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

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2017September 30, 2019

OR

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

For the transition period from  ______________ to _______________________________To _________________

Commission file number:000-31203

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

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

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

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

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

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

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

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

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

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

As of February 6, 2018November 4, 2019 (the latest practicable date), 56,832,37056,568,425 shares of the registrant’s common stock, par value $0.001 per share, net of treasury shares, were outstanding.

Form 10-Q

NET 1 UEPS TECHNOLOGIES, INC.

Table of Contents

1

Part I. Financial Information

Item 1. Financial Statements

(A) – Derived from audited financial statements

See Notes to Unaudited Condensed Consolidated Financial Statements

2

NET 1 UEPS TECHNOLOGIES, INC.

NET 1 UEPS TECHNOLOGIES, INC.

Unaudited Condensed Consolidated Statements of Operations

Unaudited Condensed Consolidated Statements of Operations

		Three months ended						Six months ended
		December 31,						December 31,
		2017			2016			2017			2016
		(In thousands, except per share data)						(In thousands, except per share data)
REVENUE	$	148,416		$	151,433		$	300,974		$	307,066
EXPENSE
Cost of goods sold, IT processing, servicing and support		73,994			73,518			148,646			148,298
Selling, general and administration		49,392			41,703			93,326			80,171
Depreciation and amortization		8,723			10,623			17,689			20,827
OPERATING INCOME		16,307			25,589			41,313			57,770
INTEREST INCOME		4,705			5,061			9,749			9,365
INTEREST EXPENSE		2,325			510			4,446			1,306
INCOME BEFORE INCOME TAX EXPENSE		18,687			30,140			46,616			65,829
INCOME TAX EXPENSE (Note 17)		10,062			10,984			20,339			22,087
NET INCOME BEFORE EARNINGS FROM EQUITY- ACCOUNTED INVESTMENTS		8,625			19,156			26,277			43,742
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS		1,354			74			3,429			733
NET INCOME		9,979			19,230			29,706			44,475
LESS NET INCOME ATTRIBUTABLE TO NON-
CONTROLLING INTEREST		357			589			601			1,202
NET INCOME ATTRIBUTABLE TO NET1	$	9,622		$	18,641		$	29,105		$	43,273
Net income per share, in U.S. dollars(Note 14)
Basic earnings attributable to Net1 shareholders	$	0.17		$	0.35		$	0.51		$	0.81
Diluted earnings attributable to Net1 shareholders	$	0.17		$	0.35		$	0.51		$	0.81

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

See Notes to Unaudited Condensed Consolidated Financial Statements

3

NET 1 UEPS TECHNOLOGIES, INC.

NET 1 UEPS TECHNOLOGIES, INC.

Unaudited Condensed Consolidated Statements of Comprehensive Income

Unaudited Condensed Consolidated Statements of Comprehensive Income

		Three months ended						Six months ended
		December 31,						December 31,
		2017			2016			2017			2016
		(In thousands)						(In thousands)
Net income	$	9,979		$	19,230		$	29,706		$	44,475
Other comprehensive income (loss)
Movement in foreign currency translation reserve		53,517			(20,766	)		39,637			1,536
Movement in foreign currency translation reserve related to equity-accounted investments		-			-			(227	)		-
Total other comprehensive income (loss), net of taxes		53,517			(20,766	)		39,410			1,536
Comprehensive income (loss)		63,496			(1,536	)		69,116			46,011
Less comprehensive income attributable to non- controlling interest		(668	)		(624	)		(801	)		(1,681	)
Comprehensive income (loss) attributable to Net1	$	62,828		$	(2,160	)	$	68,315		$	44,330

See Notes to Unaudited Condensed Consolidated Financial Statements

4

NET 1 UEPS TECHNOLOGIES, INC.

NET 1 UEPS TECHNOLOGIES, INC.

Unaudited Condensed Consolidated Statement of Changes in Equity for the six months ended December 31, 2017 (dollar amounts in thousands)

Unaudited Condensed Consolidated Statement of Changes in Equity

		Net 1 UEPS Technologies, Inc. Shareholders
								Number															Accumulated												Redeemable
		Number						of						Number of			Additional						Other			Total			Non-						Common
		of						Treasury			Treasury			Shares, Net			Paid-In			Retained			Comprehensive			Net1			Controlling						Stock
		Shares			Amount			Shares			Shares			of Treasury			Capital			Earnings			(Loss) Income			Equity			Interest			Total			(Note 1)
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 13)		588,594												588,594												-						-
Stock-based compensation charge (Note 13)																	1,477									1,477						1,477
Reversal of stock compensation charge (Note 13)		(125,961	)											(125,961	)		(42	)								(42	)					(42	)
Reversal of stock based- compensation charge related to equity-accounted investment																	(207	)								(207	)					(207	)
Net income																				29,105						29,105			601			29,706
Other comprehensive income (Note 12)																							39,210			39,210			200			39,410
Balance – December 31, 2017		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

See Notes to Unaudited Condensed Consolidated Financial Statements

5

NET 1 UEPS TECHNOLOGIES, INC.

NET 1 UEPS TECHNOLOGIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

Unaudited Condensed Consolidated Statement of Changes in Equity

		Three months ended						Six months ended
		December 31,						December 31,
		2017			2016			2017			2016
		(In thousands)						(In thousands)
Cash flows from operating activities
Net income	$	9,979		$	19,230		$	29,706		$	44,475
Depreciation and amortization		8,723			10,623			17,689			20,827
Earnings from equity-accounted investments		(1,354	)		(74	)		(3,429	)		(733	)
Fair value adjustments		(372	)		72			(281	)		(11	)
Interest payable		(159	)		(23	)		(247	)		9
Facility fee amortized		214			31			347			67
Loss (Profit) on disposal of property, plant and equipment		16			(539	)		121			(473	)
Profit on disposal of business		(463	)		-			(463	)		-
Stock-based compensation charge (reversal), net (Note 13)		608			635			1,435			(689	)
Dividends received from equity accounted investments		1,253			-			2,165			370
(Increase) Decrease in accounts receivable, pre-funded social
welfare grants receivable and finance loans receivable		6,005			6,585			(33,136	)		14,351
Increase in inventory		(2,322	)		(3,481	)		(3,848	)		(3,585	)
(Decrease) Increase in accounts payable and other payables		(481	)		(5,940	)		2,948			(2,900	)
Decrease in taxes payable		(9,754	)		(11,815	)		(916	)		(859	)
Increase (Decrease) in deferred taxes		1,419			386			428			(1,246	)
Net cash provided by operating activities		13,312			15,690			12,519			69,603
Cash flows from investing activities
Capital expenditures		(2,103	)		(3,126	)		(3,576	)		(6,549	)
Proceeds from disposal of property, plant and equipment		99			945			415			1,014
Investment in Cell C (Note 6)		-			-			(151,003	)		-
Investment in equity of equity-accounted investments (Note 6)		(40,892	)		-			(113,738	)		-
Acquisition of held to maturity investment (Note 6)		(9,000	)		-			(9,000	)		-
Investment in MobiKwik		-			-			-			(15,347	)
Loans to equity accounted investments (Note 6)					(10,044	)					(10,044	)
Acquisitions, net of cash acquired		-			(4,651	)		-			(4,651	)
Other investing activities		(154	)		-			(154	)		-
Net change in settlement assets (Note 4)		24,519			258,166			237,168			220,772
Net cash (used in) provided by investing activities		(27,531	)		241,290			(39,888	)		185,195
Cash flows from financing activities
Long-term borrowings utilized (Note 10)		-			-			95,431			247
Repayment of long-term borrowings (Note 10)		(30,881	)		(1,824	)		(45,141	)		(28,493	)
Proceeds from bank overdraft (Note 9)		690			-			32,570			-
Repayment of bank overdraft (Note 9)		(11,391	)		-			(14,343	)		-
Guarantee fee paid (Note 10)		-			(1,145	)		(552	)		(1,145	)
Acquisition of treasury stock (Note 11)		-			-			-			(32,081	)
Dividends paid to non-controlling interest		-			(58	)		-			(613	)
Net change in settlement obligations (Note 4)		(24,519	)		(258,166	)		(237,168	)		(220,772	)
Net cash used in financing activities		(66,101	)		(261,193	)		(169,203	)		(282,857	)
Effect of exchange rate changes on cash		6,857			(2,225	)		3,011			3,306
Net decrease in cash, cash equivalents and restricted cash		(73,463	)		(6,438	)		(193,561	)		(24,753	)
Cash, cash equivalents and restricted cash – beginning ofperiod		138,359			205,329			258,457			223,644
Cash, cash equivalents and restricted cash – end of period (1)	$	64,896		$	198,891		$	64,896		$	198,891

See Notes to Unaudited Condensed Consolidated Financial Statements

6

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

See Notes to Unaudited Condensed Consolidated Financial Statements
(1) Cash, cash equivalents and restricted cash as of December 31, 2016,September 30, 2019, includes restricted cash of approximately $43.7$68.8 million related to cash withdrawn from the guarantee issued by FirstRand Bank Limited (acting through its Rand Merchant Bank division).Company’s various debt facilities to fund ATMs. This cash was placed into an escrow accountmay only be used to fund ATMs and wasis considered restricted as to use and therefore wasis classified as restricted cash. The restriction lapsed upon expiry ofRefer to Note 9 for additional information regarding the guarantee.Company’s facilities.

67

NET 1 UEPS TECHNOLOGIES, INC.

NET 1 UEPS TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

for the three and six months ended December 31, 2017 and 2016

(All amounts in tables stated in thousands or thousands of U.S. dollars, unless otherwise stated)

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

1.      Basis of Presentation and Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements include all majority-owned subsidiaries over which the Company exercises control and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission for Quarterly Reports on Form 10-Q and include all of the information and disclosures required for interim financial reporting. The results of operations for the three and six months ended December 31, 2017September 30, 2019 and 2016,2018, are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.

These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2019. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented. During the three months ended December 31, 2017, the Company reclassified redeemable common stock out of total equity because redeemable common stock is required to be presented outside of permanent equity. The Company has restated these amounts in its unaudited condensed consolidated balance sheet as at June 30, 2017 and unaudited condensed consolidated statement of changes in equity for the six months ended December 31, 2017. The reclassification resulted in a decrease in total equity by approximately $107.7 million and an increase in redeemable common stock, presented outside of permanent equity, of approximately $107.7 million. This reclassification had no impact on the Company’s previously reported consolidated income, comprehensive income or cash flows.

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.

Recent accounting pronouncements adopted       Consideration of going concern

In August 2014, the FASB issued guidance regardingDisclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This    Accounting guidance requires an entitythe Company’s management to perform interim and annual assessments of itsassess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date thatafter its audited consolidated financial statements are issued. An entity must provideThe Company’s management has identified certain disclosures if conditions or events, which, considered in the aggregate, could raise substantial doubt about the entity’sCompany’s ability to continue as a going concern including the risk that the Company will be unable to:

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

        The Company’s management has implemented a number of plans to alleviate the substantial doubt about the Company’s ability to continue as a going concern. The guidance is effectiveThese plans include disposing of certain non-core assets (refer to Note 3 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the Company beginning July 1, 2017. The adoption of this guidance did not haveyear ended June 30, 2019, for additional information regarding a material impactcall option granted to DNI), engaging FT Partners to advise on the KSNET business, and extending its existing borrowings used to fund its ATMs through September 2020. In addition, the Company’s financial statements disclosures.

In July 2015,management believes it has a number of mitigating actions it can pursue, including (i) limiting the FASB issued guidance regardingSimplifyingexpansion of its microlending finance loans receivable book in South Africa; (ii) implementing further cost cutting measures; (iii) commencing additional asset realizations; (iv) managing our capital expenditures; and (v) accessing alternative sources of capital (including through the Measurementissuance of Inventory. This guidance requires entitiesadditional shares of its common stock), in order to measure most inventory “atgenerate additional liquidity. The Company’s management believes that these actions alleviate the lower of costsubstantial doubt referred to above and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures). The guidance will not apply to inventoriestherefore have concluded that are measured by using either the last-in, first-out (“LIFO”) method or the retail inventory method (“RIM”). The guidance is effective for the Company beginning July 1, 2017. The adoption of this guidance did not haveremains a material impact on the Company’s financial statements.going concern.

In November 2015, the FASB issued guidance regardingBalance Sheet Classification of Deferred Taxes. This guidance requires that deferred tax liabilities and assets are to be classified as non-current in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. This guidance is effective for the Company beginning July 1, 2017, and has been applied on a prospective basis. The adoption of this guidance has resulted in the reclassification of current deferred tax assets and liabilities as non-current deferred tax assets and liabilities in the unaudited condensed consolidated balance sheet as of December 31, 2017. Prior period current deferred tax assets have not been reclassified as non-current in the unaudited condensed consolidated balance sheet as of June 30, 2017.

In March 2016, the FASB issued guidance regardingImprovements to Employee Share-Based Payment Accounting. The guidance simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance is effective for the Company beginning July 1, 2017. The adoption of this guidance did not have a material impact on the Company’s financial statements. The Company has elected to continue to estimate the number of forfeitures when an award is made.

7

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

Recent accounting pronouncements not yet adopted as of December 31, 2017

In May 2014, the FASB issued guidance regardingRevenue from Contracts with Customers. This guidance requires an entity to recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance was originally set to be effective for the Company beginning July 1, 2017, however in August 2015, the FASB issued guidance regardingRevenue from Contracts with Customers, Deferral of the Effective Date. This guidance defers the required implementation date specified inRevenue from Contracts with Customers to December 2017. Public companies may elect to adopt the standard along the original timeline.

The guidance is effective for the Company beginning July 1, 2018. 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.

In January 2016, the FASB issued guidance regardingRecognition 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 is effective for the Company beginning July 1, 2018, and early adoption is not permitted, with certain exceptions. 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 Company is currently assessing the impact of this guidance on its financial statements disclosure.

In February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued guidance regardingLeases. 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 iswas 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 evaluatingRefer to Note 17 for the impact of the adoption of this guidance on itsour condensed consolidated financial statements on adoption.statements.

8

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

In June 2016, the FASB issued guidance regardingMeasurement 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 disclosure.and related disclosures.

In June 2016,August 2018, the FASB issued guidance regardingClassification of Certain Cash Receipts and Cash PaymentsDisclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement.. The guidance is intendedmodifies the disclosure requirements related 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.fair value measurement. This guidance is effective for the Company beginning July 1, 2018, and must be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.

In January 2017, the FASB issued guidance regardingClarifying 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 is effective for the Company beginning July 1, 2018. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.

In January 2017, the FASB issued guidance regardingSimplifying 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 is currently assessing the impact of this guidance.

8

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

Recent accounting pronouncements not yet adopted as of December 31, 2017 (continued)

In May 2017, the FASB issued guidance regardingCompensation—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 is effective for the Company beginning July 1, 2018. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.

2.    Pre-funded social welfare grantsAccounts receivable, net and other receivables and finance loans receivable, net Accounts receivable, net and other receivables

Pre-funded social welfare grants        The Company’s accounts receivable, represents primarily amounts pre-funded by the Company to certain merchants participatingnet, and other receivables as of September 30, 2019, and June 30, 2019, is presented in the merchant acquiring system.table below:

        The January 2018 payment service commenced on January 2, 2018, but the Company pre-funded certain merchants participatingloan provided to DNI was repaid in full in July 2019. Other receivables include prepayments, deposits and other receivables.

9

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

Finance loans receivable, net

        The Company’s finance loans receivable, net, as of September 30, 2019, and June 30, 2019, is presented in the merchant acquiring systems on December 30, 2017. The July 2017 payment service commenced on July 1, 2017, but the Company pre-funded certain merchants participating in the merchant acquiring systems on the last day of June 2017.table below:

3. Inventory

3. Inventory

The Company’s inventory comprised the following categorycategories as of December 31, 2017September 30, 2019, and June 30, 2017.2019.

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

4.    Settlement assets and settlement obligations

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

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

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

10

5.   Fair value of financial instruments

Fair value of financial instruments

Initial recognition and measurement

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

Risk management

The Company seeks to reducemanages its exposure to currencies other than the South African rand through a policy of matching, to the extent possible, assets and liabilities denominated in those currencies. In addition, the Company utilized financial instruments in order to economically hedge its exposure tocurrency exchange, rate and interest rate fluctuations arising from its operations. The Company is also exposed to translation, interest rate, customer concentration, credit and equity price and liquidity risks.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.

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5. Fair value of financial instruments (continued)

Fair value of financial instruments (continued)

Risk management (continued)

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 mosta significant amount of its revenues and incurs mosta significant amount of its expenses in ZAR.ZAR and Korean won (“KRW”). The U.S. dollar to both the ZAR and KRW exchange raterates 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.

Working capital finance customer concentration risk

Working capital finance customer concentration risk relates to the risk of loss that the Company would incur as a result of its concentration of working capital financing receivables. During the year ended June 30, 2017, the Company commenced marketing activities to develop and expand its working capital financing receivables base. The Company manages the risk through on-going marketing efforts to further expand its customer base as well as through regular contact with its customer to assess their need for the Company’s product.

Credit risk

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

With respect to credit risk on financial instruments, the Company maintains a policy of entering into such transactions only with South African, South Korean and European financial institutions that have a credit rating of “BB+”“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 providesprovide unsecured short-term loans to qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer and assignsassigning 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.holds. The market price of these securities may fluctuate for a variety of reasons and, consequently, the amount that the Company may obtain in a subsequent sale of these securities may significantly differ from the reported market value.

Equity liquidity risk

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

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5. Fair value of financial instruments (continued)

Financial instruments

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

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5. Fair value of financial instruments (continued)

Financial instruments (continued)

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'sCompany’s Level 3 asset represents an investment of 75,000,000 class “A” shares in Cell C, (Pty) Limited (“Cell C”), a leadingsignificant mobile telecoms provider in South Africa (refer to Note 6).Africa. The Company has designated such shares as available for sale investments.used a discounted cash flow model developed by the Company to determine the fair value of its investment in Cell C shares areas of June 30, 2019, and valued Cell C at $0.0 (zero) at September 30, 2019, and June 30, 2019. As of June 30, 2019, the Company changed its valuation methodology from a Company-developed adjusted EV/ EBITDA model to a discounted cash flow approach due to anticipated changes in Cell C’s business model and the current challenges faced by Cell C, which would not listedhave been captured by the previous valuation approach. The Company believes the Cell C business plan utilized in the Company’s valuation is reasonable based on the current performance and there is no readily determinable market valuethe expected changes in Cell C’s business model.

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

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

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

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

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5. Fair value of financial instruments (continued)

Financial instruments (continued)

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

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

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

The fair value of the Cell C shares as of December 31, 2017,September 30, 2019, represented approximately 12%0% 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 withthat there will be short-term equity price volatility with respect to these shares provided thatparticularly given the underlying business, economic and management characteristicscurrent situation of Cell C’s business.

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

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

Derivative transactions - Foreign exchange contracts

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

The Company had no outstanding foreign exchange contracts as of December 31, 2017September 30, 2019 and June 30, 2017,2019, respectively.

The following table presents the Company’s assets measured at fair value on a recurring basis as of December 31, 2017,September 30, 2019, according to the fair value hierarchy:

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5. Fair value of financial instruments (continued)

Financial instruments (continued)

The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2017,2019, according to the fair value hierarchy:

There have been no transfers in or out of Level 3 during the three and six months ended December 31, 2017September 30, 2019 and 2016,2018, respectively.

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

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

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

Assets and liabilities measured at fair value on a nonrecurring basis

The Company measures its assets at        We measure equity investments without readily determinable fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The Company has no liabilities that are measured at fair valuevalues on a nonrecurring basis. The Company reviews the carrying values of its assets when events and circumstances warrant and considers all available evidence in evaluating when declines in fair value are other-than-temporary. The fair values of the Company’s assetsthese 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. An impairment charge is recorded when the cost of the assets exceeds its fair value and the excess is determined to be other-than-temporary. The Company has not recorded any impairment charges during the reporting periods presented herein.

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

Equity-accounted investments

The Company’s ownership percentage in its equity-accounted investments as of December 31, 2017 and June 30, 2017, was as follows:

On July 27, 2017, the Company subscribed for 44,999,999 ordinary A shares in DNI, representing a 45% voting and economic interest in DNI, for a subscription price of ZAR 945.0 million ($72.0 million) in cash. Under the terms of the Company’s agreements with DNI, the Company is required        Refer to pay to DNI an additional amount of up to ZAR 360 million ($29.1 million, translated at the foreign exchange rates applicable as of December 31, 2017), in cash, subject to the achievement of certain performance targets by DNI. The Company has not accrued for this contingent consideration as of December 31, 2017. Net1 SA has pledged, among other things, its entire equity interest in DNI as security for the South African facilities described in Note 10 used to partially fund the acquisition of Cell C.

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