NET 1 UEPS TECHNOLOGIES, INC.

NET 1 UEPS TECHNOLOGIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

Unaudited Condensed Consolidated Statements of Cash Flows

		Three months ended						Nine months ended
		March 31,						March 31,
		2019			2018			2019			2018
					(asrestated(A))						(asrestated(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 andrestricted 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,September 30, 2019, includes restricted cash of approximately $74.2$68.8 million related to cash withdrawn from the Company’s various debt facilities to fund ATMs. This cash may only be used to fund ATMs and is considered restricted as to use and therefore is classified as restricted cash. Refer to Note 119 for additional information regarding the Company’s facilities.

7

NET 1 UEPS TECHNOLOGIES, INC.

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)

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"(“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,September 30, 2019 and 2018, are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.

       These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K/A10-K for the fiscal year ended June 30, 2018.2019. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented.

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

       RestatementConsideration of priorgoing concern

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

• deliver all or a substantial part of the financial results forecast in its fiscal 2020 budget;
• retain its existing borrowings and related notes for the three and nine months ended March 31, 2018

       As previously reported and more fullyfacilities, as described in Note 19, or obtain additional borrowings and facilities on commercially reasonable terms;

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

        The Company’s management has implemented a number of plans to alleviate the substantial doubt about the Company’s ability to continue as a going concern. These plans include disposing of certain non-core assets (refer to Note 3 to the Company’s audited consolidated financial statements containedincluded in its Annual Report on Form 10-K for the Form 10-K/A filedyear ended June 30, 2019, for additional information regarding a call option granted to DNI), engaging FT Partners to advise on December 6, 2018,the KSNET business, and extending its existing borrowings used to fund its ATMs through September 2020. In addition, the Company’s management believes it has a number of mitigating actions it can pursue, including (i) limiting the expansion of its microlending finance loans receivable book in South Africa; (ii) implementing further cost cutting measures; (iii) commencing additional asset realizations; (iv) managing our capital expenditures; and (v) accessing alternative sources of capital (including through the issuance of additional shares of its common stock), in order to generate additional liquidity. The Company’s management believes that these actions alleviate the substantial doubt referred to above and therefore have concluded that the Company 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.remains a going concern.

         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,February 2016, the Financial Accounting Standards Board ("FASB"(“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 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 deferred the required implementation date specified inRevenue 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 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 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 regardingClassification 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 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 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 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 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 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 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 regardingImprovements 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 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.

98

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

Recent accounting pronouncements not yet adopted as of March 31,September 30, 2019 (continued)

        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 and related disclosures.

        In August 2018, the FASB issued guidance regardingDisclosure 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:

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:

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: