in thousands or thousands of U.S. dollars, unless otherwise stated)

1.      Basis of Presentation and Summary of Significant Accounting Policies

         Unaudited Interim Financial Information

        The accompanying unaudited condensed consolidated financial statements include all majority-owned subsidiaries over which the Company exercises control and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission for Quarterly Reports on Form 10-Q and include all of the information and disclosures required for interim financial reporting. The results of operations for the three months ended September 30, 2019 and 2018, are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.

       These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented.

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

       Consideration of going concern

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

• deliver all or a substantial part of the financial results forecast in its fiscal 2020 budget;
• retain its existing borrowings and facilities, as described in Note 9, or obtain additional borrowings and facilities on commercially reasonable terms;
• arrive at a commercial settlement with SASSA, given the September 30, 2019, Supreme Court of Appeal ruling regarding the repayment of the additional implementation costs received back to SASSA (refer Note 10) and the ongoing dispute the Company has with SASSA over fees due for the six-month contract extension period in accordance with National Treasury’s recommendation;
• dispose of all or a portion of its remaining 30% interest in DNI-4PL Contracts Proprietary Limited (“DNI”). DNI’s operations are also significantly dependent on Cell C because it is the largest distributor of Cell C starter packs in South Africa. Therefore, the inability of Cell C to continue to operate through the next 12 months could also have an adverse impact on DNI’s operations; or
• dispose of investments in order to realize sufficient cash flows.

        The Company’s management has implemented a number of plans to alleviate the substantial doubt about the Company’s ability to continue as a going concern. These plans include disposing of certain non-core assets (refer to Note 3 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2019, for additional information regarding a call option granted to DNI), engaging FT Partners to advise on the KSNET business, and extending its existing borrowings used to fund its ATMs through September 2020. In addition, the Company’s management believes it has a number of mitigating actions it can pursue, including (i) limiting the expansion of its microlending finance loans receivable book in South Africa; (ii) implementing further cost cutting measures; (iii) commencing additional asset realizations; (iv) managing our capital expenditures; and (v) accessing alternative sources of capital (including through the issuance of additional shares of its common stock), in order to generate additional liquidity. The Company’s management believes that these actions alleviate the substantial doubt referred to above and therefore have concluded that the Company remains a going concern.

         Recent accounting pronouncements adopted

        In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance regarding Leases. The guidance increases transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. The amendments to current lease guidance include the recognition of assets and liabilities by lessees for those leases currently classified as operating leases. The guidance also requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This guidance was effective for the Company beginning July 1, 2019. Refer to Note 17 for the impact of the adoption of this guidance on our condensed consolidated financial statements.

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

        In June 2016, the FASB issued guidance regarding Measurement of Credit Losses on Financial Instruments. The guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, an entity is required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. This guidance is effective for the Company beginning July 1, 2020. Early adoption is permitted beginning July 1, 2019. The Company is currently assessing the impact of this guidance on its financial statements and related disclosures.

        In August 2018, the FASB issued guidance regarding Disclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement. The guidance modifies the disclosure requirements related to fair value measurement. This guidance is effective for the Company beginning July 1, 2020. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.

2.    Accounts receivable, net and other receivables and finance loans receivable, net Accounts receivable, net and other receivables

        The Company’s accounts receivable, net, and other receivables as of September 30, 2019, and June 30, 2019, is presented in the table below:

        The loan provided to DNI was repaid in full in July 2019. Other receivables include prepayments, deposits and other receivables.

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2.    Accounts receivable, net and other receivables and finance loans receivable, net (continued)

        Finance loans receivable, net

        The Company’s finance loans receivable, net, as of September 30, 2019, and June 30, 2019, is presented in the table below:

3.    Inventory

         The Company’s inventory comprised the following categories as of September 30, 2019, and June 30, 2019.

        Finished goods subject to sale restrictions represent airtime inventory purchased and held for sale to customers that may only be sold by the Company after March 31, 2020, and only with the express permission of certain South African banks. As discussed in Note 9, the Company obtained additional borrowings from its existing bankers to purchase Cell C airtime from an independent distributor of Cell C airtime. The Company did not pay the vendor for the airtime inventory directly because the parties (the vendor, Cell C, the Company and certain South African banks) agreed that the Company would pay the amount to Cell C to settle amounts payable to Cell C by the vendor in order to inject additional liquidity into Cell C. The Company may not return any unsold airtime inventory to either the vendor or Cell C. The Company agreed to mandatory prepayment terms, which require the Company to use the proceeds from the sale of the airtime inventory to settle certain borrowings. For more information about the amended finance documents, refer to Note 9.

4.    Settlement assets and settlement obligations

        Settlement assets comprise (1) cash received from credit card companies (as well as other types of payment services) which have business relationships with merchants selling goods and services via the internet that are the Company’s customers and on whose behalf it processes the transactions between various parties, (2) cash received from customers on whose behalf the Company processes payroll payments that the Company will disburse to customer employees, payroll-related payees and other payees designated by the customer, and (3) cash received from the South African government that the Company holds pending disbursement to recipient cardholders of social welfare grants.

        Settlement obligations comprise (1) amounts that the Company is obligated to disburse to merchants selling goods and services via the internet that are the Company’s customers and on whose behalf it processes the transactions between various parties and settles the funds from the credit card companies to the Company’s merchant customers, (2) amounts that the Company is obligated to pay to customer employees, payroll-related payees and other payees designated by the customer, and (3) amounts that the Company is obligated to disburse to recipient cardholders of social welfare grants.

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

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5.   Fair value of financial instruments

         Initial recognition and measurement

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

         Risk management

        The Company manages its exposure to currency exchange, translation, interest rate, customer concentration, credit and equity price and liquidity risks as discussed below.

               Currency exchange risk

        The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and U.S. dollar. The Company has used forward contracts in order to limit its exposure in these transactions to fluctuations in exchange rates between the South African rand (“ZAR”), on the one hand, and the U.S. dollar and the euro, on the other hand.

               Translation risk

        Translation risk relates to the risk that the Company’s results of operations will vary significantly as the U.S. dollar is its reporting currency, but it earns a significant amount of its revenues and incurs a significant amount of its expenses in ZAR and Korean won (“KRW”). The U.S. dollar to both the ZAR and KRW exchange rates has fluctuated significantly over the past three years. As exchange rates are outside the Company’s control, there can be no assurance that future fluctuations will not adversely affect the Company’s results of operations and financial condition.

               Interest rate risk

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

               Credit risk

        Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties. The Company maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an evaluation of a potential counterparty’s financial condition, credit rating, and other credit criteria and risk mitigation tools as the Company’s management deems appropriate. With respect to credit risk on financial instruments, the Company maintains a policy of entering into such transactions only with South African, South Korean and European financial institutions that have a credit rating of “B” (or its equivalent) or better, as determined by credit rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings.

            Microlending credit risk

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

               Equity price risk

        Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities that it holds. The market price of these securities may fluctuate for a variety of reasons and, consequently, the amount that the Company may obtain in a subsequent sale of these securities may significantly differ from the reported market value.

               Equity liquidity risk

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

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5.    Fair value of financial instruments (continued)

        Financial instruments

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

        In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology would apply to Level 1 investments. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would be included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. Investments valued using such techniques are included in Level 3 investments.

         Asset measured at fair value using significant unobservable inputs – investment in Cell C

        The Company’s Level 3 asset represents an investment of 75,000,000 class “A” shares in Cell C, a significant mobile telecoms provider in South Africa. The Company used a discounted cash flow model developed by the Company to determine the fair value of its investment in Cell C as of June 30, 2019, and valued Cell C at $0.0 (zero) at September 30, 2019, and June 30, 2019. As of June 30, 2019, the Company changed its valuation methodology from a Company-developed adjusted EV/ EBITDA model to a discounted cash flow approach due to anticipated changes in Cell C’s business model and the current challenges faced by Cell C, which would not have been captured by the previous valuation approach. The Company believes the Cell C business plan utilized in the Company’s valuation is reasonable based on the current performance and the expected changes in Cell C’s business model.

        The Company utilized the latest business plan provided by Cell C management for the period ending December 31, 2024, and following key valuation inputs were used as of September 30, 2019 and June 30, 2019:

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

        The Company utilized the aforementioned adjusted EV/EBITDA multiple valuation model in order to determine the fair value of the Cell C shares as of September 30, 2018. The primary inputs to the valuation model as of September 30, 2018, were unchanged from June 30, 2018. The primary inputs to the valuation model were Cell C’s annualized adjusted EBITDA for the 11 months ended June 30, 2018, of ZAR 3.9 billion ($275.8 million, translated at exchange rates applicable as of September 30, 2018), an EBITDA multiple of 6.75, Cell C’s net external debt of ZAR 8.8 billion ($622.3 million, translated at exchange rates applicable as of September 30, 2018) and a marketability discount of 10% as Cell C is not currently listed. The EBITDA multiple was determined based on an analysis of Cell C’s peer group, which comprises various African and emerging market mobile telecommunications operators.

        The fair value of Cell C as of September 30, 2019, utilizing the discounted cash flow valuation model developed by the Company is sensitive to the following inputs: (i) the ability of Cell C to achieve the forecasts in their business case; (ii) the weighted average cost of capital (“WACC”) rate used; and (iii) the minority and marketability discount used. The utilization of different inputs, or changes to these inputs, may result in a significantly higher or lower fair value measurement.

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5.    Fair value of financial instruments (continued)

       Financial instruments (continued)

         Asset measured at fair value using significant unobservable inputs – investment in Cell C (continued)

        The following table presents the impact on the carrying value of the Company’s Cell C investment of a 1.5% increase and 1.5% decrease in the WACC rate and the EBITDA margins used in the Cell C valuation on September 30, 2019, all amounts translated at exchange rates applicable as of September 30, 2019:

(A) the carrying value of the Cell C investment is not impacted by a 1.0% increase or a 1.0% decrease and therefore the impact of a 1.5% increase and a 1.5% decrease is presented.

        The fair value of the Cell C shares as of September 30, 2019, represented approximately 0% of the Company’s total assets, including these shares. The Company expects to hold these shares for an extended period of time and that there will be short-term equity price volatility with respect to these shares particularly given the current situation of Cell C’s business.

           Liability measured at fair value using significant unobservable inputs – DNI contingent consideration as of September 30, 2018

        The salient terms of the Company’s investment in DNI are described in Note 3 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2019. Under the terms of its subscription agreements with DNI, the Company agreed to pay to DNI an additional amount of up to ZAR 400.0 million ($28.3 million, translated at exchange rates applicable as of September 30, 2018), in cash, subject to the achievement of certain performance targets by DNI. The Company expected to pay the additional amount during the first quarter of the year ended June 30, 2020, and recorded an amount of ZAR 379.6 million ($26.8 million) and ZAR 373.6 million ($27.2 million), in other payables in its unaudited condensed consolidated balance sheet as of September 30, 2018, and in long-term liabilities as of June 30, 2018, respectively, which amount represents the present value of the ZAR 400.0 million to be paid (amounts translated at exchange rates applicable as of September 30, 2018 and June 30, 2018, respectively). The amount was settled on March 31, 2019, as described in Note 3 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2019.

         Derivative transactions - Foreign exchange contracts

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

        The Company had no outstanding foreign exchange contracts as of September 30, 2019 and June 30, 2019, respectively.

        The following table presents the Company’s assets measured at fair value on a recurring basis as of September 30, 2019, according to the fair value hierarchy:

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5.    Fair value of financial instruments (continued)

        Financial instruments (continued)

        The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2019, according to the fair value hierarchy:

         There have been no transfers in or out of Level 3 during the three months ended September 30, 2019 and 2018, respectively.

        There was no movement in the carrying value of assets measured at fair value on a recurring basis, and categorized within Level 3, during the three months ended September 30, 2019. Summarized below is the movement in the carrying value of assets measured at fair value on a recurring basis, and categorized within Level 3, during the three months ended September 30, 2019:

     Summarized below is the movement in the carrying value of assets and liabilities measured at fair value on a recurring basis, and categorized within Level 3, during the three months ended September 30, 2018:

(1) The foreign currency adjustment represents the effects of the fluctuations of the South African rand and the U.S. dollar on the carrying value.

            Assets measured at fair value on a nonrecurring basis

        We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

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6.    Equity-accounted investments and other long-term assets

        Refer to Note 9 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2019, for additional information regarding its equity-accounted investments and other long-term assets.

        Equity-accounted   

        The Company’s ownership percentage in its equity-accounted investments as of September 30, 2019 and June 30, 2019, was as follows:

               DNI

        During the three months ended September 30, 2019, the Company recorded earnings from DNI that resulted in the carrying value of DNI exceeding the amount that the Company could receive pursuant to the call option granted to DNI in May 2019. The Company has recorded an impairment loss of $0.3 million which represents the difference between the amount that the Company could receive pursuant to the call option and DNI’s carrying value.

               Bank Frick

        On October 2, 2019, the Company exercised its option to acquire an additional 35% interest in Bank Frick from the Frick Foundation. The Company will pay an amount, the “Option Price Consideration”, for the additional 35% interest in Bank Frick, which represents the higher of CHF 46.4 million ($46.5 million at exchange rates on October 2, 2019) or 35% of 15 times the average annual normalized net income of the Bank over the two years ended December 31, 2018. The shares will only transfer on payment of the Option Price Consideration, which shall occur on the later of (i) 180 days after the date of exercise of the option; (ii) in the event of any regulatory approvals being required, 10 days after receipt of approval (either unconditionally or on terms acceptable to both parties); and (iii) 10 days after the date on which the Option Price Consideration is agreed or finally determined.

               Finbond

        As of September 30, 2019, the Company owned 268,820,933 shares in Finbond representing approximately 29.0% of its issued and outstanding ordinary shares. Finbond is listed on the Johannesburg Stock Exchange and its closing price on September 30, 2019, the last trading day of the month, was ZAR 3.34 per share. The market value of the Company’s holding in Finbond on September 30, 2019, was ZAR 0.9 billion ($59.2 million translated at exchange rates applicable as of September 30, 2019). On August 2, 2019, the Company, pursuant to its election, received an additional 1,148,901 shares in Finbond as a capitalization share issue in lieu of a dividend.

               V2 Limited

        In August 2019, the Company made a further equity contribution of $1.3 million to V2 Limited (“V2”). The Company has committed to provide V2 with a further equity contribution of $1.3 million and a working capital facility of $5.0 million, which are both subject to the achievement of certain pre-defined objectives.

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6.    Equity-accounted investments and other long-term assets (continued)

        Equity-accounted investments (continued)

        Summarized below is the movement in equity-accounted investments and loans provided to equity-accounted investments during the three months ended September 30, 2019:

(1) Includes Carbon, SmartSwitch Namibia, V2 and Walletdoc;
(2) The foreign currency adjustment represents the effects of the fluctuations of the South African rand, Swiss franc, Nigerian naira and Namibian dollar, and the U.S. dollar on the carrying value.

         Other long-term assets

         Summarized below is the breakdown of other long-term assets as of September 30, 2019, and June 30, 2019:

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6.    Equity-accounted investments and other long-term assets (continued)

       Other long-term assets (continued)

        Summarized below are the components of the Company’s equity securities without readily determinable fair value and held to maturity investments as of September 30, 2019:

        (A) The notes have been impaired as discussed in the Note 9 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2019.

        Summarized below are the components of the Company’s equity securities without readily determinable fair value and held to maturity investments as of June 30, 2019:

        No interest income from the Cedar Cellular note was recorded during the three months ended September 30, 2019. Interest income of $0.2 million related to the investment in Cedar Cellular notes for the three months ended September 30, 2018, were recorded in interest income in the consolidated statement of operations. Interest on this investment will only be paid, at Cedar Cellular’s election, on maturity in August 2022.

         Contractual maturities of held to maturity investments

         Summarized below is the contractual maturity of the Company’s held to maturity investment as of September 30, 2019:

           (1) The estimated fair value of the Cedar Cellular note has been calculated utilizing the Company’s portion of the security provided to the Company by Cedar Cellular, namely, Cedar Cellular’s investment in Cell C. 
           (2) The cost basis is zero ($0.0 million).

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7.    Goodwill and intangible assets, net

       Goodwill

       Summarized below is the movement in the carrying value of goodwill for the three months ended September 30, 2019:

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

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

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

       Intangible assets

         Carrying value and amortization of intangible assets

        Summarized below is the carrying value and accumulated amortization of the intangible assets as of September 30, 2019 and June 30, 2019:

        Aggregate amortization expense on the finite-lived intangible assets for the three months ended September 30, 2019 and 2018, was approximately $1.9 million and $6.0 million, respectively.

        Future estimated annual amortization expense for the next five fiscal years and thereafter, assuming exchange rates that prevailed on September 30, 2019, is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a result of acquisitions, changes in useful lives, exchange rate fluctuations and other relevant factors.

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8.    Reinsurance assets and policyholder liabilities under insurance and investment contracts

       Reinsurance assets and policyholder liabilities under insurance contracts

        Summarized below is the movement in reinsurance assets and policyholder liabilities under insurance contracts during the three months ended September 30, 2019:

(1) Included in other long-term assets.
(2) Included in other long-term liabilities.
(3) Represents the effects of the fluctuations between the ZAR and the U.S. dollar.

        The Company has agreements with reinsurance companies in order to limit its losses from large insurance contracts, however, if the reinsurer is unable to meet its obligations, the Company retains the liability. The value of insurance contract liabilities is based on the best estimate assumptions of future experience plus prescribed margins, as required in the markets in which these products are offered, namely South Africa. The process of deriving the best estimates assumptions plus prescribed margins includes assumptions related to claim reporting delays (based on average industry experience).

       Assets and policyholder liabilities under investment contracts

        Summarized below is the movement in assets and policyholder liabilities under investment contracts during the three months ended September 30, 2019:

(1) Included in other long-term assets.
(2) Included in other long-term liabilities.
(3) Represents the effects of the fluctuations between the ZAR and the U.S. dollar.

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

9.    Borrowings

        Refer to Note 12 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2019, for additional information regarding its borrowings.

         South Africa

         The amounts below have been translated at exchange rates applicable as of the dates specified.

            July 2017 Facilities, as amended, comprising a short-term facility and long-term borrowings

               Short-term facility - Facility E

        On September 26, 2018, Net1 SA further revised its amended July 2017 Facilities agreement with RMB to include an overdraft facility (“Facility E”) of up to ZAR 1.5 billion ($106.5 million, translated at exchange rates applicable as of June 30, 2019) to fund the Company’s ATMs. The available Facility E overdraft facility was subsequently reduced to ZAR 1.2 billion ($85.2 million) in September 2019. Interest on the overdraft facility is payable on the last day of each month and on the final maturity date based on South African prime rate. The overdraft facility will be reviewed in September 2020. The overdraft facility amount utilized must be repaid in full within one month of utilization and at least 90% of the amount utilized must be repaid with 25 days. The overdraft facility is secured by a pledge by Net1 SA of, among other things, cash and certain bank accounts utilized in the Company’s ATM funding process, the cession of an insurance policy with Senate Transit Underwriters Managers Proprietary Limited, and any rights and claims Net1 SA has against Grindrod Bank Limited. As at September 30, 2019, the Company had utilized approximately ZAR 0.9 billion ($62.6 million) of this overdraft facility.

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9.    Borrowings (continued)

        This ZAR 1.2 billion overdraft facility may only be used to fund ATMs and therefore the overdraft utilized and converted to cash to fund the Company’s ATMs is considered restricted cash. The prime rate on September 30, 2019, was 10.00% .

               Short-term facility - Facility F

        On September 4, 2019, Net1 SA further amended its amended July 2017 Facilities agreement with RMB and Nedbank to include an overdraft facility (“Facility F”) of up to ZAR 300.0 million ($21.3 million, translated at exchange rates applicable as of September 30, 2019) for the sole purposes of funding the acquisition of airtime from Cell C. Net1 SA may not dispose of the airtime acquired from Cell C prior to April 1, 2020, without the prior consent of RMB, Absa Bank Limited and Investec Asset Management Proprietary Limited. Facility F comprises (i) a first Senior Facility F loan of ZAR 220 million (ii) a second Senior Facility F loan of ZAR 80 million, or such lesser amount as may be agreed by the facility agent. Facility F is required to be repaid in full within nine months following the first utilization of the facility. Net1 SA is required to prepay Facility F subject to customary prepayment terms. Interest on Facility F is based JIBAR plus a margin of 5.50% per annum and is due in full on repayment of the loan. JIBAR was 6.79% on September 30, 2019. The margin on the Facility F will increase by 1% per annum if Net1 SA has not disposed of certain assets by October 31, 2019, and will increase by a further 1% if Net1 SA has not disposed of its shareholding in DNI by January 31, 2020. Net1 SA paid a non-refundable structuring fee of ($0.1 million) ZAR 2.2 million to the Lenders in September 2019, and the Company expensed this amount in full during the first quarter of fiscal 2020.

            Nedbank facility, comprising short-term facilities

        As of September 30, 2019, the aggregate amount of the Company’s short-term South African credit facility with Nedbank Limited was ZAR 450.0 million ($29.7 million). The credit facility comprises an overdraft facility of (i) up to ZAR 300 million ($19.8 million), which is further split into (a) a ZAR 250.0 million ($16.5 million) overdraft facility which may only be used to fund ATMs used at pay points and (b) a ZAR 50 million ($3.3 million) general banking facility and (ii) indirect and derivative facilities of up to ZAR 150 million ($9.9 million), which include letters of guarantees, letters of credit and forward exchange contracts. The ZAR 250.0 million component of the primary amount may only be used to fund ATMs and therefore this component of the primary amount utilized and converted to cash to fund the Company’s ATMs is considered restricted cash.

        As of September 30, 2019, the Company has utilized approximately ZAR 94.4 million ($6.2 million) of its ZAR 250 million overdraft facility to fund ATMs, and ZAR 53.8 million ($3.6 million) of its ZAR 50 million general banking facility. On October 1, 2019, the Company reduced the amount drawn under the general banking facility to fall within the ZAR 50.0 million limitation. As of September 30, 2019 and June 30, 2019, the Company had utilized approximately ZAR 93.6 million ($6.2 million) and ZAR 93.6 million ($6.6 million), respectively, of its indirect and derivative facilities of ZAR 150 million to enable the bank to issue guarantees, letters of credit and forward exchange contracts, in order for the Company to honor its obligations to third parties requiring such guarantees (refer to Note 20).

         United States, a short-term facility

        On September 14, 2018, the Company renewed its $10.0 million overdraft facility from Bank Frick and on February 4, 2019, the Company increased the overdraft facility to $20.0 million. The interest rate on the facilities is 4.50% plus 3-month US dollar LIBOR and interest is payable on a quarterly basis. The 3-month US dollar LIBOR rate was 2.09% on September 30, 2019. The facility has no fixed term, however, it may be terminated by either party with six weeks written notice. The facility is secured by a pledge of the Company’s investment in Bank Frick. As of September 30, 2019, the Company had utilized approximately $6.7 million of this facility.

         South Korea, a short-term facility

        The Company obtained a one-year KRW 10 billion ($8.6 million) short-term overdraft facility from Hana Bank, a South Korean bank, in January 2019. The interest rate on the facilities is 1.98% plus 3-month CD rate. The CD rate as of September 30, 2019, was 1.55% . The facility expires in January 2020, however it can be renewed. The facility is unsecured with no fixed repayment terms. As of September 30, 2019, the Company had not utilized this facility.

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9.    Borrowings (continued)

       Movement in short-term credit facilities

        Summarized below are the Company’s short-term facilities as of September 30, 2019, and the movement in the Company’s short-term facilities from as of June 30, 2019 to as of September 30, 2019:

(1) Represents the effects of the fluctuations between the ZAR and the U.S. dollar.
(2) Nedbank balance as of September 30, 2019, of $9.8 million comprises the net of total overdraft facilities withdrawn of $24.4 million offset against funds in bank accounts with Nedbank of $14.6 million.

           Overdraft restricted as to use for ATM 

           Movement in long-term borrowings

           Summarized below is the movement in the Company’s long term borrowing from as of June 30, 2019, to as of September 30, 2019:

           Interest expense incurred under the Company’s South African long-term borrowing during the three months ended September 30, 2019 and 2018, was $0.6 million and $1.1 million, respectively. The prepaid facility fees amortization charged included in interest expense during the three months ended September 30, 2018, was $0.1 million.

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10.  OTHER PAYABLES

       Summarized below is the breakdown of other payables as of September 30, 2019 and June 30, 2019:

        Refer to Note 13 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2019, for additional information regarding Accrual of implementation costs to be refunded to SASSA. As of September 30, 2019, this accrual of $32.2 million (ZAR 487.5 million, translated at exchange rates applicable as of September 30, 2019, comprised a revenue refund of $18.3 million (ZAR 277.6 million), accrued interest of $11.2 million (ZAR 169.8 million), unclaimed indirect taxes of $2.6 million (ZAR 39.4 million) and estimated costs of $0.1 million (ZAR 1.4 million)). As of September 30, 2019, this accrual of $34.0 million (ZAR 479.4 million, translated at exchange rates applicable as of June 30, 2019, comprised 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)).

       Other includes transactions-switching funds payable, deferred income, client deposits and other payables.

11.   Capital structure

        The following table presents a reconciliation between the number of shares, net of treasury, presented in the unaudited condensed consolidated statement of changes in equity during the three months ended September 30, 2019 and 2018, respectively, and the number of shares, net of treasury, excluding non-vested equity shares that have not vested during the three months ended September 30, 2019 and 2018, respectively:

12.    Accumulated other comprehensive loss

        The table below presents the change in accumulated other comprehensive (loss) income per component during the three months ended September 30, 2019:

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12.    Accumulated other comprehensive loss

         The table below presents the change in accumulated other comprehensive (loss) income per component during the three months ended September 30, 2018:

         There were no reclassifications from accumulated other comprehensive loss to net (loss) income during the three months ended September 30, 2019 or 2018.

13.    Stock-based compensation

          Stock option and restricted stock activity

               Options

         The following table summarizes stock option activity for the three months ended September 30, 2019 and 2018:

           No stock options were awarded during the three months ended September 30, 2019. During the three months ended September 30, 2018, 600,000 stock options were awarded to executive officers and employees. No stock options were forfeited during the three months ended September 30, 2019. During the three months ended September 30, 2018, executive officers forfeited 200,000 stock options granted in August 2008, with a strike price of $24.46 per share, as these stock options expired unexercised. On October 14, 2019, the Company awarded 561,000 stock options to employees with a strike price of $3.07 per share. The Company has not yet completed its fair value calculation related to this award.

        The fair value of each option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the assumptions noted in the following table. The estimated expected volatility is calculated based on the Company’s 750-day volatility. The estimated expected life of the option was determined based on historical behavior of employees who were granted options with similar terms.

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13.    Stock-based compensation (continued)

          Stock option and restricted stock activity (continued)

               Options (continued)

           The table below presents the range of assumptions used to value options granted during the three months ended September 30, 2018:

          The following table presents stock options vested and expected to vest as of September 30, 2019:

         These options have an exercise price range of $6.20 to $11.23.

         The following table presents stock options that are exercisable as of September 30, 2019:

           During the three months ended September 30, 2019, 170,335 stock options became exercisable. No stock options became exercisable during the three months ended September 30, 2018. The Company issues new shares to satisfy stock option exercises.

            Restricted stock

         The following table summarizes restricted stock activity for the three months ended September 30, 2019 and 2018:

           The September 2018 grants comprise 148,000 shares of restricted stock awarded to executive officers that are subject to market and time-based vesting. During the three months ended September 30, 2018, 52,594 shares of restricted stock granted to non-employee directors vested.

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13.    Stock-based compensation (continued)

          Stock option and restricted stock activity (continued)

              Restricted stock (continued)

                  Market Conditions - Restricted Stock Granted in September 2018

        The 148,000 shares of restricted stock awarded to executive officers in September 2018 are subject to time-based and performance-based (a market condition) vesting conditions and vest in full only on the date, if any, that the following conditions are satisfied: (1) the price of the Company’s common stock must equal or exceed certain agreed VWAP levels (as described below) during a measurement period commencing on the date that it files its Annual Report on Form 10-K for the fiscal year ended 2021 and ending on December 31, 2021 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited. The $23.00 price target represents an approximate 55% increase, compounded annually, in the price of the Company’s common stock on Nasdaq over the $6.20 closing price on September 7, 2018. The VWAP levels and vesting percentages related to such levels are as follows:

• Below $15.00 (threshold)—0%
• At or above $15.00 and below $19.00—33%
• At or above $19.00 and below $23.00—66%
• At or above $23.00—100%

        The fair value of these shares of restricted stock was calculated using a Monte Carlo simulation of a stochastic volatility process. The choice of a stochastic volatility process as an extension to the standard Black Scholes process was driven by both observations of larger than expected moves in the daily time series for the Company’s VWAP price, but also the observation of the strike structure of volatility (i.e. skew and smile) for out-of-the money calls and out-of-the money puts versus at-the-money options for both the Company’s stock and NASDAQ futures.

        In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the final vested value on maturity is the share price on vesting date. In its calculation of the fair value of the restricted stock, the Company used an average volatility of 37.4% for the VWAP price, a discounting based on USD overnight indexed swap rates for the grant date, and no future dividends. The average volatility was extracted from the time series for VWAP prices as the standard deviation of log prices for the three years preceding the grant date. The mean reversion of volatility and the volatility of volatility parameters of the stochastic volatility process were extracted by regressing log differences against log levels of volatility from the time series for at-the-money options 30-day volatility quotes, which were available from January 2, 2018 onwards.

                  Market Conditions - Restricted Stock Granted in August 2017

        The 210,000 shares of restricted stock awarded to executive officers in August 2017 are subject to time-based and performance-based (a market condition) vesting conditions and vest in full only on the date, if any, that the following conditions are satisfied: (1) the price of the Company’s common stock must equal or exceed certain agreed VWAP levels (as described below) during a measurement period commencing on the date that it files its Annual Report on Form 10-K for the fiscal year ended 2020 and ending on December 31, 2020 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited. The $23.00 price target represents an approximate 35% increase, compounded annually, in the price of the Company’s common stock on Nasdaq over the $9.38 closing price on August 23, 2017. The VWAP levels and vesting percentages related to such levels are as follows:

• Below $15.00 (threshold)—0%
• At or above $15.00 and below $19.00—33%
• At or above $19.00 and below $23.00—66%
• At or above $23.00—100%

        These 210,000 shares of restricted stock are effectively forward starting knock-in barrier options with multi-strike prices of zero. The fair value of these shares of restricted stock was calculated utilizing a Monte Carlo simulation model which was developed for the purpose of the valuation of these shares. For each simulated share price path, the market share price condition was evaluated to determine whether or not the shares would vest under that simulation. A standard Geometric Brownian motion process was used in the forecasting of the share price instead of a “jump diffusion” model, as the share price volatility was more stable compared to the highly volatile regime of previous years. Therefore, the simulated share price paths capture the idiosyncrasies of the observed Company share price movements.

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13.    Stock-based compensation (continued)

          Stock option and restricted stock activity (continued)

            Restricted stock (continued)