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

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 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)

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically 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):

[   ] Large accelerated filer [X ] Accelerated filer
[   ] Non-accelerated filer [   ] Smaller reporting company
  [   ] Emerging growth company

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 ]

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

    Name of each exchange
Title of each class Trading Symbol(s) on which registered
Common stock, par value $0.001 per share UEPS NASDAQ Global Select Market
Common stock, par value $0.001 per share NT1 Johannesburg Stock Exchange

As of May 6, 2019 (the latest practicable date), 56,815,925 shares of the registrant’s common stock, par value $0.001 per share, net of treasury shares, were outstanding.


Form 10-Q

NET 1 UEPS TECHNOLOGIES, INC.

Table of Contents

    Page No.
PART I. FINANCIAL INFORMATION  
     Item 1. Financial Statements  
  Unaudited Condensed Consolidated Balance Sheets at March 31, 2019 and June 30, 2018 2
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2019 and 2018 (as restated) 3
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2019 and 2018 (as restated) 4
Unaudited Condensed Consolidated Statement of Changes in Equity for the three and nine months ended March 31, 2019 and 2018 (as restated) 5
Unaudited Condensed Consolidated Statements of Cash Flows for the three and nine months ended March 31, 2019 and 2018 (as restated) 7
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 45
     Item 3. Quantitative and Qualitative Disclosures About Market Risk 65
     Item 4. Controls and Procedures 65
PART II. OTHER INFORMATION  
     Item 1. Legal Proceedings 66
     Item 1A. Risk Factors 67
     Item 6. Exhibits 68
     Signatures   68
     EXHIBIT 10.102  

1


Part I. Financial Information

Item 1. Financial Statements

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

    March 31,     June 30,  
    2019     2018(A)
    (In thousands, except share data)  
ASSETS    
CURRENT ASSETS            
     Cash and cash equivalents $  48,757   $  87,075  
     Restricted cash (Note 11)   74,181     -  
     Pre-funded social welfare grants receivable (Note 3)   -     2,965  
     Accounts receivable, net and other receivables (Note 4)   80,150     93,448  
     Finance loans receivable, net (Note 4)   25,217     61,463  
     Inventory (Note 5)   7,861     10,361  
     Current assets of discontinued operation (Note 2)   -     22,482  
          Total current assets before settlement assets   236,166     277,794  
                     Settlement assets (Note 6)   66,222     149,047  
                                Total current assets   302,388     426,841  
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of – March: $131,212; June: $126,026   19,889     25,737  
EQUITY-ACCOUNTED INVESTMENTS (Note 2 and Note 8)   167,497     87,992  
GOODWILL (Note 2 and Note 9)   156,499     169,079  
INTANGIBLE ASSETS, net (Note 2 and Note 9)   15,719     27,129  
DEFERRED INCOME TAXES   2,862     5,751  
OTHER LONG-TERM ASSETS, including reinsurance assets (Note 8 and Note 10)   174,903     235,032  
LONG-TERM ASSETS OF DISCONTINUED OPERATION (Note 2 and Note 8)   -     241,729  
     TOTAL ASSETS   839,757     1,219,290  
LIABILITIES    
CURRENT LIABILITIES            
     Short-term credit facilities for ATM funding (Note 11)   74,181     -  
     Short-term credit facilities (Note 11)   8,865     -  
     Accounts payable   14,743     21,106  
     Other payables   37,936     41,645  
     Current portion of long-term borrowings (Note 2 and Note 11)   15,823     44,079  
     Income taxes payable   4,958     5,742  
     Current liabilities of discontinued operation (Note 2)   -     20,914  
             Total current liabilities before settlement obligations   156,506     133,486  
                     Settlement obligations (Note 6)   66,222     149,047  
                              Total current liabilities   222,728     282,533  
DEFERRED INCOME TAXES (Note 2)   6,299     17,485  
LONG-TERM BORROWINGS (Note 11)   -     5,469  
OTHER LONG-TERM LIABILITIES, including insurance policy liabilities (Note 10)   2,273     30,289  
LONG-TERM LIABILITIES OF DISCONTINUED OPERATION (Note 2)   -     37,412  
     TOTAL LIABILITIES   231,300     373,188  
COMMITMENTS AND CONTINGENCIES            
REDEEMABLE COMMON STOCK   107,672     107,672  
EQUITY    
COMMON STOCK (Note 12)
     Authorized: 200,000,000 with $0.001 par value;
     Issued and outstanding shares, net of treasury - March: 56,815,925; June: 56,685,925
 

80
   

80
 
PREFERRED STOCK
     Authorized shares: 50,000,000 with $0.001 par value;
     Issued and outstanding shares, net of treasury: March: -; June: -
 

-
   

-
 
ADDITIONAL PAID-IN-CAPITAL   277,950     276,201  
TREASURY SHARES, AT COST: March: 24,891,292; June: 24,891,292   (286,951 )   (286,951 )
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 2 and Note 13)   (204,338 )   (184,436 )
RETAINED EARNINGS   713,701     837,625  
     TOTAL NET1 EQUITY   500,442     642,519  
     NON-CONTROLLING INTEREST   343     95,911  
          TOTAL EQUITY   500,785     738,430  
                 TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS’ EQUITY $  839,757   $  1,219,290  

(A) – Derived from audited financial statements filed on Form 10-K/A on December 6, 2018 (Note 1) See Notes to Unaudited Condensed Consolidated Financial Statements

2



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

    Three months ended       Nine months ended  
    March 31,       March 31,  
    2019A       2018       2019A       2018  
            (As restatedAB)               (As restatedAB)  
    (In thousands, except per share data)       (In thousands, except per share data)  
REVENUE $  86,484     $  162,721     $  309,518     $  463,695  
EXPENSE                              
         Cost of goods sold, IT processing, servicing and support   50,179       77,860       173,680       226,506  
         Selling, general and administration   42,802       48,091       155,676       141,417  
         Depreciation and amortization   9,881       9,341       30,528       27,030  
         Impairment loss (Note 9)   5,305       19,865       13,496       19,865  
OPERATING (LOSS) INCOME   (21,683 )     7,564       (63,862 )     48,877  
CHANGE IN FAIR VALUE OF EQUITY SECURITIES (Note 7 and 8)   (26,263 )     37,843       (42,099 )     37,843  
LOSS ON DISPOSAL OF DNI (Note 2)   5,140       -       5,140       -  
INTEREST INCOME, net of impairment (Note 8)   (959 )     5,154       586       14,903  
INTEREST EXPENSE   3,493       2,426       9,030       6,872  
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE   (57,538 )     48,135       (119,545 )     94,751  
INCOME TAX (BENEFIT) EXPENSE (Note 19)   (2,490 )     19,418       1,702       39,757  
NET (LOSS) INCOME BEFORE EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS   (55,048 )     28,717       (121,247 )     54,994  
(LOSS) EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS   (464 )     3,960       (338 )     7,389  
NET (LOSS) INCOME   (55,512 )     32,677       (121,585 )     62,383  
         Continuing   (50,784 )     29,386       (124,275 )     57,181  
         Discontinued   (4,728 )     3,291       2,690       5,202  
(ADD) LESS NET (LOSS) INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST   (728 )     302       2,339       903  
         Continuing   (485 )     302       (1,362 )     903  
         Discontinued   (243 )     -       3,701       -  
NET (LOSS) INCOME ATTRIBUTABLE TO NET1    (54,784 )      32,375        (123,924 )      61,480  
         Continuing   (50,299 )     29,084       (122,913 )     56,278  
         Discontinued $ (4,485 )   $ 3,291     $ (1,011 )   $ 5,202  
Net (loss) income per share, in U.S. dollars (Note 15)                              
         Basic (loss) earnings attributable to Net1 shareholders $ (0.96 )   $ 0.57     $ (2.18 )   $ 1.08  
                   Continuing $ (0.88 )   $ 0.51     $ (2.16 )   $ 1.02  
                   Discontinued $ (0.08 )   $ 0.06     $ (0.02 )   $ 0.06  
         Diluted (loss) earnings attributable to Net1 shareholders $ (0.96 )   $ 0.57     $ (2.18 )   $ 1.08  
                   Continuing $ (0.88 )   $ 0.51     $ (2.16 )   $ 1.02  
                   Discontinued $ (0.08 )   $ 0.06     $ (0.02 )   $ 0.06  

(A) Refer to Note 2 for discontinued operations disclosures.
(B) Refer to Note 1.

See Notes to Unaudited Condensed Consolidated Financial Statements

3



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

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2019     2018     2019     2018  
          (As restatedA )           (As restatedA )  
    (In thousands)     (In thousands)  
                         
Net (loss) income $  (55,512 ) $ 32,677   $ (121,585 ) $ 62,383  
                         
Other comprehensive (loss) income                        
         Movement in foreign currency translation reserve   (8,351 )   20,683     (32,026 )   60,320  
         Release of foreign currency translation reserve related to disposal of DNI (Note 2 and Note 13)   1,806     -     1,806     -  
         Movement in foreign currency translation reserve related to equity-accounted investments   -     -     5,430     (227 )
                 Total other comprehensive (loss) income, net of taxes   (6,545 )   20,683     (24,790 )   60,093  
                         
             Comprehensive (loss) income   (62,057 )   53,360     (146,375 )   122,476  
                   Add (Less) comprehensive loss (income) attributable to non-controlling interest   1,207     (473 )   2,549     (1,274 )
                       Comprehensive (loss) income attributable to Net1 $  (60,850 ) $  52,887   $  (143,826 ) $  121,202  

(A) Refer to Note 1.

See Notes to Unaudited Condensed Consolidated Financial Statements

4



NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statement of Changes in Equity
 
             Net 1 UEPS Technologies, Inc. Shareholders

                                              Accumulated     Total                    
                Number                       Retained     Other     Net1                    
    Number           of           Number of     Additional     Earnings     Comprehensive     Equity     Non-     Total     Redeemable  
    of           Treasury     Treasury     Shares, Net     Paid-In     (As     (Loss) Income     (As     Controlling     (As     Common  
    Shares     Amount     Shares     Shares     of Treasury     Capital     restatedA )     (As restatedA )     restatedA )     Interest     restatedA )     Stock  
   For the three months ended March 31, 2018 (dollar amounts in thousands)      
Balance – January 1, 2018   81,723,662   $ 80     (24,891,292 ) $ (286,951 )   56,832,370   $ 274,961   $ 802,381   $ (123,359 ) $ 667,112   $ 3,567   $ 670,679   $ 107,672  
Restricted stock granted (Note 14)   22,817                       22,817                       -                    
Stock-based compensation charge (Note 14)                       575             575         575      
Net income                                       32,375           32,375     302     32,677        
Other comprehensive income (Note 13)                               20,512     20,512     171     20,683      
Balance – March 31, 2018   81,746,479   $ 80     (24,891,292 ) $ (286,951 )   56,855,187   $ 275,536   $ 834,756   $ (102,847 ) $ 720,574   $ 4,040   $ 724,614   $ 107,672  
   For the nine months ended March 31, 2018 (dollar amounts in thousands)      
Balance – July 1, 2017   81,261,029   $ 80     (24,891,292 ) $ (286,951 )   56,369,737   $ 273,733   $ 773,276   $ (162,569 ) $ 597,569   $ 2,766   $ 600,335   $ 107,672  
Restricted stock granted (Note 14)   611,411                       611,411                       -           -        
Stock-based compensation charge (Note 14)                       2,052             2,052         2,052      
Reversal of stock compensation charge (Note 14)   (125,961 )               (125,961 )   (42 )           (42 )       (42 )    
Reversal of stock based- compensation charge related to equity-accounted investment                       (207 )           (207 )       (207 )    
Net income                                       61,480           61,480     903     62,383        
Other comprehensive income (Note 13)                               59,722     59,722     371     60,093      
Balance – March 31, 2018   81,746,479   $ 80     (24,891,292 ) $ (286,951 )   56,855,187   $ 275,536   $ 834,756   $ (102,847 ) $ 720,574   $ 4,040   $ 724,614   $ 107,672  

(A) Refer to Note 1.

See Notes to Unaudited Condensed Consolidated Financial Statements

5



NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statement of Changes in Equity
 
           Net 1 UEPS Technologies, Inc. Shareholders

                Number                             Accumulated                          
    Number           of           Number of     Additional           Other     Total     Non-           Redeemable  
    of           Treasury     Treasury     Shares, Net     Paid-In     Retained     Comprehensive     Net1     Controlling           Common  
    Shares     Amount     Shares     Shares     of Treasury     Capital     Earnings     (Loss) Income     Equity     Interest     Total     Stock  
   For the three months ended March 31, 2019 (dollar amounts in thousands)      
Balance – January 1, 2019   81,725,217   $ 80     (24,891,292 ) $ (286,951 )   56,833,925   $ 277,463   $ 768,485   $ (198,272 ) $ 560,805   $ 91,632   $ 652,437   $ 107,672  
Stock-based compensation charge (Note 14)                       578             578         578      
Reversal of stock compensation charge (Note 14)   (18,000 )               (18,000 )   (91 )           (91 )       (91 )    
Dividends paid to non-controlling interest                                   -     (1,148 )   (1,148 )    
Deconsolidation of DNI (Note 2)                                                   -     (88,934 )   (88,934 )      
Net loss                                       (54,784 )         (54,784 )   (728 )   (55,512 )      
Other comprehensive loss (Note 13)                                             (6,066 )   (6,066 )   (479 )   (6,545 )      
Balance – March 31, 2019   81,707,217   $ 80     (24,891,292 ) $ (286,951 )   56,815,925   $ 277,950   $ 713,701   $ (204,338 ) $ 500,442   $ 343   $ 500,785   $ 107,672  
   For the nine months ended March 31, 2019 (dollar amounts in thousands)      
Balance – July 1, 2018   81,577,217   $ 80     (24,891,292 ) $ (286,951 )   56,685,925   $ 276,201   $ 837,625   $ (184,436 ) $ 642,519   $ 95,911   $ 738,430   $ 107,672  
Restricted stock granted (Note 14)   148,000                       148,000                       -           -        
Stock-based compensation charge (Note 14)                       1,763             1,763         1,763      
Reversal of stock compensation charge (Note 14)   (18,000 )               (18,000 )   (91 )           (91 )       (91 )    
Stock-based compensation charge related to equity-accounted investment (Note 8)                       77             77         77      
Dividends paid to non-controlling interest                                   -     (4,085 )   (4,085 )    
Deconsolidation of DNI (Note 2)                                                   -     (88,934 )   (88,934 )      
Net (loss) income                                       (123,924 )         (123,924 )   2,339     (121,585 )      
Other comprehensive loss (Note 13)                                             (19,902 )   (19,902 )   (4,888 )   (24,790 )      
Balance – March 31, 2019   81,707,217   $ 80     (24,891,292 ) $ (286,951 )   56,815,925   $ 277,950   $ 713,701   $ (204,338 ) $ 500,442   $ 343   $ 500,785   $ 107,672  

See Notes to Unaudited Condensed Consolidated Financial Statements

6



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

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2019     2018     2019     2018  
          (as restated(A))           (as restated(A))  
    (In thousands)     (In thousands)  
Cash flows from operating activities (Note 2)                        
Net (loss) income $  (55,512 ) $  32,677   $  (121,585 ) $  62,383  
Depreciation and amortization   9,881     9,341     30,528     27,030  
Impairment loss (Note 9)   5,305     19,865     13,496     19,865  
Allowance for doubtful accounts receivable charged   396     579     31,638     11,560  
Loss (Earnings) from equity-accounted investments   464     (3,960 )   338     (7,389 )
Interest on Cedar Cell note, net of impairment (Note 8)   2,044     (587 )   3,404     (769 )
Change in fair value of equity securities (Notes 7 and 8)   26,263     (37,843 )   42,099     (37,843 )
Fair value adjustments and foreign currency re-measurements   90     (110 )   91     (209 )
Interest payable   53     (17 )   294     (264 )
Facility fee amortized   51     120     206     467  
(Profit) Loss on disposal of property, plant and equipment   (147 )   (50 )   (413 )   71  
Loss (Profit) on disposal of business (Note 2)   5,140     -     5,140     (463 )
Stock-based compensation charge, net (Note 14)   487     575     1,672     2,010  
Dividends received from equity accounted investments   -     1,946     454     4,111  
Decrease (Increase) in accounts receivable, pre-funded social welfare grants receivable and finance loans receivable   (14,938 )   41,679     6,533     (2,438 )
Decrease (Increase) in inventory   1,451     1,072     3,612     (2,776 )
Increase (Decrease) in accounts payable and other payables   8,196     2,827     (11,339 )   5,775  
Increase in taxes payable   795     9,007     2,142     8,091  
(Decrease) Increase in deferred taxes   (4,153 )   7,824     (11,223 )   8,252  
     Net cash (used in) provided by operating activities   (14,134 )   84,945     (2,913 )   97,464  
Cash flows from investing activities (Note 2)                        
Capital expenditures   (1,615 )   (4,225 )   (7,280 )   (7,801 )
Proceeds from disposal of property, plant and equipment   295     160     781     575  
Disposal of DNI (Note 2 and Note 16)   (2,114 )   -     (2,114 )   -  
Investment in equity of equity-accounted investments (Note 8)   (489 )   (18,597 )   (2,989 )   (132,335 )
Acquisition of intangible assets   -     -     (1,384 )   -  
Investment in MobiKwik   -     -     (1,056 )   -  
Proceeds on return of investment (Note 8)   -     -     284     -  
Investment in Cell C (Note 8)   -     -     -     (151,003 )
Loans to equity-accounted investments   -     (10,635 )   -     (10,635 )
Acquisition of held to maturity investment (Note 8)   -     -     -     (9,000 )
Other investing activities   -     300     -     146  
Net change in settlement assets   (1,083 )   43,222     76,879     280,390  
     Net cash (used in) provided by investing activities   (5,006 )   10,225     63,121     (29,663 )
Cash flows from financing activities                        
Proceeds from bank overdraft (Note 11)   278,288     9,802     584,525     42,372  
Repayment of bank overdraft (Note 11)   (257,097 )   (42,650 )   (502,823 )   (56,993 )
Repayment of long-term borrowings (Note 11)   (12,499 )   (15,826 )   (36,310 )   (60,967 )
Long-term borrowings utilized (Note 11)   3,609     17,726     14,613     113,157  
Dividends paid to non-controlling interest   (1,148 )   -     (4,085 )   -  
Payment of guarantee fee (Note 11)   -     (202 )   (394 )   (754 )
Net change in settlement obligations   1,083     (43,222 )   (76,879 )   (280,390 )
     Net cash provided by (used in) financing activities   12,236     (74,372 )   (21,353 )   (243,575 )
Effect of exchange rate changes on cash   (3,199 )   1,478     (5,971 )   4,489  
Net (decrease) increase in cash, cash equivalents and restricted cash   (10,103 )   22,276     32,884     (171,285 )
Cash, cash equivalents and restricted cash – beginning   133,041     64,896     90,054     258,457  
Cash, cash equivalents and restricted cash – end of period (1) $  122,938   $  87,172   $  122,938   $  87,172  

     (A) Refer to Note 1.
     See Notes to Unaudited Condensed Consolidated Financial Statements
(1) Cash, cash equivalents and restricted cash as of March 31, 2019, includes restricted cash of approximately $74.2 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 11 for additional information regarding the Company’s facilities.

7



NET 1 UEPS TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
for the three and nine months ended March 31, 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 and nine months ended March 31, 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/A for the fiscal year ended June 30, 2018. 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.

     Restatement of prior year balances contained in financial statements and related notes for the three and nine months ended March 31, 2018

     As previously reported and more fully described in Note 1 to the consolidated financial statements contained in the Form 10-K/A filed on December 6, 2018, the Company restated its 2018 consolidated financial statements, to correctly classify and record the change in fair value of its investment in Cell C in the statement of operations rather than in other comprehensive income as originally presented due to the election of the fair value option on acquisition. The Cell C investment was acquired in August 2017, and its fair value increased by $37,843 during the three and nine months ended March 31, 2018. Accordingly, the unaudited condensed consolidated financial statements for the three and nine months ended March 31, 2018, have also been restated with the effect of increasing income before tax by $37,843, income tax expense by $8,477 and net income by $29,366 and decreasing total comprehensive income by $29,366.

     The Company also identified and corrected other insignificant misstatements in its consolidated statement of cash flows for the three and nine months ended March 31, 2018. This decreased net cash provided by operating activities by $300 with a corresponding increase in net cash provided by investing activities but had no effect on the net (decrease) increase in cash, cash equivalents and restricted cash for the three months and nine months ended March 31, 2018.

     Recent accounting pronouncements adopted

     In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance regarding Revenue from Contracts with Customers. This guidance requires an entity to recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance was originally set to be effective for the Company beginning July 1, 2017, however in August 2015, the FASB issued guidance regarding Revenue from Contracts with Customers, Deferral of the Effective Date. This guidance deferred the required implementation date specified in Revenue from Contracts with Customers to December 2017. Public companies were permitted to adopt the standard along the original timeline. The guidance became effective for the Company beginning July 1, 2018. The Company elected the modified retrospective transition method upon adoption of this guidance. The adoption of this guidance did not have a material impact on the Company’s financial statements, except for the additional footnote disclosures provided.

     In January 2016, the FASB issued guidance regarding Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The guidance requires changes in the fair value of the Company’s equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income. In addition, the guidance clarifies the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This guidance became effective for the Company beginning July 1, 2018. The amendments are required to be applied by means of a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this guidance did not have a material impact on the Company’s financial statements.

8


1. Basis of Presentation and Summary of Significant Accounting Policies (continued)

     Recent accounting pronouncements adopted (continued)

     Equity securities are measured at fair value. The Company may elect to measure equity securities without readily determinable fair values at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We perform a qualitative assessment on a quarterly basis and recognize an impairment loss if there are sufficient indicators that the fair value of the equity security is less than carrying value. There were no changes in the fair value of our equity securities recorded during the three and nine months ended March 31, 2019. Changes in fair value will be recorded in our condensed consolidated statement of operations in future periods within a caption titled "changes in fair value of equity securities".

     In June 2016, the FASB issued guidance regarding Classification of Certain Cash Receipts and Cash Payments. The guidance is intended to reduce diversity in practice and explains how certain cash receipts and payments are presented and classified in the statement of cash flows, including beneficial interests in securitization, which would impact the presentation of the deferred purchase price from sales of receivables. This guidance became effective for the Company beginning July 1, 2018, and must be applied retrospectively. The Company has elected to classify distributions received from equity method investees using the nature of the distribution approach. This election requires the Company to evaluate each distribution received on the basis of the source of the payment and classify the distribution as either operating cash inflows or investing cash inflows. The adoption of this guidance did not have a material impact on the Company’s financial statements and the Company was not required to make any retrospective adjustments.

     In January 2017, the FASB issued guidance regarding Clarifying the Definition of a Business. This guidance provides a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The guidance became effective for the Company beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial statements.

     In January 2017, the FASB issued guidance regarding Simplifying the Test for Goodwill Impairment. This guidance removes the requirement for an entity to calculate the implied fair value of goodwill (as part of step 2 of the current goodwill impairment test) in measuring a goodwill impairment loss. The guidance is effective for the Company beginning July 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has elected to early adopt this guidance beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial statements.

     In May 2017, the FASB issued guidance regarding Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The guidance amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance became effective for the Company beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial statements.

     In June 2018, the FASB issued guidance regarding Improvements to Non-employee Share-Based Payment Accounting. The guidance simplifies the accounting for share-based payments granted to non-employees for goods and services and aligns the guidance for these share-based payments with guidance applicable to accounting for share-based payments granted to employees. The guidance is effective for the Company beginning July 1, 2019. Early adoption is permitted. The Company has elected to early adopt this guidance beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial statements.

     Recent accounting pronouncements not yet adopted as of March 31, 2019

     In February 2016, the 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 is effective for the Company beginning July 1, 2019. Early adoption is permitted. The Company expects that this guidance may have a material impact on its financial statements and is currently evaluating the impact of this guidance on its financial statements on adoption.

9


1. Basis of Presentation and Summary of Significant Accounting Policies (continued)

     Recent accounting pronouncements not yet adopted as of March 31, 2019 (continued)

     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. Acquisition and disposal of controlling interest in DNI

          2018 acquisition

     The Company’s acquisition of a controlling interest in DNI-4PL Contracts Proprietary Limited ("DNI") is described in Note 3 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018. During the three and nine months ended March 31, 2019, the Company determined that certain customer relationships of $7.0 million should not have been separately identified and recorded as intangible assets because there were no separately identified cash flows related to these customer relationships. These customer relationships, net of deferred taxes of $2 million, should been recorded as a component of goodwill. During the three months ended March 31, 2019, the Company determined that DNI is a discontinued operation. The table below presents the DNI balances included on the Company’s consolidated balance sheet as of June 30, 2018, as well as the amended preliminary purchase price allocation ("PPA") of the DNI acquisition, translated at the foreign exchange rates applicable on the date of acquisition:

    DNI – discontinued operation  
    as of June 30, 2018  
    Initial               Amended  
    DNI PPA       Amendment       DNI PPA  
Current assets of discontinued operation: $ 22,482     $ -     $ 22,482  
     Cash and cash equivalents   2,979       -       2,979  
     Accounts receivable (Note 4)   16,235       -       16,235  
     Finance loans receivable (Note 4)   742       -       742  
     Inventory (Note 5)   2,526       -       2,526  
Long-term assets of discontinued operation:   241,729       (1,951 )     239,778  
     Property, plant and equipment   1,317       -       1,317  
     Equity-accounted investment (Note 8)   339       -       339  
     Goodwill (Note 9)   114,161       5,017       119,178  
     Intangible assets (Note 9)   104,003       (6,968 )     97,035  
     Deferred tax assets   561       -       561  
     Other long-term assets (Note 8)   21,348       -       21,348  
Current liabilities of discontinued operation:   (20,914 )     -       (20,914 )
     Accounts payables   (13,949 )     -       (13,949 )
     Other payables   (6,349 )     -       (6,349 )
     Current portion of long-term borrowings (Note 11)   (616 )     -       (616 )
Long-term liabilities of discontinued operation:   (37,412 )     1,951       (35,461 )
     Other long-term liabilities   (8,291 )     -       (8,291 )
     Deferred tax liabilities   (29,121 )     1,951       (27,170 )
     Fair value of assets and liabilities on acquisition $ 205,885     $ -     $ 205,885  

10


2. Acquisition and disposal of controlling interest in DNI (continued)

          2018 acquisition (continued)

     The Company recorded intangible asset amortization, deferred taxes and non-controlling interest entries related to these customer relationships that should have been included in goodwill during the six months ended December 31, 2018. The Company has reversed these entries during the three and nine months ended March 31, 2019. The table below presents the impact of reversal of these entries on the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019 and the caption in which the impact is included:

    Three and  
    nine months  
    ended  
    March 31,  
    2019  
Reversal of intangible asset amortization - decrease depreciation and amortization $ 506  
Deferred tax impact related to reversal of intangible asset amortization - decrease income tax benefit   142  
Increase in non-controlling interest $ 164  

          2019 disposal of a controlling interest in DNI

          Transaction to sell 17% during the three and nine months ended March 31, 2019

     On February 28, 2019, the Company through its wholly owned subsidiary, Net1 Applied Technologies South Africa Proprietary Limited ("Net1 SA"), entered into a transaction with JAA Holdings Proprietary Limited, a limited liability private company duly incorporated in the Republic of South Africa, and PK Gain Investment Holdings Proprietary Limited, a limited liability private company duly incorporated in the Republic of South Africa, in terms of which Net1 SA reduced its shareholding in DNI from 55% to 38%. The transaction closed on March 31, 2019. The parties used a cashless settlement process on closing, refer to Note 16. Net1 SA used the proceeds from the sale of the DNI shares to settle its ZAR 400 million ($27.6 million, translated at exchange rates applicable as of March 31, 2019) obligation to DNI to subscribe for an additional share as part of the contingent consideration settlement process.

     As of March 31, 2019, the Company owned 38% of the voting and economic rights of DNI. The Company accounted for its 38% investment in DNI using the equity method, refer to Note 8. The Company no longer controls DNI and deconsolidated its investment in DNI effective March 31, 2019. In April 2019, the Company’s management approved and commenced a process to sell its retained interest in DNI, which includes the transactions described above.

          Transaction to sell 8% in May 2019 (subsequent to March 31, 2019)

     On May 3, 2019, Net1 SA entered into a transaction with FirstRand Bank Limited, acting through its Rand Merchant Bank division ("RMB"), in terms of which Net1 SA further reduced its shareholding in DNI from 38% to 30% through the sale of 7,605,235 ordinary "A" shares in DNI for a transaction consideration of ZAR 215.0 million ($14.8 million, translated at exchange rates applicable as of March 31, 2019) (the "RMB Disposal"). The parties used a cashless settlement process on closing. The transaction closed on May 3, 2019, and the Company used the proceeds from the sale of these DNI shares and ZAR 15.0 million of its existing cash reserves to settle its outstanding long-term borrowings of ZAR 230.0 million in full, refer to Note 11.

     On May 3, 2019, 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 ($195.2 million, translated at exchange rates applicable as of March 31, 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 $59.3 million, translated at exchange rates applicable as of March 31, 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 2.5% of DNI’s voting and participation interests.

11


2. Acquisition and disposal of controlling interest in DNI (continued)

          2019 disposal of a controlling interest in DNI (continued)

     The table below presents the impact of the deconsolidation of DNI and the calculation of the net loss recognized on deconsolidation:

                Equity method        
                investment as of        
                March 31, 2019        
                (Refer also Note 8)      
                8%              
                retained              
                interest           Attributed  
                sold in     30%     to non-  
          17%     May     retained     controlling  
    Total     sold     2019     interest     interest  
Fair value of consideration received $ 27,626   $ 27,626   $ -   $ -   $ -  
Fair value of retained interest of 30% in DNI(1)   74,195     -     14,849     59,346     -  
Carrying value of non-controlling interest   88,934     -     -     -     88,934  
 Subtotal   190,755     27,626     14,849     59,346     88,934  
 Less: carrying value of DNI, comprising   195,895     34,311     14,540     58,110     88,934  
     Cash and cash equivalents   2,114     354     158     633     969  
     Accounts receivable, net   24,577     4,116     1,841     7,358     11,262  
     Finance loans receivable, net   1,030     173     77     308     472  
     Inventory   893     149     66     268     410  
     Property, plant and equipment, net   1,265     212     95     379     579  
     Equity-accounted investments (Note 8)   242     41     19     72     110  
     Goodwill (Note 9)   113,003     18,924     8,466     33,834     51,779  
     Intangible assets, net   80,769     13,526     6,051     24,183     37,009  
     Deferred income taxes   28     5     2     8     13  
     Other long-term assets   26,553     4,447     1,989     7,950     12,167  
     Accounts payable   (5,186 )   (868 )   (389 )   (1,553 )   (2,376 )
     Other payables(2)   (16,484 )   (2,760 )   (1,235 )   (4,936 )   (7,553 )
     Income taxes payable   (2,482 )   (416 )   (186 )   (743 )   (1,137 )
     Deferred income taxes   (22,083 )   (3,698 )   (1,654 )   (6,612 )   (10,119 )
     Long-term debt (Note 11)   (10,150 )   (1,700 )   (760 )   (3,039 )   (4,651 )
     Released from accumulated other comprehensive income – foreign currency translation reserve (Note 13)   1,806     1,806     -     -     -  
        Loss recognized on disposal, before tax, comprising   (5,140 )   (6,685 )   309     1,236     -  
             Related to sale of 17% of DNI   (6,685 )   (6,685 )   -     -        
             Related to fair value adjustment of retained interest in 38% of DNI   1,545     -     309     1,236      
             Taxes related to gain recognized on disposal(3)   -     505     (3,836 )   3,331        
                   Loss recognized on disposal, after tax $ (5,140 ) $ (7,190 ) $ 4,145   $ (2,095 )      

(1) The fair value of the retained interest in 38% of DNI of $74.2 million ($14.9 million plus $59.3 million has been calculated using the implied fair value of DNI pursuant to the RMB Disposal and has been calculated as ZAR 215.0 million divided by 7. 605235% multiplied by 38%, translated to dollars at the March 31, 2019, rate of exchange. The fair value of the retained interest in DNI is included in equity-accounted investment on the unaudited condensed consolidated balance sheet as of March 31, 2019.
(2) Other payables include a short-term loan of ZAR 60.5 million ($4.2 million, translated at exchange rates applicable as of March 31, 2019) due to the Company and included in accounts receivable, net on the Company’s unaudited condensed consolidated balance sheet as of March 31, 2019. The loan is repayable in full on or before June 30, 2019. Interest on the loan is charged at the South African prime rate.
(3) Amounts presented are net of a valuation allowance provided. The disposal of DNI results in a capital loss for tax purposes of approximately $1.5 million and the Company has provided a valuation allowance of $1.5 million against this capital loss because it does not have any capital gains to offset against this amount. On an individual basis, the transaction to dispose of 17% of DNI resulted in a capital gain of $0.5 million and the re-measurement of the retained 38% interest has resulted in a capital loss of $2.0 million ($5.3 million (8% transaction) less $3.3 million (30% transaction)). The valuation allowance of $1.5 million has been provided against the $5.3 million, for a net amount presented in the table above of $3.8 million ($5.3 million less $1.5 million).

12


2. Acquisition and disposal of controlling interest in DNI (continued)

          Discontinued operation

     The Company has determined that the disposal of its controlling interest in DNI represents a discontinued operation because it represents a strategic shift that will have a major effect on the Company’s operations and financial results as a result of the sale of a significant portion of its investment in DNI. The facts and circumstances leading to the disposal of a controlling interest are described above. The loss related to the disposal of a controlling interest in DNI is presented above. DNI was allocated to the Company’s financial inclusion and applied technologies operating segment and the amortization of intangible assets identified and recognized related to the DNI acquisition were allocate to corporate/eliminations. The impact of the disposal of a controlling interest on the Company’s operating segments is presented in Note 18.

     The Company retains a continuing involvement in DNI through its 38% interest in DNI (refer above and to Note 8). The Company expects to retain an interest in DNI for less than 12 months. As disclosed above, the Company sold an 8% interest in DNI in May 2019, and has entered into an agreement under which it has provided a call option to DNI to repurchase the remaining 30% interest in DNI. The Company did not record any earnings under the equity method related to its retained 38% investment in DNI during the three and nine months ended March 31, 2019. The Company has not presented revenues and expenses between the Company and DNI, and cash inflows or outflows from or to DNI after the disposal transaction because the Company closed the transaction to sell a controlling interest in DNI on March 31, 2019.

     The table below presents the impact of the deconsolidation of DNI on certain major captions to the Company’s unaudited condensed consolidated statement of operations and unaudited condensed consolidated statement of cash flows for three and nine months ended March 31, 2019 and 2018, that have not been separately presented on those statements:

    DNI  
    Three months ended     Nine months ended  
    March 31,     March 31,  
    2019     2018     2019     2018  
Unaudited condensed consolidated statement of operations Discontinued:                
     Revenue $ 17,842   $ -   $ 56,337   $ -  
     Cost of goods sold, IT processing, servicing and support   7,502     -     27,667     -  
     Selling, general and administration   1,935     -     4,295     -  
     Depreciation and amortization   2,427     -     8,026     -  
     Impairment loss   5,305     -     5,305     -  
     Operating income   673     -     11,044     -  
     Interest income   208     -     707     -  
     Interest expense   396     -     812     -  
     Net income before tax   (4,655 )   -     5,799     -  
     Income tax expense   146     -     3,124     -  
     Net income before earnings from equity-accounted investments   (4,801 )   -     2,675     -  
     Earnings from equity-accounted investments(1)(2) $ 73   $ 3,291   $ 15   $ 5,202  
Unaudited condensed consolidated statement of cash flows Discontinued:                
     Total net cash (used in) provided by operating activities(3)   $(393 ) $ -   $ 6,635   $ 1,765  
     Total net cash (used in) provided by investing activities   $(319 ) $ -     $(516 ) $ -  

     (1) Earnings from equity-accounted investments for the three and nine months ended March 31, 2019, represents earnings attributed to equity-accounted investment owned by DNI and included in the Company’s results as a result of the consolidation of DNI.
     (2) Earnings from equity-accounted investments for the three and nine months ended March 31, 2018, represents DNI earnings (net of amortization of acquired intangibles and related deferred tax) attributed to the Company as a result of the Company using the equity method to account for its investment in DNI during the period. 
     (3) Total net cash (used in) provided by operating activities for the three and nine months ended March 31, 2018, represent dividends received from DNI during these periods.

3. Pre-funded social welfare grants receivable

     Pre-funded social welfare grants receivable represents primarily amounts pre-funded by the Company to certain merchants participating in the merchant acquiring system. The Company’s contract with the South African Social Security Agency expired on September 30, 2018, and therefore the Company no longer pre-funds social welfare grants. The July 2018 payment service commenced on July 1, 2018 but the Company pre-funded certain merchants participating in the merchant acquiring systems on the last day of June 2018.

13


4. 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 March 31, 2019, and June 30, 2018, is presented in the table below:

      March 31,           June 30,    
      2019           2018    
Accounts receivable, trade, net   $ 25,098         $ 40,268    
 Accounts receivable, trade, gross     26,155           41,369    
 Allowance for doubtful accounts receivable, end of period     1,057           1,101    
         Beginning of year     1,101           1,255    
         Reversed to statement of operations     (2 )         -    
         Charged to statement of operations     3,053           (47 )  
         Utilized     (3,020 )         642    
         Deconsolidated as a result of transaction in Note 2     (38 )         (776 )  
         Foreign currency adjustment     (37 )         27    
Current portion of payments to agents in South Korea amortized over the contract period     17,366           21,971    
         Payments to agents in South Korea amortized over the contract period.     29,080           39,553    
         Less: Payments to agents in South Korea amortized over the contract period included in other long-term assets (Note 8)     11,714           17,582    
Loan provided to Finbond     1,036           1,107    
Loan provided to DNI (Note 2)     4,180           -    
Other receivables     32,470           30,102    
         Total accounts receivable, net   $ 80,150         $ 93,448    

Finance loans receivable, net

The Company’s finance loans receivable, net, as of March 31, 2019, and June 30, 2018, is presented in the table below:

      March 31,           June 30,    
      2019           2018    
Microlending finance loans receivable, net   $ 19,735         $ 57,504    
 Microlending finance loans receivable, gross     22,964           61,743    
 Allowance for doubtful microlending finance loans receivable, end of period     3,229           4,239    
         Beginning of year     4,239           3,717    
         Charged to statement of operations     27,955           4,348    
         Utilized     (28,756 )         (3,588 )  
         Foreign currency adjustment     (209 )         (238 )  
 Working capital finance receivable, net     5,482           3,959    
 Working capital finance receivable, gross     18,274           16,123    
 Allowance for doubtful working capital finance receivable, end of period     12,792           12,164    
         Beginning of year     12,164           3,752    
         Charged to statement of operations     632           8,415    
         Foreign currency adjustment     (4 )         (3 )  
                     Total finance loans receivable, net   $ 25,217         $ 61,463    

     (1) Other finance loans receivable have been deconsolidated as of March 31, 2019, pursuant to the DNI disposition described in Note 2.

     During the three and nine months ended March 31, 2019, the Company recorded an increase in its allowance for doubtful microlending finance loans receivable of approximately $0.1 million and $27.9 million, respectively. This high level of allowance related to the non-funding of accounts for a portion of the EPE customer base as a result of the auto-migration of the customer base to the South Africa Post Office account offering during the three months ended December 31, 2018. During the three and nine months ended March 31, 2019, the Company utilized $24.2 million and $28.8 million, respectively, against the allowance for doubtful microlending finance loans receivable.

14


5. Inventory

     The Company’s inventory comprised the following category as of March 31, 2019, and June 30, 2018.

    March 31,     June 30,  
    2019     2018  
Finished goods $ 7,861   $ 10,361  
  $ 7,861   $ 10,361  

6. Settlement assets and settlement obligations

     Settlement assets comprise (1) cash received from the South African government that the Company holds pending disbursement to recipient cardholders of social welfare grants (2) 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, and (3) cash received from customers on whose behalf the Company processes payroll payments that the Company will disburse to customer employees, payroll-related payees and other payees designated by the customer.

     Settlement obligations comprise (1) amounts that the Company is obligated to disburse to recipient cardholders of social welfare grants, (2) amounts that the Company is obligated to 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, and (3) amounts that the Company is obligated to pay to customer employees, payroll-related payees and other payees designated by the customer.

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

7. Fair value of financial instruments

          Initial recognition and measurement

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

          Risk management

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

               Currency exchange risk

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

               Translation risk

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

               Interest rate risk

     As a result of its normal borrowing and 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.

15


7. Fair value of financial instruments (continued)

     Risk management (continued)

               Credit risk (continued)

     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 and liquidity risk

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

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

     Financial instruments

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

     In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology 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 leading mobile telecoms provider in South Africa. The Company has developed an adjusted EV/EBITDA multiple valuation model in order to determine the fair value of its investment in the Cell C shares. The primary inputs to the valuation model as of March 31, 2019, were Cell C’s adjusted EBITDA for the year ended December 31, 2018, of ZAR 3.5 billion ($242.6 million, translated at exchange rates applicable as of March 31, 2019), an EBITDA multiple of 6.40; Cell C’s net adjusted external debt of ZAR 9.4 billion ($648.9 million, translated at exchange rates applicable as of March 31, 2019); and a marketability discount of 10% as Cell C is not currently listed, but has publicly stated its intention to list. The primary inputs to the valuation model as of June 30, 2018, were Cell C’s annualized adjusted EBITDA for the 11 months ended June 30, 2018, of ZAR 3.9 billion ($284.8 million, translated at exchange rates applicable as of June 30, 2018), an EBITDA multiple of 6.75, Cell C’s net external debt of ZAR 8.8 billion ($641.1 million, translated at exchange rates applicable as of June 30, 2018) and a marketability discount of 10%. The EBITDA multiple was determined based on an analysis of Cell C’s peer group, which comprises eight African and emerging market mobile telecommunications operators.

     The fair value of Cell C utilizing the adjusted EV/EBITDA valuation model developed by the Company is sensitive to the following inputs: (i) the Company’s determination of adjusted EBITDA; (ii) the EBITDA multiple used; and (iii) the marketability discount used. Utilization of different inputs, or changes to these inputs, may result in significantly higher or lower fair value measurement.

16


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 of a 0.50 increase and 0.50 decrease to the EBITDA multiple used in the Cell C valuation on the March 31, 2019, carrying value of the Company’s Cell C investment (all amounts translated at exchange rates applicable as of March 31, 2019):

    Sensitivity for  
    fair value of  
    Cell C investment  
EBITDA multiple of 5.90 times $ 105,601  
EBITDA multiple of 6.40 times   121,941  
EBITDA multiple of 6.90 times $ 138,347  

     The fair value of the Cell C shares as of March 31, 2019, represented approximately 15% of the Company’s total assets, including these shares. The Company expects to hold these shares for an extended period of time and it is not concerned with short-term equity price volatility with respect to these shares provided that the underlying business, economic and management characteristics of the company remain sound.

          Liability measured at fair value using significant unobservable inputs – DNI contingent consideration

     The salient terms of the Company’s investment in DNI is described in Note 3 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018. Under the terms of its subscription agreements with DNI, the Company agreed to pay to DNI an additional amount of up to ZAR 400.0 million ($27.6 million, translated at exchange rates applicable as of March 31, 2019), 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 373.6 million ($27.2 million), in long-term liabilities as of June 30, 2018, which amount represented the present value of the ZAR 400.0 million to be paid (amounts translated at the exchange rate applicable as of June 30, 2018, respectively).

     As described in Note 2 and Note 16, the Company settled the ZAR 400 million due to DNI as of March 31, 2019. The Company recorded accreted interest during three and nine months ended March 31, 2019, of $1.0 million and $1.8 million (ZAR 14.4 million and ZAR 26.4 million, translated at the applicable average exchange rates during the periods specified), respectively.

          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’s outstanding foreign exchange contracts are as follows as of March 31, 2019:

    Fair market  
Notional amount Strike price value price Maturity
USD 420,000 ZAR 15.5704 ZAR 14.5150 April 26, 2019

The Company had no outstanding foreign exchange contracts as of June 30, 2018.

17


Fair value of financial instruments (continued)

     Financial instruments (continued)

     The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2019, according to the fair value hierarchy:

    Quoted price in     Significant              
    active markets     other     Significant        
    for identical     observable     unobservable        
    assets     inputs     inputs        
    (Level 1)   (Level 2)   (Level 3)   Total  
Assets                        
 Investment in Cell C $ -   $ -   $ 121,941   $ 121,941  
 Related to insurance business:                        
     Cash, cash equivalents and restricted cash (included in other long-term assets)   596     -     -     596  
     Fixed maturity investments (included in cash and cash equivalents)   4,620     -     -     4,620  
 Other   -     420     -     420  
     Total assets at fair value $ 5,216   $ 420   $ 121,941   $ 127,577  
Liabilities                        
 Foreign exchange contracts   -     31     -     31  
     Total liabilities at fair value $ -   $ 31   $ -   $ 31  

     The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2018, according to the fair value hierarchy:

    Quoted price in     Significant              
    active markets     other     Significant        
    for identical     observable     unobservable        
    assets     inputs     inputs        
    (Level 1)   (Level 2)   (Level 3)   Total  
Assets                        
 Investment in Cell C $ -   $ -   $ 172,948   $ 172,948  
 Related to insurance business:                        
     Cash and cash equivalents (included in other long-term assets)   610     -     -     610  
     Fixed maturity investments (included in cash and cash equivalents)   8,304     -     -     8,304  
 Other   -     18     -     18  
     Total assets at fair value $ 8,914   $ 18   $ 172,948   $ 181,880  
Liabilities                        
 DNI contingent consideration $ -   $ -   $ 27,222   $ 27,222  
     Total liabilities at fair value $ -   $ -   $ 27,222   $ 27,222  

     There have been no transfers in or out of Level 3 during the three and nine months ended March 31, 2019 and 2018, respectively.

18


Fair value of financial instruments (continued)

Financial instruments (continued)

     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 nine months ended March 31, 2019:

    Carrying value  
Assets      
Balance as at June 30, 2018 $ 172,948  
         Loss on fair value re-measurements   (42,099 )
         Foreign currency adjustment(1)   (8,908 )
                Balance as of March 31, 2019 $ 121,941  
Liabilities      
Balance as at June 30, 2018 $ 27,222  
         Accretion of interest   1,848  
         Settlement of contingent consideration (Note 2 and Note 16)   (27,626 )
         Foreign currency adjustment(1)   (1,444 )
                Balance as of March 31, 2019 $ -  

     (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.

     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 nine months ended March 31, 2018:

    Carrying value  
Assets      
 Acquisition of investment in Cell C $ 151,003  
         Gain on fair value re-measurements   37,843  
         Foreign currency adjustment(1)   18,124  
                  Balance as of March 31, 2018 $ 206,970  

      (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.

8. 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/A for the year ended June 30, 2018, for additional information regarding its equity-accounted investments and other long-term assets.

     Equity-accounted investments

     The Company’s ownership percentage in its equity-accounted investments as of March 31, 2019 and June 30, 2018, was as follows:

  March 31, June 30,
  2019 2018
Bank Frick & Co AG ("Bank Frick") 35% 35%
DNI 38% -
Finbond Group Limited ("Finbond") 29% 29%
OneFi Limited (formerly KZ One) ("OneFi") 25% 25%
SmartSwitch Namibia (Pty) Ltd ("SmartSwitch Namibia") 50% 50%
V2 Limited ("V2") 50% -
Walletdoc Proprietary Limited ("Walletdoc") 20% 20%

19


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

     Equity-accounted investments (continued)

          DNI

     The Company consolidated DNI up until March 31, 2019, as disclosed in Note 2. The Company has retained a 38% interest in DNI and uses the equity method to account for its interest in DNI because it has the ability to exert significant influence over the operations of DNI through its shareholding and board representation.

          Finbond

     As of March 31, 2019, the Company owned 267,672,032 shares in Finbond. Finbond is listed on the Johannesburg Stock Exchange and its closing price on March 31, 2019, the last trading day of the quarter, was R4.69 per share. The market value of the Company’s holding in Finbond on March 31, 2019, was ZAR 1.3 billion ($86.7 million translated at exchange rates applicable as of March 31, 2019). On July 11, 2018, the Company, pursuant to its election, received an additional 6,602,551 shares in Finbond as a capitalization share issue in lieu of a dividend.

          V2 Limited

     On October 4, 2018, the Company acquired a 50% voting and economic interest in V2 Limited ("V2") for $2.5 million. The Company has committed to provide V2 with a further equity contribution of $2.5 million and a working capital facility of $5.0 million, which are both subject to the achievement of certain pre-defined objectives.

     Summarized below is the movement in equity-accounted investments and loans provided to equity-accounted investments during the nine months ended March 31, 2019:

          Bank                    
    DNI     Frick     Finbond      Other(1)      Total  
Investment in equity:                              
     Balance as of June 30, 2018 $ -   $ 48,129   $ 30,958   $ 6,092   $ 85,179  
             Re-measurement of 8% of DNI (Note 2)   14,849     -     -     -     14,849  
             Re-measurement of 30% of DNI (Note 2)   59,346     -     -     -     59,346  
             Acquisition of shares   -     -     1,920     2,989     4,909  
             Stock-based compensation   -     -     77     -     77  
             Comprehensive income (loss):   -     (1,895 )   7,305     (318 )   5,092  
                     Other comprehensive income   -     -     5,430     -     5,430  
                     Equity accounted earnings (loss)   -     (1,895 )   1,875     (318 )   (338 )
                             Share of net income   -     616     1,852     (318 )   2,150  
                             Amortization of acquired intangible assets   -     (562 )   -     -     (562 )
                             Deferred taxes on acquired intangible assets   -     135     -     -     135  
                             Dilution resulting from corporate transactions   -     -     23     -     23  
                             Other   -     (2,084 )   -     -     (2,084 )
             Dividends received   -     -     (1,920 )   (454 )   (2,374 )
             Return on investment   -     -     -     (284 )   (284 )
             Deconsolidation of DNI (Note 2)   -     -     -     (242 )   (242 )
             Foreign currency adjustment(2)   -     (228 )   (1,921 )   (50 )   (2,199 )
     Balance as of March 31, 2019 $ 74,195   $ 46,006   $ 36,419   $ 7,733   $ 164,353  
Investment in loans:                              
     Balance as of June 30, 2018 $ -   $ -   $ -   $ 3,152   $ 3,152  
             Foreign currency adjustment(2)   -     -     -     (8 )   (8 )
     Balance as of March 31, 2019 $ -   $ -   $ -   $ 3,144   $ 3,144  
                Equity     Loans     Total  
Carrying amount as of:                              
             June 30, 2018             $ 85,179   $ 3,152        
                     Continuing             $ 84,840   $ 3,152   $ 87,992  
                     Discontinued (Note 2)             $ 339   $ -   $ 339  
             March 31, 2019             $ 164,353   $ 3,144   $ 167,497  

(1) Includes primarily OneFi, 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.

20


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

     Other long-term assets

     Summarized below is the breakdown of other long-term assets as of March 31, 2019, and June 30, 2018:

    March 31,       June 30,  
    2019       2018  
               
Total equity investments $ 148,934     $ 199,865  
         Investment in 15% of Cell C, at fair value (Note 7)   121,941       172,948  
         Investment in 13% of MobiKwik(1)   26,993       26,917  
Total held to maturity investments   6,992       10,395  
         Investment in 7.625% of Cedar Cellular Investment 1 (RF) (Pty) Ltd 8.625% notes   6,992       10,395  
Long-term portion of payments to agents in South Korea amortized over the contract period   11,714       17,582  
Policy holder assets under investment contracts (Note 10)   596       610  
Reinsurance assets under insurance contracts (Note 10)   644       633  
Other long-term assets   6,023       5,947  
         Total other long-term assets $ 174,903     $ 235,032  

     (1) The Company has determined that MobiKwik does not have readily determinable fair value and has therefore elected to record this investment at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company accounted for its investment in MobiKwik at cost as of June 30, 2018.

     During the nine months ended March 31, 2019, the Company paid $1.1 million to subscribe for additional shares in MobiKwik. As of March 31, 2019, the Company owned approximately 13% of MobiKwik’s issued share capital.

     Summarized below are the components of the Company’s equity securities without readily determinable fair value and held to maturity investments as of March 31, 2019:

          Unrealized     Unrealized        
          holding     holding     Carrying  
    Cost basis     gains     losses     value  
Equity securities:                        
     Investment in MobiKwik $ 26,993   $ -   $ -   $ 26,993  
Held to maturity:                        
     Investment in Cedar Cellular notes   6,992     -     -     6,992  
             Total $ 33,985   $ -   $ -   $ 33,985  

     Summarized below are the components of the Company’s held to maturity investments as of June 30, 2018:

          Unrealized     Unrealized        
    Cost     holding     holding     Carrying  
    basis(1)   gains(1)   losses     value  
Held to maturity:                        
     Investment in Cedar Cellular notes $ 10,395   $ -   $ -   $ 10,395  
             Total $ 10,395   $ -   $ -   $ 10,395  

     (1) An amount of $1.4 million attributed to interest recognized under the Cedar Cellular note was incorrectly included in the unrealized holding gains column as of June 30, 2018, and has been reclassified to the cost basis column.

     The Company recognized interest income of $0.6 million, related to the Cedar Cellular notes during each of the three months ended March 31, 2019 and 2018, respectively. The Company recognized interest income of $2.0 million and $0.8 million, related to the Cedar Cellular notes during the nine months ended March 31, 2019 and 2018, respectively. Interest on this investment will only be paid, at Cedar Cellular’s election, on maturity in August 2022. The Company’s effective interest rate on the Cedar Cellular note is 24.82% as of March 31, 2019.

21


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

     Other long-term assets (continued)

     The Company does not expect to recover the entire amortized cost basis of the Cedar Cellular notes due to a reduction in the amount of future cash flows expected to be collected from the debt security. The Company does not expect to generate any cash flows from the debt security prior to the maturity date in August 2022, and expects to recover approximately $16.0 million at maturity. The Company has calculated the present value of the expected cash flows to be collected from the debt security by discounting these cash flows at the interest rate implicit in the security upon acquisition (at a rate of 24.82%). The present value of the expected cash flows of $7.0 million is less than the amortized cost basis recorded of $9.6 million (before the March 2019 impairment for the three months ended March 31, 2019) and $12.4 million (before the cumulative 2019 impairments for the nine months ended March 31, 2019). Accordingly, the Company recorded an other-than-temporary impairment related to a credit loss of $2.6 million and $5.4 million during the three and nine months ended March 31, 2019, respectively. The impairment of $2.6 million and $5.4 million is included in interest income, net of impairment in the unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019, respectively.

Contractual maturities of held to maturity investments

     Summarized below is the contractual maturity of the Company’s held to maturity investment as of March 31, 2019:

          Estimated  
    Cost     fair  
    basis     value(1)
Due in one year or less $ -   $ -  
Due in one year through five years   6,992     6,992  
Due in five years through ten years   -     -  
Due after ten years   -     -  
         Total $ 6,992   $ 6,992  

     (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.

9. Goodwill and intangible assets, net

     Goodwill

          Impairment loss

               Three and nine months ended March 31, 2019

     The Company assesses the carrying value of goodwill for impairment annually, or more frequently, whenever events occur and circumstances change indicating potential impairment. The Company performs its annual impairment test as of June 30 of each year. The Company did not recognize an impairment loss during the three months ended March 31, 2019. During the second quarter of fiscal 2019, the Company performed an impairment analysis and during the nine months ended March 31, 2019, the Company recognized an impairment loss of approximately $8.2 million, of which approximately $7.0 million related to goodwill allocated to its International Payment Group ("IPG") business within its international transaction processing operating segment and $1.2 million related to goodwill within its South African transaction processing operating segment.

     Given the consolidation and restructuring of IPG over the period to December 31, 2018, several business lines were terminated or meaningfully reduced, resulting in lower than expected revenues, profits and cash flows. IPG’s new business initiatives are still in their infancy, and it is expected to generate lower cash flows than initially forecast.

     In order to determine the amount of goodwill impairment, the estimated fair value of the Company’s IPG business assets and liabilities were compared to the carrying value of the IPG’s assets and liabilities. The Company used a discounted cash flow model in order to determine the fair value of IPG. The allocation of the fair value of IPG required the Company to make a number of assumptions and estimates about the fair value of assets and liabilities where the fair values were not readily available or observable. Based on this analysis, the Company determined that the carrying value of IPG’s assets and liabilities exceeded their fair value at the reporting date.

     In the event that there is a deterioration in the South African transaction processing and the international transaction processing operating segment, or in any other of the Company’s businesses, this may lead to additional impairments in future periods.

22


9. Goodwill and intangible assets, net (continued)

     Goodwill (continued)

          Impairment loss (continued)

               Three and nine months ended March 31, 2018

     During the three and nine months ended March 31, 2018, the Company recognized an impairment loss of approximately $19.9 million related to goodwill allocated to the Masterpayment business within its international transaction processing operating segment as a result of changes to the operating model of Masterpayment. During the second quarter of fiscal 2018, the Company re-evaluated the operating performance and ongoing viability of Masterpayment’s working capital financing and supply chain solutions offering and determined to exit this portion of its business. While the Company believed that it could scale this offering in the medium to long-term by focusing on customers and industries outside Masterpayment’s initial target market, this standalone offering did not fit the Company’s strategy of providing payment solutions and working capital to small and medium-sized merchants. In order to focus on the Company’s stated international strategy, the Company decided to wind-down the traditional working capital finance book issued to non-payment solutions customers. During the third quarter of fiscal 2018, the Company evaluated Masterpayment’s business strategy and following the wind-down referred to above, it has determined that Masterpayment is unlikely to deliver the financial results or cash flows previously anticipated. The Company and two of Masterpayment’s senior managers agreed, by mutual consent, that with effect from the end of March 2018, the managers terminated their employment with Masterpayment in order to dedicate themselves to new professional tasks.

     In order to determine the amount of goodwill impairment, the estimated fair value of the Company’s Masterpayment business was allocated to the individual fair value of the assets and liabilities of Masterpayment as if it had been acquired in a business combination, which resulted in the implied fair value of the goodwill. The Company used a discounted cash flow model in order to determine the fair value of Masterpayment. The allocation of the fair value of Masterpayment required the Company to make a number of assumptions and estimates about the fair value of assets and liabilities where the fair values were not readily available or observable.

     Summarized below is the movement in the carrying value of goodwill for the nine months ended March 31, 2019:

    Gross       Accumulated       Carrying  
    value       impairment       value  
Balance as of June 30, 2018 $ 304,013     $ (20,773 )   $ 283,240  
 Continuing   189,852       (20,773 )     169,079  
 Discontinued (Note 2)   114,161       -       114,161  
     Impairment of goodwill   -       (8,191 )     (8,191 )
     Amendment to DNI preliminary purchase price allocation (Note 2)   5,017       -       5,017  
     Deconsolidation of DNI (Note 2)   (113,003 )     -       (113,003 )
     Foreign currency adjustment(1)   (10,730 )     166       (10,564 )
             Balance as of March 31, 2019 $ 185,297     $ (28,798 )   $ 156,499  

     (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:

    South               Financial          
    African       International       inclusion and          
    transaction       transaction       applied       Carrying  
    processing       processing       technologies       value  
Balance as of June 30, 2018 $ 20,946     $ 123,948     $ 138,346     $ 283,240  
 Continuing   20,946       123,948       24,185       169,079  
 Discontinued (Note 2)   -       -       114,161       114,161  
     Impairment of goodwill   (1,180 )     (7,011 )     -       (8,191 )
     Amendment to DNI preliminary purchase price allocation (Note 2)   -       -       5,017       5,017  
     Deconsolidation of DNI (Note 2)   -       -       (113,003 )     (113,003 )
     Foreign currency adjustment(1)   (1,083 )     (2,349 )     (7,132 )     (10,564 )
             Balance as of March 31, 2019 $ 18,683     $ 114,588     $ 23,228     $ 156,499  

     (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.

23


9. Goodwill and intangible assets, net (continued)

     Intangible assets

          Impairment loss

     The Company identified and recognized certain customer relationships as part of its acquisition of DNI, which included relationships related to an agreement with Cell C under which DNI shared in revenues earned by Cell C from other mobile telecommunications network renting ("tenant rentals") certain Cell C infrastructure that was constructed utilizing funding provided by DNI. Cell C expected to utilize the funding provided by DNI to construct 1,000 towers. Cell C recently entered into a roaming arrangement with another South African mobile telecommunications network provider which will extend its network coverage. Cell C utilized funding from DNI to construct approximately 22% of the towers that it had originally estimated to complete, however, the conclusion of the roaming arrangement has resulted in Cell C halting the construction of further network infrastructure.

     The Company expects DNI to earn fewer tenant rentals than initially planned due to the lower number of towers constructed. During the three and nine months ended March 31, 2019, the Company updated the discounted cash flow model used to calculate the fair value of the customer relationships acquired on acquisition of DNI to assess the impact of the lower number of towers on its projected cash flows from the tenant rentals customer relationship. The lower number of towers has significantly reduced the projected cash flows earned from tenant rentals which resulted in a lower fair value attributed to the customer relationship. The Company compared the updated fair value of the customer relationship to the carrying amount and determined that the customer relationship is impaired. The Company has recorded an impairment loss of $5.3 million in the impairment loss caption on its unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019. The customer relationship was not allocated to an operating segment and the impairment loss is included in corporate/eliminations.

     The economics of the tenant rentals arrangement between DNI and Cell C was excluded from the performance targets agreed between DNI and the Company because the arrangement was outside of DNI’s core business. DNI continues to perform above expectations and as of March 31, 2019, the Company believes that there are no other impairment indicators related to any of the other DNI intangible assets identified.

          Carrying value and amortization of intangible assets

     Summarized below is the carrying value and accumulated amortization of the intangible assets as of March 31, 2019 and June 30, 2018:

    As of March 31, 2019     As of June 30, 2018  
    Gross           Net     Gross           Net  
    carrying     Accumulated      carrying      carrying     Accumulated       carrying    
    value     amortization     value     value     amortization     value  
Finite-lived intangible assets:                                    
     Customer relationships(1) $ 97,481     ($83,377 ) $ 14,104   $ 100,421   $ (76,237 ) $ 24,184  
     Software and unpatented technology(1)   32,272     (32,076 )   196     33,121     (32,342 )   779  
     FTS patent   2,646     (2,646 )   -     2,792     (2,792 )   -  
     Exclusive licenses   4,506     (4,506 )   -     4,506     (4,506 )   -  
     Trademarks and brands(1)   6,776     (6,119 )   657     6,962     (5,589 )   1,373  
     Total finite-lived intangible assets   143,681     (128,724 )   14,957     147,802     (121,466 )   26,336  
Indefinite-lived intangible assets:                                    
     Financial institution license   762     -     762     793     -     793  
     Total indefinite-lived intangible assets   762     -     762     793     -     793  
          Total intangible assets $ 144,443   $ (128,724 ) $ 15,719   $ 148,595   $ (121,466 ) $ 27,129  

     (1) Intangible assets acquired as part of the DNI acquisition in June 2018 have been deconsolidated and are excluded from the March 31, 2019, balances, refer to Note 2.

     Aggregate amortization expense on the finite-lived intangible assets for the three months ended March 31, 2019 and 2018, was approximately $6.1 million and $3.0 million, respectively. Aggregate amortization expense on the finite-lived intangible assets for the nine months ended March 31, 2019 and 2018, was approximately $18.3 million and $8.8 million, respectively.

24


9. Goodwill and intangible assets, net (continued)

     Intangible assets (continued)

          Carrying value and amortization of intangible assets (continued)

     Future estimated annual amortization expense for the next five fiscal years and thereafter, assuming exchange rates that prevailed on March 31, 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.

Fiscal 2019(1) $ 21,631  
Fiscal 2020   7,810  
Fiscal 2021   2,833  
Fiscal 2022   69  
Fiscal 2023   69  
Thereafter   211  
     Total future estimated annual amortization expense $ 32,623  

     (1) Estimated annual amortization expense for fiscal 2019 includes amortization of DNI acquired intangible assets from July 1, 2018, until deconsolidation on March 31, 2019.

10. 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 nine months ended March 31, 2019:

    Reinsurance     Insurance  
    assets(1)   contracts(2)
Balance as of June 30, 2018 $ 633   $ (2,032 )
     Increase in policyholder benefits under insurance contracts   67     (5,940 )
     Claims and policyholders’ benefits under insurance contracts.   (22 )   6,427  
     Foreign currency adjustment(3)   (34 )   106  
         Balance as of March 31, 2019 $ 644   $ (1,439 )

     (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 certain insurance contracts, however, if the reinsurer is unable to meet its obligations, the Company retains the liability.

     The Company determines its reserves for policyholder benefits under its life insurance products using a model which estimates claims incurred that have not been reported and total present value of disability claims-in-payment at the balance sheet date. This model allows for best estimate assumptions based on experience (where sufficient) plus prescribed margins, as required in the markets in which these products are offered, namely South Africa. The best estimate assumptions include (i) mortality and morbidity assumptions reflecting the company’s most recent experience and (ii) claim reporting delays reflecting Company specific and industry experience. Most of the disability claims-in-payment reserve is reinsured and the reported values were based on the reserve held by the relevant reinsurer.

     Assets and policyholder liabilities under investment contracts

     Summarized below is the movement in assets and policyholder liabilities under investment contracts during the nine months ended March 31, 2019:

    Assets(1)   Investment contracts(2)
Balance as of June 30, 2018 $ 610   $ (610 )
     Increase in policyholder benefits under investment contracts   18     (18 )
     Foreign currency adjustment(3)   (32 )   32  
         Balance as of March 31, 2019 $ 596   $ (596 )

     (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.

25


11. 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

               Long-term borrowings – Facilities A, B, C and D

     The Company’s South African amended July 2017 Facilities agreement is described in Note 14 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018. The carrying value of these long-term borrowings as of March 31, 2019, was ZAR 229.1 million ($15.8 million), net of deferred fees of ZAR 0.9 million ($0.1 million), and the carrying amount approximated its fair value. Interest on these term loans was payable on the last business day of March, June, September and December of each year and on the final maturity date based on the Johannesburg Interbank Agreed Rate ("JIBAR") in effect from time to time plus a margin of 2.75%. The JIBAR has been set at 7.15% for the period to June 29, 2019, in respect of the loans provided under the South African long-term facilities agreement. The next principal repayment of ZAR 151.3 million ($10.6 million, translated at exchange rates applicable as of March 31, 2019) was scheduled to be paid on June 29, 2019, however the Company settled the outstanding amount of ZAR 230.0 million ($15.9 million, translated at exchange rates applicable as of March 31, 2019) in full on May 3, 2019, utilizing a combination of existing cash reserves and through the sale of DNI shares as discussed in Note 2.

               Short-term facility - Facility E

     On September 26, 2018, Net1 SA further amended its amended July 2017 Facilities agreement with RMB to include an overdraft facility ("Facility E") of up to ZAR 1.5 billion ($103.6 million) to fund the Company’s ATMs. Interest on the overdraft facility is payable on the last day of each month and on the final maturity date based on the South African prime rate less a margin of 1.00%. The overdraft facility is up for review on September 26, 2019. 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, any rights and claims Net1 SA has against Grindrod Bank Limited, and, in March 2019, the Company also agreed to provide RMB with the cession of a Company U.S. dollar denominated bank account. The Company paid a non-refundable origination fee of approximately ZAR 3.8 million ($0.3 million) in October 2018. As at March 31, 2019, the Company had utilized approximately ZAR 1.1 billion ($72.8 million translated at exchange rates applicable as of March 31, 2019) of this overdraft facility. This ZAR 1.5 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 March 31, 2019, was 10.25%.

          Nedbank facility, comprising short-term facilities

     On February 28, 2019, the aggregate amount of the Company’s short-term facility with Nedbank Limited was reduced from ZAR 700 million to ZAR 450 million, as a result of the reduction of the general banking facility from ZAR 300 million to ZAR 50 million. As of March 31, 2019, the aggregate amount of the Company’s short-term South African credit facility with Nedbank was ZAR 450.0 million ($31.1 million) and consists of (i) a primary amount of up to ZAR 450 million ($31.1 million) and (ii) a secondary amount, which has been temporarily withdrawn as discussed below. The primary amount comprises an overdraft facility of (i) up to ZAR 300 million ($20.7 million), which is further split into (a) a ZAR 250.0 million ($17.3 million) overdraft facility which may only be used to fund ATMs used at pay points and (b) a ZAR 50 million ($3.4 million) general banking facility and (ii) indirect and derivative facilities of up to ZAR 150 million ($10.4 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 our ATMs is considered restricted cash. The short-term facility provides Nedbank with the right to set off funds held in certain identified Company bank accounts with Nedbank against any amounts owed to Nedbank under the facility. As of March 31, 2019, the Company had total funds of $4.2 million in bank accounts with Nedbank which have been set off against $5.6 million drawn under the Nedbank facility, for a net amount drawn under the facility of $1.4 million.

     As of March 31, 2019, the interest rate on the overdraft facility was 9.10%. The Company has ceded its investment in Cash Paymaster Services Proprietary Limited ("CPS"), a South African subsidiary, as well as all of its rights, title and interest in an insurance policy issued by Fidelity Risk Proprietary Limited as security for its repayment obligations under the facility. A commitment fee of 0.35% per annum is payable on the monthly unutilized amount of the overdraft portion of the short-term facility. The Company is required to comply with customary non-financial covenants, including, without limitation, covenants that restrict its ability to dispose of or encumber its assets, incur additional indebtedness or engage in certain business combinations.

26


11. Borrowings (continued)

          Nedbank facility, comprising short-term facilities (continued)

     As of March 31, 2019, the Company has utilized approximately ZAR 81.4 million ($5.6 million) of its ZAR 250 million overdraft facility to fund ATMs and utilized none of its ZAR 50 million general banking facility and temporary facility. As of March 31, 2019 and June 30, 2018, the Company had utilized approximately ZAR 96.7 million ($6.7 million) and ZAR 108.0 million ($7.9 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).

          June 2018 Facility, a long-term borrowing (a DNI facility)

     The Company’s South African long-term facility agreement is described in Note 14 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018. DNI is the primary party to this facility and these long-term borrowings have been deconsolidated as of March 31, 2019, following the transaction referred to in Note 2. Interest on the revolving credit facility is payable quarterly based on JIBAR in effect from time to time plus a margin of 2.75%. The Company paid a non-refundable origination fee of approximately ZAR 2.0 million ($0.1 million) during the three and nine months ended March 31, 2019.

     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 2.59975% on March 31, 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 March 31, 2019, the Company had utilized approximately $8.9 million of this facility.

     South Korea, comprising long-term borrowings

     The Company’s South Korean senior secured loan facility is described in Note 14 to its audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018. On July 29, 2017, the Company utilized approximately KRW 0.3 billion ($0.3 million) of its Facility C revolving credit facility to pay interest due on the Company’s South Korean senior secured loan facility. On October 20, 2017, the Company made an unscheduled repayment of $16.6 million and settled the full outstanding balance, including interest, related to these borrowings. This facility is no longer available.

     South Korea, a short-term facility

     The Company obtained a one year KRW 10 billion ($10.0 million) short-term overdraft facility from Hana Bank, a South Korean bank, in January 2019. The interest rate on the facilities is 1.984% plus the 3-month CD rate. The CD rate as of March 31, 2019 was 1.87%. The facility expires in January 2020, however can be renewed. The facility is unsecured with no fixed repayment terms. As of March 31, 2019, the Company had not utilized this facility.

27


11. Borrowings (continued)

     Movement in short-term credit facilities

     Summarized below are the Company’s short-term facilities as of March 31, 2019, and the movement in the Company’s short-term facilities from as of June 30, 2018 to as of March 31, 2019:

                    United       South          
    South Africa       States       Korea          
    Amended               Bank                  
    July 2017       Nedbank       Frick       Hana       Total  
Short-term facilities as of March 31, 2019: $ 103,599     $ 31,080     $ 20,000     $ 8,792     $ 163,471  
     Overdraft   -       3,453       20,000       8,792       32,245  
     Overdraft restricted as to use for ATM funding only   103,599       17,267       -       -       120,866  
     Indirect and derivative facilities   -       10,360       -       -       10,360  
Movement in utilized overdraft facilities:                                      
     Balance as of June 30, 2018   -       -       -       -       -  
             Utilized   506,472       64,196       13,857       -       584,525  
             Repaid   (434,629 )     (63,202 )     (4,992 )     -       (502,823 )
             Foreign currency adjustment(1)   945       399       -       -       1,344  
                     Balance as of March 31, 2019(2)   72,788       1,393       8,865       -       83,046  
                             Restricted as to use for ATM funding only   72,788       1,393       -       -       74,181  
                             No restrictions as to use   -       -       8,865       -       8,865  
Movement in utilized indirect and derivative facilities:                            
     Balance as of June 30, 2018   -       7,871       -       -       7,871  
             Guarantees cancelled   -       (829 )     -       -       (829 )
             Utilized   -       47       -       -       47  
             Foreign currency adjustment(1)   -       (411 )     -       -       (411 )
                     Balance as of March 31, 2019 $ -     $ 6,678     $ -     $ -     $ 6,678  

     (1) Represents the effects of the fluctuations between the ZAR and the U.S. dollar.
     (2) Nedbank balance as of March 31, 2019, of $1.4 million comprises the net of total overdraft facilities withdrawn of $5.6 million offset against funds in bank accounts with Nedbank of $4.2 million.

     Movement in long-term borrowings

     Summarized below is the movement in the Company’s long term borrowing from as of June 30, 2018 to as of March 31, 2019:

    South Africa          
    Continuing       Discontinued      
            June                  
    Amended       2018       Other          
    July 2017       Facility       (Note 2)     Total  
                               
Included in current portion of long-term borrowings $ 44,079     $ -     $ 616     $ 44,695  
Included in long-term borrowings   5,469       -       -       5,469  
Balance as of June 30, 2018   49,548       -       616       50,164  
     Utilized   -       14,613       -       14,613  
     Repaid   (30,797 )     (4,944 )     (569 )     (36,310 )
     Deconsolidated (Note 2)   -       (10,150 )     -       (10,150 )
     Foreign currency adjustment(1)   (2,928 )     481       (47 )     (2,494 )
Balance as of March 31, 2019, included in current portion of long-term borrowings $ 15,823     $ -     $ -     $ 15,823  

     (1) Represents the effects of the fluctuations between the ZAR and the U.S. dollar.

The Company paid a non-refundable deal origination fee of approximately ZAR 6.3 million ($0.6 million) in August 2017. Interest expense incurred under the Company’s South African long-term borrowing during the three months ended March 31, 2019 and 2018, was $0.6 million and $1.9 million, respectively. Interest expense incurred during the nine months ended March 31, 2019 and 2018, was $2.7 million and $5.5 million, respectively. Prepaid facility fees amortized during each of the three months ended March 31, 2019 and 2018, was $0.1 million, respectively. Prepaid facility fees amortized during the nine months ended March 31, 2019 and 2018, was $0.2 million and $0.3 million, respectively.

28


11. Borrowings (continued)

     Movement in long-term borrowings (continued)

     Interest expense incurred in respect of the Company’s South Korean debt facilities during the nine months ended March 31, 2018, was $0.4 million. Prepaid facility fees amortized during the three months ended March 31, 2018, was $0.1 million.

12. 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 nine months ended March 31, 2019 and 2018, respectively, and the number of shares, net of treasury, excluding non-vested equity shares that have not vested during the nine months ended March 31, 2019 and 2018, respectively:

    March 31,     March 31,  
    2019     2018  
             
Number of shares, net of treasury:            
     Statement of changes in equity   56,815,925     56,855,187  
     Less: Non-vested equity shares that have not vested (Note 14)   (831,408 )   (934,673 )
Number of shares, net of treasury excluding non-vested equity shares that have not vested   55,984,517     55,920,514  

13. Accumulated other comprehensive loss

     The table below presents the change in accumulated other comprehensive (loss) income per component during the three months ended March 31, 2019:

    Three months ended  
    March 31, 2019  
    Accumulated        
    foreign        
    currency        
    translation        
    reserve     Total  
             
Balance as of January 1, 2019 $ (198,272 ) $ (198,272 )
 Release of foreign currency translation reserve related to disposal of DNI (Note 2).   1,806     1,806  
 Movement in foreign currency translation reserve   (7,872 )   (7,872 )
       Balance as of March 31, 2019 $ (204,338 ) $ (204,338 )

     The table below presents the change in accumulated other comprehensive (loss) income per component during the three months ended March 31, 2018:

     
    Three months ended  
    March 31, 2018  
          Accumulated        
          net        
          unrealized        
          income on        
    Accumulated     asset        
    foreign     available for        
    currency     sale, net of        
    translation     tax (As        
    reserve     restatedA)     Total  
                   
Balance as of January 1, 2018 $ (123,359 ) $ -   $ (123,359 )
     Movement in foreign currency translation reserve   20,512     -     20,512  
             Balance as of March 31, 2018 $ (102,847 ) $ -   $ (102,847 )

     (A) Refer to Note 1.

29


13. Accumulated other comprehensive loss (continued)

     The table below presents the change in accumulated other comprehensive (loss) income per component during the nine months ended March 31, 2019:

    Nine months ended  
    March 31, 2019  
    Accumulated        
    foreign        
    currency        
    translation        
    reserve     Total  
             
Balance as of June 30, 2018 $ (184,436 ) $ (184,436 )
 Release of foreign currency translation reserve related to disposal of DNI (Note 2).   1,806     1,806  
 Movement in foreign currency translation reserve related to equity-accounted investment   5,430     5,430  
 Movement in foreign currency translation reserve   (27,138 )   (27,138 )
               Balance as of March 31, 2019 $ (204,338 ) $ (204,338 )

     The table below presents the change in accumulated other comprehensive (loss) income per component during the nine months ended March 31, 2018:

    Nine months ended  
    March 31, 2018  
          Accumulated        
          net        
          unrealized        
          income on        
    Accumulated     asset        
    foreign     available for        
    currency     sale, net of        
    translation     tax (As        
    reserve     restatedA)     Total  
                   
Balance as of June 30, 2017 $ (162,569 ) $ -   $ (162,569 )
     Movement in foreign currency translation reserve related to equity accounted investment   (227 )   -     (227 )
     Movement in foreign currency translation reserve   59,949     -     59,949  
             Balance as of March 31, 2018 $ (102,847 ) $ -   $ (102,847 )

     (A) Refer to Note 1.

     During the three and nine months ended March 31, 2019, the Company reclassified $1.8 million from accumulated other comprehensive loss (accumulated foreign currency translation reserve) to net (loss) income related to the DNI disposal (refer to Note 2). There were no reclassifications from accumulated other comprehensive loss to net (loss) income during the three and nine months ended March 31, 2018.

30


14. Stock-based compensation

     Stock option and restricted stock activity

          Options

     The following table summarizes stock option activity for the nine months ended March 31, 2019 and 2018:

                Weighted              
          Weighted     average           Weighted  
          average     remaining     Aggregate     average  
          exercise     contractual     intrinsic     grant date  
    Number of     price     term     value     fair value  
    shares     ($)     (in years)     ($’000)   ($)  
                               
Outstanding – June 30, 2018   809,274     13.99     2.67     370     4.20  
 Granted – September 2018   600,000     6.20     10.00     1,212     2.02  
 Forfeitures   (278,386 )   19.16                 5.00  
     Outstanding – March 31, 2019   1,130,888     8.60     6.33     -     2.70  
                               
Outstanding – June 30, 2017   846,607     13.87     3.80     486     4.21  
 Forfeitures   (37,333 )   11.23                 4.55  
     Outstanding – March 31, 2018   809,274     13.99     2.92     427     4.20  

     During the nine months ended March 31, 2019, 600,000 stock options were awarded to executive officers and employees. No stock options were awarded during the three months ended March 31, 2019, or during the three and nine months ended March 31, 2018, respectively. During the three months ended March 31, 2019, employees forfeited 78,386 stock options. No stock options were forfeited during the three months ended March 31, 2018. During the nine months ended March 31, 2019, employees and executive officers forfeited 278,386 stock options, including 200,000 stock options granted in August 2008, with a strike price of $24.46 per share, as these stock options expired unexercised. During the nine months ended March 31, 2018, employees forfeited 37,333 stock options.

     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.

     The table below presents the range of assumptions used to value options granted during the nine months ended March 31, 2019:

  Nine months
  ended
  March 31,
  2019
Expected volatility 44%
Expected dividends 0%
Expected life (in years) 3
Risk-free rate 2.75%

     The following table presents stock options vested and expected to vest as of March 31, 2019:

                Weighted        
          Weighted     average        
          average     remaining     Aggregate  
          exercise     contractual     intrinsic  
    Number of     price     term     value  
    shares     ($)     (in years)     ($’000)
Vested and expected to vest – March 31, 2019   1,130,888     8.60     6.33     -  

     These options have an exercise price range of $6.20 to $13.16.

31


14. Stock-based compensation (continued)

     Stock option and restricted stock activity (continued)

          Options (continued)

     The following table presents stock options that are exercisable as of March 31, 2019:

                Weighted        
          Weighted     average        
          average     remaining     Aggregate  
          exercise     contractual     intrinsic  
    Number of     price     term     value  
    shares     ($)     (in years)     ($’000)
Exercisable – March 31, 2019   547,888     11.13     2.97     -  

     No stock options became exercisable during the three and nine months ended March 31, 2019, or during the three months ended March 31, 2018, respectively. However, during the nine months ended March 31, 2018, 105,982 stock options became exercisable. The Company issues new shares to satisfy stock option exercises.

          Restricted stock

     The following table summarizes restricted stock activity for the nine months ended March 31, 2019 and 2018:

    Number of       Weighted  
    shares of       average grant  
    restricted       date fair value  
    stock       ($’000)
Non-vested – June 30, 2018   765,411       6,162  
 Granted – September 2018   148,000       114  
 Total Vested   (64,003 )     503  
     Vested – August 2018   (52,594 )     459  
     Vested – March 2019   (11,409 )     44  
 Forfeitures   (18,000 )     70  
         Non-vested – March 31, 2019   831,408       5,496  
               
Non-vested – June 30, 2017   505,473       11,173  
 Total Granted   611,411       4,522  
     Granted – August 2017   588,594       4,288  
     Granted – March 2018   22,817       234  
 Vested – August 2017   (56,250 )     527  
 Total Forfeitures   (125,961 )     1,491  
     Forfeitures   (30,635 )     358  
     Forfeitures – August and November 2014 awards with market conditions   (95,326 )     1,133  
         Non-vested – March 31, 2018   934,673       9,608  

     The September 2018 grants comprise 148,000 shares of restricted stock awarded to executive officers that are subject to market and time-based vesting. The August 2017 grants comprise (i) 326,000 shares of restricted stock awarded to executive officers and employees that are subject to time-based vesting, (ii) 210,000 shares of restricted stock awarded to executive officers that are subject to market and time-based vesting, and (iii) 52,594 shares of restricted stock awarded to non-employee directors.

     The 326,000 shares of restricted stock will only vest if the recipient is employed by the Company on a full-time basis on August 23, 2020. The 52,594 shares of restricted stock awarded to non-employee directors in August 2017 vested on August 23, 2018, and 11,409 shares of restricted stock, representing half of the 22,817 shares granted to our Chief Financial Officer on March 1, 2018, vested on March 1, 2019. During the three and nine months ended March 31, 2019, 18,000 shares of restricted stock with time-based vesting conditions were forfeited by employees upon their termination from the Company. During the nine months ended March 31, 2018, 56,250 shares of restricted stock granted to non-employee directors vested and employees forfeited 30,635 shares of restricted stock with either market or performance conditions upon their termination from the Company.

32


14. 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:

     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:

     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.

33


14. Stock-based compensation (continued)

     Stock option and restricted stock activity (continued)

          Restricted stock (continued)

     In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the final vested value on maturity is the share price on vesting date. The value of the grant is the average of the discounted vested values. The Company used an expected volatility of 44.0%, an expected life of approximately three years, a risk-free rate ranging between 1.275% to 1.657% and no future dividends in its calculation of the fair value of the restricted stock. The estimated expected volatility was calculated based on the Company’s 30 day VWAP share price using the exponentially weighted moving average of returns.

               Performance Conditions - Restricted Stock Granted in August 2016

     In August 2016 the Company awarded 350,000 shares of restricted stock to executive officers. In May 2017, the Company agreed to accelerate the vesting of 200,000 of these shares of restricted stock granted to the Company’s former Chief Executive Officer. The remaining 150,000 shares continue to be subject to time-based and performance-based vesting conditions. In order for any of the shares to vest, the recipient must remain employed by the Company on a full-time basis on the date that it files its Annual Report on Form 10-K for the fiscal year ended June 30, 2019. If that condition is satisfied, then the shares will vest based on the level of Fundamental EPS the Company achieves for the fiscal year ended June 30, 2019 ("2019 Fundamental EPS"), as follows:

     At levels of 2019 Fundamental EPS greater than $2.60 and less than $3.00, the number of shares that will vest will be determined by linear interpolation relative to 2019 Fundamental EPS of $2.80. Any shares that do not vest in accordance with the above-described conditions will be forfeited. All shares of restricted stock have been valued utilizing the closing price of shares of the Company’s common stock quoted on The Nasdaq Global Select Market on the date of grant.

     Forfeiture of restricted stock awarded in August and November 2014 that did not achieve targeted market conditions

     During the nine months ended March 31, 2018, restricted stock with market conditions awarded in August and November 2014, were forfeited, because the target market conditions were not achieved. The stock-based compensation charge related to these awards was not reversed upon forfeiture because these awards contained market conditions.

     The fair value of restricted stock vesting during each of the nine months ended March 31, 2019 and 2018, respectively, was $0.5 million.

     Stock-based compensation charge and unrecognized compensation cost

     The Company recorded a stock-based compensation charge, net during the three months ended March 31, 2019 and 2018 of $0.5 million and $0.6 million respectively, which comprised:

          Allocated to cost        
          of goods sold, IT     Allocated to  
          processing,     selling, general  
    Total     servicing and     and  
    charge     support     administration  
Three months ended March 31, 2019                  
 Stock-based compensation charge $ 578   $ -   $ 578  
 Reversal of stock compensation charge related to                  
 restricted stock and stock options forfeited $ (91 )   -   $ (91 )
           Total – three months ended March 31, 2019 $ 487   $ -   $ 487  
Three months ended March 31, 2018                  
 Stock-based compensation charge $ 575   $ -   $ 575  
           Total – three months ended March 31, 2018 $ 575   $ -   $ 575  

34


14. Stock-based compensation (continued)

     Stock option and restricted stock activity (continued)

          Restricted stock (continued)

     The Company recorded a stock-based compensation charge, net during the nine months ended March 31, 2019 and 2018 of $1.7 million and $2.0 million respectively, which comprised:

          Allocated to cost        
          of goods sold, IT     Allocated to  
          processing,     selling, general  
    Total     servicing and     and  
    charge     support     administration  
Nine months ended March 31, 2019                  
 Stock-based compensation charge $ 1,763   $ -   $ 1,763  
Reversal of stock compensation charge related to restricted stock and stock options forfeited   (91 )   -     (91 )
           Total – nine months ended March 31, 2019 $ 1,672   $ -   $ 1,672  
Nine months ended March 31, 2018                  
 Stock-based compensation charge $ 2,052   $ -   $ 2,052  
Reversal of stock compensation charge related to stock options forfeited   (42 )   -     (42 )
           Total – nine months ended March 31, 2018 $ 2,010   $ -   $ 2,010  

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

     As of March 31, 2019, the total unrecognized compensation cost related to stock options was approximately $1.0 million, which the Company expects to recognize over approximately three years. As of March 31, 2019, the total unrecognized compensation cost related to restricted stock awards was approximately $2.0 million, which the Company expects to recognize over approximately two years.

     As of March 31, 2019 and June 30, 2018, respectively, the Company recorded a deferred tax asset of approximately $0.8 million and $0.7 million, related to the stock-based compensation charge recognized related to employees of Net1. As of March 31, 2019, and June 30, 2018, respectively, the Company recorded a valuation allowance of approximately $0.8 million and $0.7 million, related to the deferred tax asset because it does not believe that the stock-based compensation deduction would be utilized as it does not anticipate generating sufficient taxable income in the United States. The Company deducts the difference between the market value on date of exercise by the option recipient and the exercise price from income subject to taxation in the United States.

15. (Loss) Earnings per share

     The Company has issued redeemable common stock which is redeemable at an amount other than fair value. Redemption of a class of common stock at other than fair value increases or decreases the carrying amount of the redeemable common stock and is reflected in basic earnings per share using the two-class method. There were no redemptions of common stock, or adjustments to the carrying value of the redeemable common stock during the three and nine months ended March 31, 2019 or 2018. Accordingly, the two-class method presented below does not include the impact of any redemption. The Company’s redeemable common stock is described in Note 15 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018.

     Basic (loss) earnings per share include shares of restricted stock that meet the definition of a participating security because these shares are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Basic (loss) earnings per share have been calculated using the two-class method and basic (loss) earnings per share for the three and nine months ended March 31, 2019 and 2018, reflects only undistributed earnings. The computation below of basic (loss) earnings per share excludes the net (loss) income attributable to shares of unvested restricted stock (participating non-vested restricted stock) from the numerator and excludes the dilutive impact of these unvested shares of restricted stock from the denominator.

     Diluted (loss) earnings per share have been calculated to give effect to the number of shares of additional common stock that would have been outstanding if the potential dilutive instruments had been issued in each period. Stock options are included in the calculation of diluted (loss) earnings per share utilizing the treasury stock method and are not considered to be participating securities, as the stock options do not contain non-forfeitable dividend rights.

35


15. (Loss) Earnings per share (continued)

     The calculation of diluted (loss) earnings per share includes the dilutive effect of a portion of the restricted stock granted to employees in August 2016, August 2017, March 2018, May 2018 and September 2018 as these shares of restricted stock are considered contingently returnable shares for the purposes of the diluted earnings per share calculation and the vesting conditions in respect of a portion of the restricted stock had been satisfied. The vesting conditions for awards made in September 2018, March 2018, August 2017 and August 2016 are discussed in Note 14 above and the vesting conditions for all other awards are discussed in Note 18 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018.

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

    Three months ended       Nine months ended  
    March 31,       December 31,  
    2019       2018       2019       2018  
            (As               (As  
            restatedA)               restatedA)  
    (in thousands except       (in thousands except percent  
    percent and       and  
    per share data)       per share data)  
Numerator:                              
     Net (loss) income attributable to Net1 $ (54,784 )   $ 32,375     $ (123,924 )   $ 61,480  
     Undistributed (loss) earnings   (54,784 )     32,375       (123,924 )     61,480  
             Continuing   (50,299 )     29,084       (122,913 )     58,189  
             Discontinued $ (4,485 )   $ 3,291     $ (1,011 )   $ 3,291  
     Percent allocated to common shareholders (Calculation 1)   98%       98%       99%       98%  
     Numerator for (loss) earnings per share: basic and diluted.   $(53,958 )   $ 31,868       $(122,113 )   $ 60,490  
             Continuing   (49,540 )     28,629       (121,117 )     57,252  
             Discontinued   $(4,417 )     $3,239       $(996 )     $3,238  
                               
Denominator:                              
     Denominator for basic (loss) earnings per share: weighted- average common shares outstanding   55,971       55,828       55,965       55,874  
     Effect of dilutive securities:                           -  
             Stock options   -       61       24       54  
                     Denominator for diluted (loss) earnings per share:
                     adjusted weighted average common shares outstanding and assumed conversion
  55,971       55,889       55,989       55,928  
                               
(Loss) Earnings per share:                              
     Basic $ (0.96 )   $ 0.57     $ (2.18 )   $ 1.08  
             Continuing $ (0.88 )   $ 0.51     $ (2.16 )   $ 1.02  
             Discontinued $ (0.08 )   $ 0.06     $ (0.02 )   $ 0.06  
     Diluted $ (0.96 )   $ 0.57     $ (2.18 )   $ 1.08  
             Continuing $ (0.88 )   $ 0.51     $ (2.16 )   $ 1.02  
             Discontinued $ (0.08 )   $ 0.06     $ (0.02 )   $ 0.06  
                               
(Calculation 1)                              
     Basic weighted-average common shares outstanding (A)   55,971       55,828       55,965       55,874  
     Basic weighted-average common shares outstanding and unvested restricted shares expected to vest (B)   56,828       56,716       56,795       56,788  
     Percent allocated to common shareholders (A) / (B)   98%       98%       99%       98%  
(A) Refer to Note 1.                              

     Options to purchase 1,166,554 and 503,698 shares of the Company’s common stock at prices ranging from $6.20 to $13.16 per share and $8.75 to $13.16 per share were outstanding during the three and nine months ended March 31, 2019, respectively, but were not included in the computation of diluted (loss) earnings per share because the options’ exercise price was greater than the average market price of the Company’s common stock. The options, which expire at various dates through September 7, 2028, were still outstanding as of March 31, 2019.

36


16. Supplemental cash flow information

     The following table presents supplemental cash flow disclosures for the three and nine months ended March 31, 2019, and 2018:

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2019     2018     2019     2018  
Cash received from interest $ 1,403   $ 4,561   $ 4,765   $ 14,409  
Cash paid for interest $ 3,373   $ 2,298   $ 9,027   $ 6,716  
Cash paid for income taxes $ 2,411   $ 2,276   $ 12,533   $ 22,925  

     Investing activities

     The transaction referred to in Note 2 under which the Company reduced its shareholding in DNI from 55% to 38% and used the proceeds, of $27.6 million, from the sale to settle its obligation, of $27.6 million, to subscribe for additional shares in DNI was closed using a cashless settlement process. Therefore, the proceeds from sale and the settlement of the obligation to subscribe for additional shares in DNI were not included in net cash (used in) provided by investing activities in the Company’s unaudited condensed consolidated statement of cash flows for the three and nine months ended March 31, 2019.

17. Revenue recognition

     The Company is a leading provider of transaction processing services, financial inclusion products and services and secure payment technology. The Company operates market-leading payment processors in South Africa and internationally. The Company offers debit, credit and prepaid processing and issuing services for all major payment networks. In South Africa, The Company provides innovative low-cost financial inclusion products, including banking, lending and insurance, and is a leading distributor of mobile subscriber starter packs for Cell C, a South African mobile network operator.

     Disaggregation of revenue

     The following table represents our revenue disaggregated by major revenue streams, including reconciliation to operating segments for the three months ended March 31, 2019:

                Rest of        
    South           the        
    Africa     Korea     world     Total  
South African transaction processing                        
     Processing fees $ 14,166   $ -   $ -   $ 14,166  
     Other   1,908     -     -     1,908  
          Sub-total   16,074     -     -     16,074  
International transaction processing                        
     Processing fees   -     30,895     2,125     33,020  
     Other   -     1,161     177     1,338  
           Sub-total   -     32,056     2,302     34,358  
Financial inclusion and applied technologies                        
     Telecom products and services   17,409     -     -     17,409  
     Account holder fees   2,445     -     -     2,445  
     Lending revenue   6,075     -     -     6,075  
     Technology products   5,357     -     -     5,357  
     Insurance revenue   755     -     -     755  
     Other   4,011     -     -     4,011  
             Sub-total   36,052     -     -     36,052  
  $ 52,126   $ 32,056   $ 2,302   $ 86,484  

37


17. Revenue recognition (continued)

     Disaggregation of revenue (continued)

     The following table represents our revenue disaggregated by major revenue streams, including reconciliation to operating segments for the nine months ended March 31, 2019:

                Rest of        
    South           the        
    Africa     Korea     world     Total  
South African transaction processing                        
     Processing fees $ 63,426   $ -   $ -   $ 63,426  
     Welfare benefit distribution fees   3,086     -     -     3,086  
     Other   4,828     -     -     4,828  
          Sub-total   71,340     -     -     71,340  
International transaction processing                        
     Processing fees   -     99,866     7,323     107,189  
     Other   -     4,141     539     4,680  
           Sub-total   -     104,007     7,862     111,869  
Financial inclusion and applied technologies                        
     Telecom products and services   54,576     -     -     54,576  
     Account holder fees   16,190     -     -     16,190  
     Lending revenue   22,021     -     -     22,021  
     Technology products   15,396     -     -     15,396  
     Insurance revenue   4,580     -     -     4,580  
     Other   13,546     -     -     13,546  
           Sub-total   126,309     -     -     126,309  
  $ 197,649   $ 104,007   $ 7,862   $ 309,518  

     Nature of goods and services

          Processing fees

     The Company earns processing fees from transactions processed for its customers. The Company provides its customers with transaction processing services that involve the collection, transmittal and retrieval of all transaction data in exchange for consideration upon completion of the transaction. In certain instances, the Company also provides a funds collection and settlement service for its customers. The Company considers these services as a single performance obligation. The Company’s contracts specify a transaction price for services provided. Processing revenue fluctuates based on the type and the volume of transactions processed. Revenue is recognized on the completion of the processed transaction.

     Customers that have a bank account managed by the Company are issued cards that can be utilized to withdraw funds at an ATM or to transact at a merchant point of sale device ("POS"). The Company earns processing fees from transactions processed for these customers. The Company’s contracts specify a transaction price for each service provided (for instance, ATM withdrawal, balance enquiry, etc.). Processing revenue fluctuates based on the type and the volume of transactions performed by the customer. Revenue is recognized on the completion of the processed transaction.

          Welfare benefit distribution fees

     The Company provided a welfare benefits distribution service in South Africa to a customer under a contract which expired on September 30, 2018. The Company was required to distribute social welfare grants to identified recipients using an internally developed payment platform at designated distribution points (pay points) which enabled the recipients to access their grants. The contract specified a fixed fee per account for one or more grants received by a recipient. The Company recognized revenue for each grant recipient paid at the fixed fee.

          Telecom products and services

     The Company has entered into contracts with mobile networks in South Africa to distribute subscriber identity modules ("SIM") cards on their behalf. The Company is entitled to receive consideration based on the activation of each SIM as well as from a percentage of the value loaded onto each SIM. The Company recognizes revenue from these services once the criteria specified for activation have been met as well as when it is entitled to its consideration related to the value loaded onto the SIM. Revenue from contracts with mobile networks fluctuates based on the number of SIMs activated as well as on the value loaded onto the SIM.

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17. Revenue recognition (continued)

     Nature of goods and services (continued)

          Telecom products and services (continued)

     The Company purchases airtime for resale to customers. The Company recognizes revenue as the airtime is delivered to the customer. Revenue from the resale of airtime to customers fluctuates based on the volume of airtime sold.

          Account holder fees

     The Company provides bank accounts to customers and this service is underwritten by a regulated banking institution because the Company is not a bank. The Company charges its customers a fixed monthly bank account administration fee for all active bank accounts regardless of whether the account holder has transacted or not. The Company recognizes account holder fees on a monthly basis on all active bank accounts. Revenue from account holder’s fees fluctuates based on the number of active bank accounts.

          Lending revenue

     The Company provides short-term loans to customers in South Africa and charges up-front initiation fees and monthly service fees. Initiation fees are recognized using the effective interest rate method, which requires the utilization of the rate of return implicit in the loan, that is, the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan. Monthly service fee revenue is recognized under the contractual terms of the loan. The monthly service fee amount is fixed upon initiation and does not change over the term of the loan.

          Technology products

     The Company supplies hardware and licenses for its customers to use the Company’s technology. Hardware includes the sale of POS devices, SIM cards and other consumables which can occur on an ad hoc basis. The Company recognizes revenue from hardware at the transaction price specified in the contract as the hardware is delivered to the customer. Licenses include right to use certain technology developed by the Company and is recognized ratably over the license period.

          Insurance revenue

     The Company writes life insurance contracts, and policy holders pay the Company a monthly insurance premium at the beginning of each month. Premium revenue is recognized on a monthly basis net of policy lapses. Policy lapses are provided for on the basis of expected non-payment of policy premiums.

     Significant judgments and estimates

     The Company was subject to a court process regarding the determination of the price to be charged for welfare benefit distribution services provided from April 1, 2018 to September 30, 2018. In December 2018, the Constitutional Court of South Africa clarified that it was not required to ratify the price and stated that the parties should reach an agreement on the price, failing which they should approach the lower courts in South Africa. The Company has initiated discussions with SASSA, but the parties had not reached an agreement as of March 31, 2019, regarding the pricing for services provided through September 30, 2018. Management determined, under previous revenue guidance, that there was no evidence of an arrangement at a fixed and determinable price other than that noted in the court ordered extension provided in March 2018 and did not record any additional revenue related to the services provided from April 1, 2018 to June 30, 2018, and recorded revenue at the rate specified in the contract. Upon adoption of the new revenue guidance on July 1, 2018, the Company determined that it was unable to estimate the amount of revenue that it is entitled to receive because the court had not yet confirmed the amount at that date. Accordingly, the Company has not recorded any additional revenue during the nine months ended March 31, 2019, related to the price to be charged for welfare benefit distribution services provided through September 30, 2018. The Company recorded revenue at the rate specified in the contract. The Company expects to record any additional revenue once there is agreement between the Company and SASSA on the fee.

     Accounts Receivable, Contract Assets and Contract Liabilities

     The Company recognizes accounts receivable when its right to consideration under its contracts with customers becomes unconditional. The Company has no contract assets or contract liabilities.

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18. Operating segments

     The Company discloses segment information as reflected in the management information systems reports that its chief operating decision maker uses in making decisions and to report certain entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets or reports material revenues. A description of the Company’s operating segments is contained in Note 22 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018. As discussed in Note 2, the Company has presented DNI as a discontinued operation.

     The reconciliation of the reportable segment’s revenue to revenue from external customers for the three months ended March 31, 2019 and 2018, is as follows:

    Revenue  
                From  
    Reportable     Inter-     external  
    Segment     segment     customers  
South African transaction processing $ 17,374   $ 1,300   $ 16,074  
International transaction processing   34,358     -     34,358  
Financial inclusion and applied technologies   36,650     598     36,052  
 Total for the three months ended March 31, 2019 $ 88,382   $ 1,898   $ 86,484  
                   
South African transaction processing $ 73,508   $ 7,429   $ 66,079  
International transaction processing   46,240     -     46,240  
Financial inclusion and applied technologies   59,574     9,172     50,402  
 Total for the three months ended March 31, 2018 $ 179,322   $ 16,601   $ 162,721  

     The reconciliation of the reportable segment’s revenue to revenue from external customers for the nine months ended March 31, 2019 and 2018, is as follows:

          Revenue        
                From  
    Reportable     Inter-     external  
    Segment     segment     customers  
South African transaction processing $ 77,093   $ 5,753   $ 71,340  
International transaction processing   111,869     -     111,869  
Financial inclusion and applied technologies   128,611     2,302     126,309  
 Total for the nine months ended March 31, 2019 $ 317,573   $ 8,055   $ 309,518  
                   
South African transaction processing $ 204,093   $ 19,755   $ 184,338  
International transaction processing   136,447     -     136,447  
Financial inclusion and applied technologies   168,018     25,108     142,910  
 Total for the nine months ended March 31, 2018 $ 508,558   $ 44,863   $ 463,695  

     The Company does not allocate interest income, interest expense or income tax expense to its reportable segments. The Company evaluates segment performance based on segment operating income before acquisition-related intangible asset amortization which represents operating income before acquisition-related intangible asset amortization and allocation of expenses allocated to Corporate/Eliminations, all under GAAP.

     The reconciliation of the reportable segments measures of profit or loss to income before income taxes for the three and nine months ended March 31, 2019 and 2018, is as follows:

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2019     2018     2019     2018  
Reportable segments measure of profit or loss $ (7,818 ) $ 12,795   $ (31,678 ) $ 65,579  
 Operating income: Corporate/Eliminations   (13,865 )   (5,231 )   (32,184 )   (16,702 )
 Change in fair value of equity securities   (26,263 )   37,843     (42,099 )   37,843  
 Loss on disposal of DNI   (5,140 )   -     (5,140 )   -  
 Interest income, net of impairment   (959 )   5,154     586     14,903  
 Interest expense   (3,493 )   (2,426 )   (9,030 )   (6,872 )
  (Loss) Income before income taxes $ (57,538 ) $ 48,135   $ (119,545 ) $ 94,751  

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18. Operating segments (continued)

     The following tables summarize segment information that is prepared in accordance with GAAP for the three and nine months ended March 31, 2019 and 2018, with the impact of the deconsolidation of DNI included in discontinued operations:

    Three months ended       Nine months ended  
    March 31,       March 31,  
    2019       2018       2019       2018  
Revenues                              
     South African transaction processing $ 17,374     $ 73,508     $ 77,093     $ 204,093  
     International transaction processing   34,358       46,240       111,869       136,447  
     Financial inclusion and applied technologies   36,650       59,574       128,611       168,018  
             Continuing   18,808       59,574       72,274       168,018  
             Discontinued   17,842       -       56,337       -  
                     Total   88,382       179,322       317,573       508,558  
                             Continuing   70,540       179,322       261,236       508,558  
                             Discontinued   17,842       -       56,337       -  
Operating income (loss)                              
     South African transaction processing(1)   (12,954 )     12,719       (28,297 )     38,521  
     International transaction processing   1,909       (14,892 )     628       (14,567 )
     Financial inclusion and applied technologies(1)   3,227       14,968       (4,009 )     41,625  
             Continuing(1)   (4,911 )     14,968       (28,409 )     41,625  
             Discontinued   8,138       -       24,400       -  
                     Subtotal: Operating segments   (7,818 )     12,795       (31,678 )     65,579  
                     Corporate/Eliminations   (13,865 )     (5,231 )     (32,184 )     (16,702 )
                             Continuing   (6,399 )     (5,231 )     (19,465 )     (16,702 )
                             Discontinued   (7,466 )     -       (12,719 )     -  
                                 Total(1)   (21,683 )     7,564       (63,862 )     48,877  
                                     Continuing(1)   (22,355 )     7,564       (75,543 )     48,877  
                                     Discontinued   672       -       11,681       -  
Depreciation and amortization                              
     South African transaction processing   914       1,236       2,776       3,476  
     International transaction processing   2,367       4,668       7,937       13,681  
     Financial inclusion and applied technologies   616       398       1,657       1,062  
             Continuing   349       398       1,044       1,062  
             Discontinued   267       -       613       -  
         Subtotal: Operating segments   3,897       6,302       12,370       18,219  
               Corporate/Eliminations   5,984       3,039       18,158       8,811  
                     Continuing   3,824       3,039       10,745       8,811  
                     Discontinued   2,160       -       7,413       -  
                             Total   9,881       9,341       30,528       27,030  
                                     Continuing   7,454       9,341       22,502       27,030  
                                     Discontinued   2,427       -       8,026       -  
Expenditures for long-lived assets                              
     South African transaction processing   434       1,794       2,767       3,171  
     International transaction processing   712       1,990       2,353       3,788  
     Financial inclusion and applied technologies   469       441       2,160       842  
             Continuing   61       441       1,429       842  
             Discontinued   408       -       731       -  
          Subtotal: Operating segments   1,615       4,225       7,280       7,801  
               Corporate/Eliminations   -       -       -       -  
                             Total   1,615       4,225       7,280       7,801  
                                     Continuing   1,207       4,225       6,549       7,801  
                                     Discontinued $ 408     $ -     $ 731     $ -  

     (1) South African transaction processing and Financial inclusion and applies technologies include retrenchment costs for the three months ended March 31, 2019 of: $2,972 (nine months: $3,673) and $1,570 (nine months: $1,570), respectively, for total retrenchment costs for the three months of $4,542 (nine months: $5,243). The retrenchment costs are included in selling, general and administration expense on the unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019.

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18. Operating segments (continued)

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

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

19. Income tax

     Income tax in interim periods

     For the purposes of interim financial reporting, the Company determines the appropriate income tax provision by first applying the effective tax rate expected to be applicable for the full fiscal year to ordinary income. This amount is then adjusted for the tax effect of significant unusual items, for instance, changes in tax law, valuation allowances and non-deductible transaction-related expenses that are reported separately, and have an impact on the tax charge. The cumulative effect of any change in the enacted tax rate, if and when applicable, on the opening balance of deferred tax assets and liabilities is also included in the tax charge as a discrete event in the interim period in which the enactment date occurs.

     For the three and nine months ended March 31, 2019, the Company’s effective tax rate was adversely impacted by the valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by the Company’s South African businesses, the non-deductible impairment losses, the DNI disposal loss, and non-deductible expenses, including transaction-related expenditure and non-deductible interest on its South African long-term debt facility, which was partially offset by tax expense recorded by the Company’s profitable businesses in South Africa and South Korea. The deferred tax impact of the change in the fair value of the Company’s investment in Cell C also impacted the Company’s 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. The March 31, 2019, carrying value of the Company’s investment in Cell C is less than its initial cost and therefore it has a capital gains benefit for tax purposes, however, the Company does not expect to generate any significant capital gains in the foreseeable future and has provided a valuation allowance of $3.6 million related to this capital gains benefit deferred tax asset.

     The Company’s effective tax rate for the three and nine months ended March 31, 2018, was 40.3% and 42.0%, respectively, and was higher than the South African statutory rate as a result of an impairment loss, non-deductible expenses (including transaction-related expenditure and non-deductible interest on our South African long-term facility), the impact of the changes in U.S. federal statutory tax rates described below and for the nine months ended March 31, 2018, a valuation allowance provided related to an allowance for doubtful working capital finance receivables created. The deferred tax impact of the change in the fair value of the Company’s investment in Cell C also impacted the Company’s effective rate for fiscal 2018, as this amount is recorded at a lower rate (at a capital gains rate) than the South African statutory rate.

     Recent Tax Legislation

     On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA"), was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect the Company’s business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. During the year ended June 30, 2018, the TCJA required the Company to incur a transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income. The TCJA also reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. The TCJA includes a provision to tax global intangible low taxed income ("GILTI") of foreign subsidiaries which is effective for the Company beginning July 1, 2018.

     The TCJA was effective in the third quarter of fiscal year 2018. As of March 31, 2019, the Company has not completed its accounting for the estimated tax effects of the TCJA. Due to the timing of the enactment and the complexity in applying the provisions of the TCJA, the provisional net charge is subject to revisions as the Company continues to complete its analysis of the TCJA, collect and prepare necessary data, and interpret additional guidance issued by standard-setting and regulatory bodies. Adjustments may materially impact the Company’s provision for income taxes and effective tax rate in the period in which the adjustments are made.

     The Company has calculated its Transition Tax liability as of June 30, 2018, and recorded a Transition Tax, before the application of any foreign tax credits, of $56.9 million, and has no liability after the application of generated foreign tax credits. In fact, the Company believes that it may generate excess foreign tax credits based on its preliminary calculations.

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19. Income tax (continued)

     Recent Tax Legislation (continued)

     The Company re-measured its deferred taxes to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The TCJA subjects a U.S. corporation to tax on its GILTI. Due to the complexity of the new GILTI tax rules, the Company continues to evaluate this provision of the TCJA and the application of GAAP. Under GAAP, the Company has the option to make an accounting policy election of either (i) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or (ii) factoring such amounts into a company’s measurement of its deferred taxes (the "deferred method"). The Company has elected the period cost method and will record U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred. The Company is not yet able to reasonably estimate the effect of this provision of the TCJA on it because whether it expects to have future U.S. inclusions in taxable income related to GILTI depends on a number of different aspects of the Company’s estimated future results of global operations. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements.

     Uncertain tax positions

     There were no significant changes in the Company’s uncertain tax positions during the three and nine months ended March 31, 2019. As of March 31, 2019, the Company had accrued interest related to uncertain tax positions of approximately $0.1 million on its balance sheet.

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

     As of March 31, 2019 and June 30, 2018, the Company had unrecognized tax benefits of $1.0 million and $0.8 million, respectively, all of which would impact the Company’s effective tax rate. The Company files income tax returns mainly in South Africa, South Korea, Germany, Hong Kong, India, the United Kingdom, Botswana and in the U.S. federal jurisdiction. As of March 31, 2019, the Company’s South African subsidiaries are no longer subject to income tax examination by the South African Revenue Service for periods before June 30, 2014. The Company is subject to income tax in other jurisdictions outside South Africa, none of which are individually material to its financial position, statement of cash flows, or results of operations.

20. Commitments and contingencies

     Guarantees

     The South African Revenue Service and certain of the Company’s customers, suppliers and other business partners have asked the Company to provide them with guarantees, including standby letters of credit, issued by a South African bank. The Company is required to procure these guarantees for these third parties to operate its business.

     Nedbank has issued guarantees to these third parties amounting to ZAR 96.0 million ($6.6 million, translated at exchange rates applicable as of March 31, 2019) and thereby utilizing part of the Company’s short-term facility. The Company in turn has provided nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 96.0 million ($6.6 million, translated at exchange rates applicable as of March 31, 2019). The Company pays commission of between 0.4% per annum to 1.94% per annum of the face value of these guarantees and does not recover any of the commission from third parties.

     The Company has not recognized any obligation related to these counter-guarantees in its consolidated balance sheet as of March 31, 2019. The maximum potential amount that the Company could pay under these guarantees is ZAR 96.0 million ($6.6 million, translated at exchange rates applicable as of March 31, 2019). The guarantees have reduced the amount available for borrowings under the Company’s short-term credit facility described in Note 11.

     Contingencies

          Challenge to Payment by SASSA of Additional Implementation Costs

     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, including VAT, to SASSA, plus interest from June 2014 to date of payment. On April 4, 2018, CPS filed an application seeking leave to appeal the whole order and judgment of the High Court with the High Court because its believes 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 refused the application seeking leave to appeal.

     In May 2018, CPS delivered its petition 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 is expected to be heard during the first half of calendar 2019. The Company cannot predict how the Supreme Court will rule on the matter.

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20. Commitments and contingencies (continued)

     The Company is subject to a variety of other insignificant claims and suits that arise from time to time in the ordinary course of business. Management currently believes that the resolution of these other matters, individually or in the aggregate, will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.

21. Related party transactions

     DNI leased a building that was owned by a company in which Mr. A.J. Dunn, DNI’s Chief Executive Officer, has a direct shareholding of 16%. The property was sold in November 2018. During the nine months ended March 31, 2019, DNI paid rental of approximately $1.0 million. On April 2, 2019, the Company’s board of directors determined that Mr. A.J. Dunn no longer performs a policy-making function by virtue of the change in the importance of his position within the Net1 group and is, therefore, no longer an executive officer.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with our Annual Report on Form 10-K/A for the year ended June 30, 2018, and the unaudited condensed consolidated financial statements and the accompanying notes included in this Form 10-Q.

Forward-looking statements

     Some of the statements in this Form 10-Q constitute forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, implied or inferred by these forward-looking statements. Such factors include, among other things, those listed under Item 1A.—"Risk Factors" and elsewhere in our Annual Report on Form 10-K/A for the year ended June 30, 2018. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "would," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology.

     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially. We undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

     You should read this Form 10-Q and the documents that we reference herein and the documents we have filed as exhibits hereto and thereto and which we have filed with the United States Securities and Exchange Commission completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Recent Developments

 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, 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 Africa 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 six months. 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 remain on track to reaching a breakeven EBITDA on a monthly basis by the end of the last quarter of fiscal 2019.

    Restructuring of South African operations – In late January, 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), reducing the availability of our mobile ATM infrastructure, and terminating certain leases. During the third quarter of 2019, we incurred retrenchment costs of $4.5 million related to the reduction of personnel 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 on a larger scale during Q1 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 third quarter of fiscal 2019 due to a more steady 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, but these discussions are still at an early stage.

    Our loan book under Moneyline has increased slightly in the third 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. Within Smartlife, the number of policies paid up has also stabilized and while the lapses related to the increased non-payment continued in the third quarter of fiscal 2019, the lapse-rate is now also returning to more normal levels.
 

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SASSA contract exit and summary of legal proceedings

     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. An update on the key topics follow:

     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 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 on SASSA for the pricing and have instituted a dispute resolution process. We believe it may be necessary for this matter to go through a legal process for resolution.

     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 during 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 it was unlikely that those EPE customers, who had provided biometric consent prior to regulations being effected, would be required to be returned to us. 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. While the first and third actions are longer processes, we believe SASSA’s response to the second action should provide valuable insights into their Annexure C acceptance and processing policies, and will guide our future efforts to bank the unbanked in South Africa. The risk of our remaining EPE customers being auto-migrated still exists, but there has been no further auto-migration since November 2018. Refer to discussion under "Part II—Item 1—Legal Proceedings— Legal proceedings against SASSA in respect of transfer of grant payments from EPE to SAPO accounts."

     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 R400 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 $59.3 million in order to monetize our remaining investment in DNI. We expect the call option to be exercised within the next eight months.

     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. reserves. 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 have completed the first phase of their project, which consisted of the identification of actionable items. In phase two, they will work 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.

     Cell C – During the third quarter of fiscal 2019, Cell C signed a binding term sheet with the Buffet consortium which, once concluded, is expected to substantially improve Cell C’s liquidity position and meaningfully reduce its debt servicing costs. Cell C has also appointed a new chief executive officer, whose focus is on executing the Buffet transaction, managing liquidity and lifting the operational performance of the business.

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     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 the calendar 2019.

    Once completed, IPG is expected to begin the deployment of its new products to the European SME market. During the third quarter of 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 early 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 calendar 2018 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.

     ZappGroup – Our new Africa-focused investment, ZappGroup made significant strides in its second quarter of existence. During Q2 2019, ZappGroup had signed up the largest bank in Ghana and went live with a beta product. During the third quarter of fiscal 2019, ZappGroup progressed live testing and has also signed up two of the three largest mobile operators in Ghana. 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 first 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 the third quarter of 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 – Our virtual card project with MobiKwik has continued to demonstrate steady growth given the constraints applied by our current issuing bank partner. However, as a result of new regulatory guidelines, MobiKwik has applied for direct membership with Visa and once finalized, is expected to allow MobiKwik to expand issuances to its millions of customers. MobiKwik has performed well in advance of expectations, primarily due to its successful transition to being a digital financial services provider. During the year ended March 31, 2019, MobiKwik has more than doubled its revenue and halved its loss, keeping its momentum to reach breakeven in its current fiscal year. Digital financial services now account for approximately 25% of MobiKwik’s total monthly revenue compared to zero during the previous fiscal  year.

Critical Accounting Policies

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

     Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially may result in materially different results under different assumptions and conditions. We have identified the following critical accounting policies that are described in more detail in our Annual Report on Form 10-K/A for the year ended June 30, 2018:

     Recent accounting pronouncements adopted

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

     Recent accounting pronouncements not yet adopted as of March 31, 2019

     Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of March 31, 2019, including the expected dates of adoption and effects on our 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:

Table 1   Three months ended     Nine months ended     Year ended  
    March 31,     March 31,     June 30,  
    2019     2018     2019     2018     2018  
ZAR : $ average exchange rate   14.0207     11.9614     14.1319     12.9291     12.8557  
Highest ZAR : $ rate during period   14.6337     12.4308     15.4335     14.4645     14.4645  
Lowest ZAR : $ rate during period   13.3064     11.5526     13.1528     11.5526     11.5526  
Rate at end of period   14.4789     11.8255     14.4789     11.8255     13.7255  
                               
KRW : $ average exchange rate   1,125     1,072     1,125     1,104     1,098  
Highest KRW : $ rate during period   1,137     1,091     1,141     1,156     1,156  
Lowest KRW : $ rate during period   1,112     1,059     1,108     1,059     1,056  
Rate at end of period   1,137     1,061     1,137     1,061     1,114  

ZAR: US $ Exchange Rates

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KRW: US $ Exchange Rates


     Translation exchange rates for financial reporting purposes

     We are required to translate our results of operations from ZAR and KRW to U.S. dollars on a monthly basis. Thus, the average rates used to translate this data for the three and nine months ended March 31, 2019 and 2018, vary slightly from the averages shown in the table above. The translation rates we use in presenting our results of operations are the rates shown in the following table:

Table 2   Three months ended     Nine months ended     Year ended  
    March 31,     March 31,     June 30,  
    2019     2018     2019     2018     2018  
Income and expense items: $1 = ZAR.   14.1703     11.9479     14.2665     12.8934     12.6951  
Income and expense items: $1 = KRW   1,131     1,067     1,124     1,099     1,095  
Balance sheet items: $1 = ZAR   14.4789     11.8255     14.4789     11.8255     13.7255  
Balance sheet items: $1 = KRW   1,137     1,061     1,137     1,061     1,114  

Results of operations

     The discussion of our consolidated results of operations is based on amounts as reflected in our unaudited condensed consolidated financial statements which are prepared in accordance with U.S. GAAP. We analyze our results of operations both in U.S. dollars, as presented in the 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.

     DNI was accounted for using the equity method from August 1, 2017, until June 30, 2018, the date upon which we obtained control of DNI through the acquisition of an additional voting and economic interest. Accordingly, the three and nine months ended March 31, 2019, included DNI for the entire period as a consolidated subsidiary. DNI was included as an equity-accounted investment for the entire third quarter of fiscal 2018 and for eight of the nine months ended March 31, 2018. Except for the loss recognized on disposal of DNI, the deconsolidation of DNI on March 31, 2019, did not have an impact on the analysis presented below for the three and nine months ended March 31, 2019.

     Our operating segment revenue presented in "—Results of operations by operating segment" represents total revenue per operating segment before inter-segment eliminations. Reconciliation between total operating segment revenue and revenue presented in our unaudited condensed consolidated financial statements is included in Note 18 to those statements.

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

     Third quarter of fiscal 2019 compared to third quarter of fiscal 2018

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

     Consolidated overall results of operations

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

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

    In U.S. Dollars  
Table 3   (U.S. GAAP)  
    Three months ended March 31,  
    2019(A)       2018        
            As        
            restated(A)(B)   $ %  
  $ ’000     $ ’000     change  
Revenue   86,484       162,721     (47% )
Cost of goods sold, IT processing, servicing and support   50,179       77,860     (36% )
Selling, general and administration   42,802       48,091     (11% )
Depreciation and amortization   9,881       9,341     6%  
Impairment loss   5,305       19,865     (73% )
Operating (loss) income   (21,683 )     7,564     nm  
Change in fair value of equity securities   (26,263 )     37,843     nm  
Loss on disposal of DNI   5,140       -     nm  
Interest income, net of impairment loss   (959 )     5,154     nm  
Interest expense   3,493       2,426     44%  
(Loss) income before income tax (benefit) expense   (57,538 )     48,135     nm  
Income tax (benefit) expense   (2,490 )     19,418     nm  
Net (loss) income before (loss) earnings from equity-accounted investments   (55,048 )     28,717     nm  
(Loss) earnings from equity-accounted investments   (464 )     3,960     nm  
Net (loss) income   (55,512 )     32,677     nm  
       Continuing   (50,784 )     29,386     nm  
       Discontinued   (4,728 )     3,291     nm  
(Add) Less net (loss) income attributable to non-controlling interest   (728 )     302     nm  
       Continuing   (485 )     302     nm  
       Discontinued   (243 )     -     nm  
Net (loss) income attributable to us   (54,784 )     32,375     nm  
       Continuing   (50,299 )     29,084     nm  
       Discontinued   (4,485 )     3,291     nm  

(A) Refer to Note 2 to the unaudited condensed consolidated financial statements for discontinued operations disclosures.
(B) Refer to Notes 1 to the unaudited condensed consolidated financial statements for additional information regarding the restatement.

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    In South African Rand  
Table 4   (U.S. GAAP)  
    Three months ended March 31,  
    2019(A)     2018        
            As        
            restated(A)(B)     ZAR %  
    ZAR ’000       ZAR ’000     change  
Revenue   1,225,669       1,944,174     (37% )
Cost of goods sold, IT processing, servicing and support   711,146       930,263     (24% )
Selling, general and administration   606,599       574,586     6%  
Depreciation and amortization   140,036       111,606     25%  
Impairment loss   75,184       237,345     (68% )
Operating (loss) income   (307,296 )     90,374     nm  
Change in fair value of equity securities   (372,204 )     452,144     nm  
Loss on disposal of DNI   72,845       -     nm  
Interest income   (13,591 )     61,579     nm  
Interest expense   49,503       28,986     71%  
(Loss) income before income tax expense   (815,439 )     575,111     nm  
Income tax expense   (35,289 )     232,004     nm  
Net (loss) income before (loss) earnings from equity-accounted                    
investments   (780,150 )     343,107     nm  
(Loss) earnings from equity-accounted investments   (6,576 )     47,314     nm  
Net (loss) income   (786,726 )     390,421     nm  
       Continuing   (719,720 )     351,100     nm  
       Discontinued   (67,006 )     39,321     nm  
(Add) Less net (loss) income attributable to non-controlling interest   (10,317 )     3,608     nm  
       Continuing   (6,873 )     3,608     nm  
       Discontinued   (3,444 )     -     nm  
Net (loss) income attributable to us   (776,409 )     386,813     nm  
       Continuing   (712,847 )     347,492     nm  
       Discontinued   (63,562 )     39,321     nm  

(A) Refer to Note 2 to the unaudited condensed consolidated financial statements for discontinued operations disclosures.
(B) Refer to Notes 1 to the unaudited condensed consolidated financial statements for additional information regarding the restatement.

     The decrease in revenue was primarily due to the expiration of our SASSA contract, elimination of fees earned on SASSA-Grindrod accounts and the effect of fewer EPE accounts due to the auto-migration and its knock-on effect on related fees, financial and value-added services, partially offset by the inclusion of DNI.

     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 transactions costs incurred by us and fewer prepaid airtime sales, which was partially offset by the inclusion of DNI. Our third quarter of fiscal 2019 expenses 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.

     In ZAR, the increase in selling, general and administration expense was primarily due to the inclusion of DNI, payment of $4.5 million (ZAR 63.8 million) of retrenchment packages and an increase in costs at the international payments group as part of its restructuring and re-establishment initiatives, which was partially offset by the elimination of some operating costs related to our expired SASSA contract. Our third quarter of fiscal 2019 expense also includes certain committed fixed and variable costs (including premises and staff costs) that relate to the maintenance and expansion of our financial inclusion initiatives.

     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.

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     During the third quarter of fiscal 2019, we 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 of the review, we recorded an impairment loss of $5.3 million related to a portion of the customer relationship during the third quarter of fiscal 2019. Refer to Note 9 of our unaudited condensed consolidated financial statements for additional information regarding the impairment loss.

     During the third quarter of 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, we recognized an impairment loss of approximately $19.9 million related to the entire carrying value of goodwill acquired.

     Our operating (loss) income margin for the third quarter of fiscal 2019 and 2018 was (25.1%) and 4.6%, respectively. Operating (loss) income margin excluding the impairment losses incurred during the respective periods would have been (18.9%) and 16.9%, respectively. We discuss the components of operating income margin under "—Results of operations by operating segment."

     The change in fair value of equity securities represents a non-cash fair value adjustment (loss) gain of $(26.3 million) related to Cell C and caused by reduced EBITDA levels in Cell C. Refer to Note 7 of our unaudited condensed consolidated financial statements for the methodology and inputs used in the fair value calculation for the third quarter of fiscal 2019.

     We recognized a non-cash loss of $5.1 million related to the sale of DNI on March 31, 2019.

     Excluding the impact of the impairment of $2.6 million discussed in Note 8 of our unaudited condensed consolidated financial statements, interest on surplus cash decreased to $1.6 million (ZAR 23.3 million) from $5.2 million (ZAR 61.6 million), due primarily to the lower average daily ZAR cash balances resulting from our significant investments over the last 21 months and the cash used to fund the operating losses of the last quarter in the South African operations.

     Interest expense increased to $3.5 million (ZAR 49.5 million) from $2.4 million (ZAR 29.0 million), due to increased borrowings which we obtained to fund our ATMs, which was partially offset by a reduction in our long-term South African debt.

     Fiscal 2019 tax benefit was $2.5 million (ZAR 35.3 million) compared to a tax expense of $19.4 million (ZAR 232.0 million) in fiscal 2018. Our effective tax rate was adversely impacted by the valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by our South African businesses, the non-deductible impairment losses, the DNI disposal loss, and non-deductible expenses, including transaction-related expenditure and non-deductible interest on our South African long-term debt facility, which was partially offset by tax expense recorded by our profitable businesses in South Africa and South Korea. 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. The March 31, 2019, carrying value of our investment in Cell C is less than its initial cost and therefore it has a capital gains benefit for tax purposes, however, we do not expect to generate any significant capital gains in the foreseeable future and have provided a valuation allowance of $3.6 million related to this capital gains benefit deferred tax asset. Our effective tax rate for fiscal 2018, was 40.3% and was higher than the South African statutory rate as a result of the deferred tax impact of the increase in the fair value of our investment in Cell C, the impairment loss, non-deductible expenses (including transaction-related expenditure and non-deductible interest on our South African long-term facility).

     DNI was consolidated into our results for the third quarter of fiscal 2019. The consolidation of DNI has adversely impacted the comparability of our (loss) earnings from equity-accounted investments during the third quarter of fiscal 2019 because it was accounted for using the equity method during the third quarter of fiscal 2018. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first quarter and its annual results during our fourth quarter. The table below presents the relative (loss) earnings from our equity accounted investments:

Table 5   Three months ended March 31,  
    2019       2018   $ %  
  $ ’000     $ ’000     change  
Bank Frick   (90 )     653     nm  
Share of net income   52       747     (93% )
Amortization of intangible assets, net of deferred tax   (142 )     (94 )   51%  
DNI   -       3,291     nm  
       Share of net income   -       3,628     nm  
       Amortization of intangible assets, net of deferred tax   -       (337 )   nm  
Other   (374 )     16     nm  
       (Loss) earnings from equity accounted investments   (464 )     3,960     Nm  

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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:

Table 6 In U.S. Dollars (U.S. GAAP)  
  Three months ended March 31,
    2019       % of       2018       % of     %  
Operating Segment $ ’000       total     $ ’000       total     change  
Revenue:                                    
       South African transaction processing   17,374       20%       73,508       45%     (76% )
       International transaction processing   34,358       40%       46,240       28%     (26% )
       Financial inclusion and applied technologies   36,650       42%       59,574       37%     (38% )
               Continuing   18,808       21%       59,574       37%     (68% )
               Discontinued   17,842       21%       -       -     nm  
                     Subtotal: Operating segments   88,382       102%       179,322       110%     (51% )
       Intersegment eliminations   (1,898 )     (2% )     (16,601 )     (10% )   (89% )
               Consolidated revenue   86,484       100%       162,721       100%