While we continue to dedicate resources and management time to ensuring that we have effective internal control over financial reporting, failure to achieve and maintain an effective internal control environment could have a material adverse effect on the market’smarket's perception of our business and our stock price.

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

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

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

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

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

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

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

It is doubtful whether an original action based on United States federal securities laws may be brought before South African courts. A plaintiff who is not resident in South Africa may be required to provide security for costs in the event of proceedings being initiated in South Africa. Furthermore, the Rules of the High Court of South Africa require that documents executed outside South Africa must be authenticated for the purpose of use in South African courts.

In reaching the foregoing conclusions in respect of South Africa, we consulted with our South African legal counsel, Cliffe Dekker Hofmeyr Inc.

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None.

We lease our corporate headquarters facility which consists of approximately 93,000 square feet in Johannesburg, South Africa. We also lease properties throughout South Africa, including a 12,088 square foot manufacturing facility in Lazer Park, a 50,052 square foot administration building in Kramerville, Johannesburg, 175224 financial services branches, 98 financial service express stores and 7840 depot facilities. We also lease additional office space in Johannesburg, Cape Town and Durban, South Africa; London, United Kingdom; Seoul, South Korea; Munich, Germany; Hong Kong and Zhuhai, China;Kong; Mumbai, IndiaIndia; Pietà Malta and Black River, Mauritius. These leases expire at various dates through 2022. We own land and buildings in Ahnsung, Kyung-gi, South Korea, that is used for the storage of business documents. We believe that we have adequate facilities for our current business operations.

ITEM 3.    LEGAL PROCEEDINGS

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

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

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

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

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

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

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Constitutional Court order regarding extension of contract with SASSA for 12six months for cash payments

March 2017 Constitutional Court order

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

The March 2017 order also included public accountability provisions that directly impacted CPS. These provisions are similar to those included in the Constitutional Court’s April 2014 order, and require CPS to provide the Constitutional Court with an audited statement of expenses incurred, income received and net profit earned under the 12 month12-month extension contract ending March 31, 2018. CPS duly complied with the order in that it filed the previously mentioned statements for the period ended March 31, 2017 on May 30, 2017. SASSA was also required to obtain an independent audit of the audited information provided by CPS. Furthermore, the Constitutional Court has instructed SASSA to send this audited information to National Treasury for its approval prior to submission to the Constitutional Court.

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

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

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

31March 2018 Constitutional Court order

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

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

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

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

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

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

On February 6,Dispute with SASSA regarding payment of fees for the last six months of the contract

     Following the March 23, 2018 CPS appliedConstitutional Court order for a six-month extension of our contract with SASSA for payment of grants in cash at pay points only, we were allowed to charge our monthly fee based on the previously contracted rate of ZAR 16.44 (including VAT) per cash pay point recipient. Given that we only serviced the highest-cost beneficiaries, the Constitutional Court allowed us to approach the National Treasury in order for them to make a fair determination of the price we should be paid for services rendered. National Treasury recommended a rate of ZAR 51.00 (including VAT) per cash pay point recipient per month to the Constitutional Court requesting clarity on whether CPS may participate in any future SASSA tender processes. On February 23, 2018,Court. Contrary to SASSA’s stance, the Constitutional Court orderedon December 5, 2018, ruled that they are not required to ratify the Treasury recommended rate, and that CPS may participateand SASSA must agree on the pricing. To date we have not reached an agreement with SASSA on the pricing and have issued summons to commence legal proceedings to record an amount in accordance with National Treasury recommendation. We cannot predict whether we will be successful in these legal proceedings, if the new SASSA tender process, which commenced in December 2017.matter will be heard or how the Court will rule on the matter if it is heard.

Litigation Regarding Legality of Debit Orders under Social Assistance Act Regulations

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

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

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

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

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

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

On July 19, 2017, SASSA and the Black Sash served applications petitioning the South African Supreme Court of Appeal to grant them leave to appeal to either the Supreme Court or to a full bench of the Pretoria High Court. On September 29, 2017, the Supreme Court of Appeal referred the petitions to oral argument. The oral argument in respect of the petitions was heard on August 16 and 17, 2018.

We believe that SASSA’s and The matter was heard on August 16, 2018, by the Supreme Court. The Supreme Court granted the Black Sash’s claims are without merit, and we intendSash the right to defend against them vigorously. However, we cannot predict howintervene but dismissed the courts will rule on the matter.application for leave to appeal with costs.

In addition, on June 15, 2016, SASSA brought criminal charges against us and Grindrod Bank for contravening the Social Assistance Act, alleging that we and Grindrod Bank failed to act in accordance with SASSA’s instructions by processing debit orders against social welfare beneficiaries’ bank accounts after the Regulations came into effect. On June 28, 2016, the Pretoria High Court prohibited SASSA from making any representations to the South African Police Services and the National Prosecuting Authority regarding the criminal charges brought against us and Grindrod Bank pending the determination of the proceedings, including the determination of any appeals. In addition, the order prevented SASSA from issuing further demands to us and Grindrod Bank to stop the processing of debit transactions against SASSA bank accounts pending the determination of the dispute, including the determination of any appeals. On August 8, 2016, we were informed that the NPA had reached a “no prosecution” decision on the criminal charges filed by SASSA. On May 17, 2017, the NPA reaffirmed its “no prosecution decision” reached in August 2016 on the criminal charges brought by SASSA against us and Grindrod Bank. In addition, the NPA notified us that no further action would be taken and that we could consider the case closed.

Challenge to Payment by SASSA of Additional Implementation Costs

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

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

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

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On May 23, 2018, CPS delivered its petition seeking leave to appeal the whole order and judgment of the Pretoria High Court with the Supreme Court of Appeal.Court. On June 21, 2018, Corruption Watch delivered a responding affidavit and, on July 4, 2018, CPS delivered its replying affidavit. We await directionsIn September 2018, CPS received notification from the Supreme Court of Appeal. However, we cannot predict whetherthat its petition seeking leave to appeal will be granted or if granted, howhad been granted. The matter was heard on September 10, 2019. On September 30, 2019, the Supreme Court dismissed the appeal and ordered us to pay Corruption Watch’s costs, including that of Appeal would rule on the matter.two counsel. We are discussing further legal steps with our counsel.

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

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

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

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

Regarding the NCR’s application to cancel the registration of Moneyline, we raised a number of procedural points in defense which, if we are successful, will be dispositive of the application. Argumentand argument on these points was heard on November 27, 2015, before three tribunal members. Two ruled against us and one upheld our points. We are appealing the majority ruling to the High Court. This matter was initially scheduled to be heard on December 6, 2017, however, the matter was subsequently removed from the roll. A new hearing date has not been allocated and the matter will be heard on December 4, 2018, by a full bench of the Pretoria High Court.

We still await judgment. If we are successful, it will dispose of the application. If we do not prevail, then the NCR’s application will be set down before the Consumer Tribunal for argument on the main issues raised by the NCR, as dealt with above. We cannot predict the outcome of this litigation.

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

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

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

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

ITEM 4.      MINE SAFETY DISCLOSURES

Not applicable.

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PART II

Market information

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

The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by Nasdaq.

Our transfer agent in the United States is Computershare Shareowner Services LLC, 480 Washington Blvd, Jersey City, New Jersey, 07310. According to the records of our transfer agent, as of August 16, 2018,September 12, 2019, there were 1512 shareholders of record of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders whose shares are heldshareholders of record byare banks, brokers, and other financial institutions.institutions (i.e. “street name”). Our transfer agent in South Africa is Link Market Services South Africa (Pty) Ltd, 13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein, 2001, South Africa.

Dividends

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

Issuer purchases of equity securities

On February 3, 2016, our board of directors approved the replenishment of our existing share repurchase authorization to repurchase up to an aggregate of $100 million of common stock and, as of June 30, 2018,2019, we had utilized approximately $47.5 million of this authorization and approximately $52.5 million remains available. The authorization has no expiration date. We did not repurchase any shares of our common stock during fiscal 2018.2019.

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Share performance graph

The chart below compares the five-year cumulative return, assuming the reinvestment of dividends, where applicable, on our common stock with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph assumes $100 was invested on June 30, 2013,2014, in each of our common stock, the companies in the S&P 500 Index, and the companies in the NASDAQ Industrial Index.

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected historical consolidated financial data should be read together with Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8—“Financial Statements and Supplementary Data.” The following selected historical financial data as of June 30, 20182019 and 2017,2018, and for the three years ended June 30, 2018,2019, have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial data presented below as of June 30, 2017, 2016 2015 and 20142015 and for the years ended June 30, 20152016 and 2014,2015, have been derived from our consolidated financial statements, which are not included herein.herein, and have been restated as noted below, which is unaudited. The selected historical financial data as of each date and for each period presented have been prepared in accordance with U.S. GAAP. These historical results are not necessarily indicative of results to be expected in any future period.

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

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

(R) Income tax expense, net income attributable to Net1 and Income from continuing operations per share: Basic and Diluted for the years ended June 30, 2018 and 2017, restated to correct the misstatement discussed in Note 1 to the audited consolidated financial statements. Year ended June 30, 2016, restated as follows: Income tax expense (decreased by 0.1 million), net income attributable to Net1 (decreased by 0.2 million) and Income from continuing operations per share: Basic (unchanged) and Diluted (unchanged).

(1)	Fiscal 2014 includes recovery of $26.6 million of implementation costs from SASSA.
(2)	Includes a separation payment of $8.0 million paid to our former chief executive officer in 2017.
(3)	Includes a non-cash charge of approximately $11.3 million in 2014 related to common stock issued in a BEE transaction.

(1) Impacted by expiration of SASSA contract in September 2018. Also impacted by inclusion of DNI for the first nine months of fiscal 2019 – refer to Note 3 to the audited consolidated financial statements, which also includes discontinued operation disclosures related to DNI.
(2) Revenue for the year ended June 30, 2019, includes revenue that has been reversed of $19.7 million (ZAR 277.6 million) as a result of the Supreme Court ruling discussed in Note 13 to our audited consolidated financial statements, and selling, general and administrative includes $14.3 million (ZAR 201.8 million) related to the Supreme Court ruling.
(3) Includes an allowance for doubtful financial loans receivable of $28.8 million in 2019 and separation payment of $8.0 million paid to our former chief executive officer in 2017.

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Additional Operating Data:
(in thousands, except percentages)

(1) Cash flows provided by (used in) provided by investing activities include movements in settlement assets and cash flows (used in) provided by (used in) financing activities include movement in settlement liabilities.
(2) Fiscal 2019 operating loss margin was (14%) before retrenchment costs, the impact of the SASSA implementation costs accrual (refer to Note 13 of our audited consolidated financial statements), and impairment losses (refer to Note 10 of our audited consolidated financial statements for a full description of the impairment losses). Fiscal 2018 operating income margin was 15%13% before the impairment loss (Refer to Note 10 of our audited consolidated financial statements for a full description of the impairment loss). Fiscal 2017 operating income margin was 18% before the separation payment of $8.0 million paid to our former chief executive officer.officer

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Consolidated Balance Sheet Data:
(in thousands)

^(R) During fiscal 2018, we reclassified redeemable common stock out ofTotal assets and total equity because redeemable common stock is requiredas of June 30, 2018, restated to be presented outsidecorrect the misstatement discussed in Note 1 to the audited consolidated financial statements. As of permanent equity. We have restated these amounts in our consolidated balance sheet as at June 30, 2017, 2016 and 2016, respectively. The reclassification resulted in a decrease in2015, restated as follows: total assets (2017 and 2016: decreased by 1.9 million; 2015: decreased by 1.8 million) and total equity (2017: decreased by approximately $107.7 million1.5 million; 2016 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.2015: decreased by 1.4 million).

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

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

Overview

We are a leading provider of payment solutions, transaction processing services and financial technology, across multiple industriesor fintech, products and services to the unbanked and underbanked in a number of emerging and developed economies.

In emerging economies these customers are typically individuals, while in developed countries, they are primarily small businesses. We have developed and market a comprehensive transaction processing solution that encompasses our smart card-based alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction channels. Our market-leading system can enable the billions of people globally who generally have limited or no access to a bank account to enter affordably into electronic transactions with each other, government agencies, employers, merchants and other financial service providers. Our UEPS, and UEPS/EMV derivative discussed below, uses biometrically secure smart cards that operate in real-time but either offline or online, unlike traditional payment systems offered by major banking institutions that require immediate access through a communications network to a centralized computer. This offline capability means that usersown most of our system can conduct transactions at any time with other card holders in even the most remote areas so long as a smart card reader, which is often portable and battery powered, is available. Our off-line systems also offer the highest level of availability and affordability by removing any components that are costly and are prone to outages. Our latest version of the UEPS technology has been certified by EMV, which facilitates our proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled point of sale terminal or ATM. The UEPS/EMV technology has been deployed on an extensive scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our social welfare grant customers. In addition to effecting purchases, cash-backs and any form of payment our system can be used for banking, healthcare management, international money transfers, voting and identification.

We also provide secure financial technology solutions and services, by offering transaction processing and financial products to various industries. We have extensive expertise in secure online transaction processing, cryptography, mobile telephony, integrated circuit card (chip/smart card) technologies, and the design and provision ofwhere possible, utilize this technology to provide financial and value-added services to our cardholder base.customers.

Our technology is widely used in South Africa today, where we provide bank accounts to approximately 3.0 million EPE customers and are in the last month of our contract to distribute welfare payments, using our UEPS/EMV technology, process debit and credit card payment transactions on behalf of a wide range of retailers through our EasyPay system, process value-added services such as bill payments and prepaid airtime and electricity for the major bill issuers and local councils in South Africa, and provide mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of third-party and associated payroll payments in South Africa through our FIHRST service. We provide financial inclusion services such as microloans, insurance, mobile transacting and prepaid utilities to our cardholder base.

In addition, through KSNET, we are one of the top three value-added network, or VAN, processors in South Korea, and we offer card processing, payment gateway and banking value-added services in that country. We also offer end-to-end payment services through IPG in Europe, the U.K., Asia and the United States. We are also collaborating with Bank Frick on exploiting opportunities in the blockchain and cryptocurrency environments.

Our Applied Technologies business unit has an array of web and mobile applications and payment technologies, such as MVC, Chip and GSM licensing and VTU, and has deployed solutions in many countries, including South Africa, Namibia, Nigeria, Malawi, Cameroon, the Philippines, India and Colombia.

Sources of Revenue

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

We have structured our business and our business development efforts around four related but separate approaches to deploying our technology. In our most basic approach, we act as a supplier, selling our equipment, software, and related technology to a customer. The revenue and costs associated with this approach are reflected in our Financial inclusion and applied technologies segment.

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We have found that we have greater revenue and profit opportunities, however, by acting as a service provider instead of a supplier. In this approach we own and operate the UEPS ourselves, charging one-time and on-goingongoing fees for the use of the system either on a fixed or ad valorem basis. This is the case in South Africa, where we distribute welfare grants on behalf of the South African government on a fixed fee basis, provide bank accounts on a fixedmonthly fee basis, butand charge a feefees on an ad valorem basis for goods and services purchased using our smart card. The revenue and costs associated with this approach are reflected in our South African transaction processing and Financial inclusion and applied technologies segments.

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

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

Through KSNET, we earn most of our revenue from payment processing services we provide to approximately 240,000223,000 merchants and to card issuers in South Korea through our value-added-network. Through IPG we generate fee revenue through the provision of payment service provider and card issuing and acquiring services in primarily Germany,Europe, China and the U.S. We also generate fees from our customers who utilize our VCPay technology to generate a unique, one-time use prepaid virtual card number to securely purchase goods and services or perform bill payments in any card-not-present environment. The revenue and costs at of all of these businesses are reflected in our International transaction processing segment.

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

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

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Developments during Fiscal 20182019

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

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

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

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

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

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

CPS and SASSA Contract TerminationExpiration

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

Settlement of payment of fees due for the last six months of the SASSA contract – Following the March 23, 2018 the Constitutional Court orderedorder for a six-month extension of our current contract with SASSA for the payment of grants in cash at pay points only, we were allowed to charge our monthly fee based on the same terms and conditions aspreviously contracted rate of ZAR 16.44 (including VAT) per cash pay point recipient. Given that we only serviced the contract that was due to expire on March 31, 2018. Accordingly, we have continued to pay grant recipients at pay points. While the Court order was silent regarding the payment of the other 9.1 million grant recipients who access their grants utilizing PIN or by biometric verification at POS and ATMs, we have continued to support the bank accounts that underpin these grant payments. As SASSA is no longer paying us a service fee for the management of these accounts with effect from April 1, 2018, grant recipients now bear the cost for the fees associated with these accounts. SASSA has indicated that grant recipients will be encouraged to open a commercial bank account of their choice in the future, including the special account offered by SAPO for grant recipients. SASSA reported in its September 2018 filing withhighest-cost beneficiaries, the Constitutional Court the SASSA CEO reported that 5,475,752 new SASSA/SAPO payment cards have been issued.

The Constitutional Court further ordered that we mayallowed us to approach the National Treasury in order for them to investigate and make a recommendation regardingfair determination of the price we should be paid for services rendered. National Treasury recommended a rate of ZAR 51.00 (including VAT) per cash pay point recipient per month to the Constitutional Court. Contrary to SASSA’s stance, the Constitutional Court on December 5, 2018, ruled that they are not required to ratify the Treasury recommended rate, and that CPS and SASSA must agree on the pricing. To date we have not reached an agreement with SASSA on the pricing and have commenced legal proceedings to receive an amount in accordance with National Treasury recommendation.

Auto-migration of EPE customers to SAPO – As part of SASSA’s migration to SAPO, a number of EPE customers were auto-migrated by SASSA between August and October 2018, where post office accounts were unilaterally opened for beneficiaries by SASSA, often without the customer’s consent. We initiated a legal process to halt this migration and to try and recover some of our EPE customers who had been migrated despite completing the mandatory documentation for electing to be paid in a private bank account. On January 29, 2019, we received an adverse order in that the court declined to reverse the auto-migration process. Following this order, we followed a multi-faceted approach to try and address the auto-migration issue. First, we were granted leave to appeal the order, which we are pursuing. Second, the court granted an order requiring SASSA to account for our contracted services during the six-month period. We approached the National Treasury for a price review shortly after receiptprocess to auto-migrate approximately 700,000 of the Constitutional Court order and on April 30, 2018,EPE accounts who had submitted Annexure C forms to SAPO. Third, we are considering taking the National Treasury filed their recommendation with the Constitutional Court proposing fee levels that were materially lower than we had requested, but significantly higher than the current fee levels. As we believe that National Treasury’s recommendation does not take SASSA’s stated plans into account, and does not recognize the need for us to maintain our infrastructure regardlessdecision of the number of beneficiaries paid, we asked the Constitutional Courtminister for permission to refer the matter back to National Treasury.administrative review.

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We received permission from            While the Constitutional Courtfirst and re-engaged with National Treasury, who indicated that the original recommendationthird actions are longer processes, we are currently reviewing SASSA’s response to the Constitutional Courtsecond action and will notdetermine if there is any further action that can be amended. We have subsequently filed an urgent application with the Constitutional Court, requesting that the National Treasury recommendation be made an order of the court to enable SASSA to pay us, withtaken as a further request to engage with National Treasury to determine a fair price for the last three monthsresult. The risk of our contract period whereremaining EPE customers being auto-migrated still exists, but there has been a significant decline in the number of beneficiaries we have paid, while we have maintained our full payment infrastructure. We have not received any response from the Constitutional Court regarding this application. For additional information refer to “Item 1A.—Risk Factors—The pricing recommended by National Treasury to the Constitutional Court for our services provided at pay points for the period from April 1, 2018 through September 30, 2018, has not yet been approved by the Constitutional Court. If the amount payable to us is not commercially reasonable, our results of operations, financial position and cash flows may be adversely affected.”

On April 25, 2018, we, and other bidders, received a notice from SASSA informing us of the suspension of the tender issued in December 2017 for the appointment of a service provider to distribute grants in cash at pay points when our contract expires on September 30,no further auto-migration since November 2018.

In an affidavit filed with the Constitutional Court, the recently appointed Minister of Social Development, Ms. Susan Shabangu, indicated that she had ordered the suspension of the tender due to objections received regarding the completeness of the tender document from a prospective bidder, as well as the fact that the Bid Evaluation Committee did not have the required skills to evaluate a tender of this nature. Minister Shabangu also indicated to members of the Portfolio Committee for Social Development in the South African Parliament that there will be no request for a further extension of our contract when it expires on September 30, 2018. SASSA has subsequently informed the Constitutional Court that it has amended the contract with the SAPO to include the servicing of pay points when our contract expires.

We are relieved that we have finally have visibility regarding the end ofconcluded our contract and we look forward to the successful completion of our contractwith SASSA on September 30, 2018. We are extremely proud of our achievements of uninterrupted grant delivery to 11.0 million social grant recipients since the inception of our contract in April 2012, and the annual saving of more than ZAR 2.0 billion per annum that our biometric payment technology realized for government due to the elimination of fraudulent grants. We intend to focus

Progress on various corporate activities

            As part of the extensive strategic review of all of our resourcesbusinesses and technology on the provision of financial inclusion services to our target market after our contract expires, without the contractual constraints and challengesinvestments, we have experienced duringmade 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 past six years.sale of 17% in DNI for ZAR 400 million. We utilized the proceeds from this sale to settle the contingent purchase consideration of ZAR 400 million, which related to the achievement of certain performance targets by DNI. Second, in May 2019, we sold an additional 8% of DNI to RMB, and used the proceeds to early-settle the majority of our outstanding long-term borrowings. Third, also in May 2019, we granted DNI a call option to acquire our remaining 30% interest in DNI at a strike price of ZAR 859 million, or $61.0 million translated at exchange rates applicable as of June 30, 2019, in order to monetize our remaining investment in DNI. We expect the call option to be exercised prior to the expiry on December 31, 2019.

EPE, MoneylineEarly repayment of long-term debt – We utilized ZAR 15.0 million of our cash reserves and Smart Life

In June 2015, we began the rolloutproceeds from the sale of EPE,an 8% interest in DNI to early-settle our business-to-consumer offeringZAR 230.0 million long-term borrowings in full. This has strengthened our balance sheet and improved our liquidity profile in South Africa.Africa as we reposition the business.

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

Cell C – Cell C has had a difficult six months and has come under increasing pressure on its liquidity due to its high level of debt and the associated servicing costs. During the third quarter of fiscal 2019, Cell C signed a term sheet with the Buffet consortium, but the implementation of this capitalization has been delayed. As a result, Cell C requested shareholder support and in September 2019, we agreed to provide up to ZAR 300 million of July 31, 2018, we had more than 3.0 million EPE accounts, comparedsupport to 2.0 million asthe company through the purchase of July 31, 2017. EPE isprepaid airtime. This, along with support from Blue Label Telecoms and Cell C’s debt providers, should provide a fully transactional, low cost account createdliquidity platform to serve the needs of South Africa’s unbanked and under-banked population, many of whom are social grant recipients. The EPE account offers customers a comprehensive suite of financial services and various financial inclusion services, such as prepaid products, in an economical, convenient and secure solution. EPE provides account holdersCell C to enable it to conclude revised commercial arrangements with a biometrically-enabled UEPS/EMV debit MasterCard, mobile and internet banking services, ATM and POS services,MTN, as well as loans, insurance and other financial products and value-added services.

In order for us to address the sizeable opportunity for EPE and related financial inclusion services in South Africa, in fiscal 2016, we began to expand our brick-and-mortar financial services branch infrastructure, which supplements our nationwide distribution, with a biometrically-enabled UEPS/EMV ATM network, and hired a dedicated sales force. We are currently expanding our physical branch and ATM infrastructure and our efforts will be supplemented by employing a roaming sales force equipped with a biometrically-enabled UEPS/EMV card-issuing work station. In January 2018, we deployed an additional 500 portable card-issuing working stations and employed 625 temporary staff to achieve this objective. At July 31, 2018, we had 169 branches (April 30, 2018: 152), 1,175 ATMs (April 30, 2018: 1,100), and 2,977 (April 30, 2018: 2,371) dedicated employees, including the temporary staff.

Our efforts have resulted in an increased rate in the number of EPE accounts opened, the amount of loans disbursed and the number of insurance policies sold. We have opened approximately 815,000 EPE accounts during the last seven months since January 1, 2018, and we will have additional capacity to further increase our activities when our staff members and infrastructure currently dedicated to the SASSA contract become available for this initiative when our contract with SASSA ends. We have, however, experienced significant “churn” of our EPE accounts due to the unilateral decision by SASSA to open SAPO accounts for some of our EPE cardholders and to deposit their grants into these accounts, despite the legal and valid request by these cardholders to be paid via their EPE accounts. We have laid complaints with the relevant regulators in an effort to remedy this unfortunate situation but we have not received any response to date. For additional information refer to “Item 1A.—Risk Factors—We face competition from the incumbent retail banks in South Africa and SAPO in the unbanked market segment, which could limit growth in our transaction-based activities segment.”

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Our loan book under Moneyline has continued to grow despite our tightening of lending criteria given the current changes in the grant recipient environment. During the 13 months since July 1, 2017, we sold approximately 172,000 new policies related to our simple, low-cost life insurance products, in addition to the free basic life insurance policy provided with every EPE account opened. On May 2, 2018, we introduced low-cost mobile telephony and data packages, designed in collaboration with Cell C and DNI, as part of our “lifestyle” product offering and we intend to deploy further relevant products in the near future. While the initial take up has been disappointing, we believe Cell C’s recently concluded infrastructure sharing deal in South Africa with MTN will significantly lift the market penetration of these products. We believe that we are a market leader, both in terms of cost and scale, in the provision of bank accounts, credit and insurance products in the market segments that we serve.

The graph below presents the growthrecapitalization of the number of EPE cards and Smart Life policies:

Cell C and DNI

In August 2017, we purchased 15% of Cell C, one of the three major licensed mobile operators in South Africa with over 15 million active subscribers at the time of investment. In July 2017, we purchased a 45% interest in DNI, and in March 2018, we agreed to subscribe for additional shares in DNI to ultimately increase our interest to 55% with effect from June 30, 2018. DNI is the leading distributor of mobile subscriber starter packs for Cell C, while also distributing prepaid airtime through its extensive network of field operatives and agents.

Thebusiness. Our investments in Cell C and DNI are consistent with our approachCedar Cellular notes were carried at $0 as of leveraging our significant and established infrastructure, and pursuing strategic acquisition opportunities or partnerships to gain access to new markets and complementary products. We believe that customers want a truly bespoke, affordable and comprehensive mobile-based digital product. We believe that the Cell C and DNI investments enable us to address the needs of the broader South African population through a stake in a value chain that includes the network, payment, product, distribution and hardware. Our relationship with Cell C and DNI has other complementary benefits. For example, we recently sold four million SIM cards to Cell C during fiscal 2018 and received orders for an additional 15 million SIMs. During the first week of May 2018, we launched new low-cost products for our unbanked and under-banked customer base that were developed in collaboration with DNI and Cell C. Our investment in DNI complements our existing distribution footprint and provides us with access to an additional 2,500 employees who are dedicated to the marketing of our products, mainly in urban and semi-urban areas.

For additional financial information regarding Cell C and DNI, pleaseJune 30, 2019, refer to Notes 3, 7 and 9 to our audited consolidated financial statements.statements for additional information regarding these investments.

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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 Finbondis required to undergo recertification with Visa, which is currently underway and OneFiexpected to be completed during calendar 2019. Once completed, IPG is expected to begin the deployment of its new products to the European SME market. During fiscal 2019, IPG also secured approval from the Mauritian regulators to become a principal member of China UnionPay for international issuing and acquiring. This approval has been shared with UnionPay, and we are awaiting their acceptance of the same. Our beta prototype crypto-asset storage product is now ready, and we believe we will begin commercially rolling out this market-leading product with Bank Frick in the first half of fiscal 2020.

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

            On October 2017,2, 2019, we acquired a 30%exercised an option to acquire an additional 35% interest in Bank Frick a fully licensed bank based in Balzers, Liechtenstein, from the Kuno Frick Family FoundationFoundation. We will pay an amount, the “Option Price Consideration”, for approximately CHF 39.8 million ($40.9 million). In January 2018, we purchased anthe additional 5%35% interest in Bank Frick, fromwhich represents the Frick Foundationhigher of CHF 46.4 million ($46.5 million at exchange rates on October 2, 2019) or 35% of 15 times the average annual normalized net income of the Bank over the two years ended December 31, 2018.

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

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

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

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

India – We have deployed our virtual card technology with MobiKwik to its users. In fiscal 2019, MobiKwik applied for CHF 10.4 million ($11.1 million),direct membership with Visa and became an associate member in cash, and the Frick Foundation agreed to contribute approximately CHF 3.8 million ($4.1 million) to Bank Frick to facilitate the development of Bank Frick’s Fintech and blockchain businesses. ItQ4 2019. Given this is the first time a non-bank has been approved as a Visa member in India, the Visa/MobiKwik application has been submitted to the central bank in the CHF areafor approval. Once approved, it is expected to have issued a certificate based on cryptocurrencies, launched custodial services for professional cryptocurrency investors, and has supported over a dozen initial coin offerings, or ICOs. Bank Frick has stated that it expectsallow MobiKwik to increase its head count by 50% in 2018 in order to support the expansion of its blockchain offerings as well as related IT and operational support.

We are approaching the final stages of certification for Finbond to become an issuer of biometrically-enabled UEPS/EMVexpand issuing virtual cards and expect to commence with related activities during the first half of fiscal 2019. Finbond operates an extensive distribution network of approximately 430 branches across South Africa that will be utilized as issuing and service points for the biometrically-enabled UEPS/EMV cards. We are also deploying biometrically-enabled ATM’s across the Finbond branch network. As part of a rights offering conducted by Finbond in April 2018, we subscribed for 55,585,514 additional Finbond shares and now own an aggregate of 261,069,481 Finbond shares, representing approximately 28.5% of Finbond’s issued and outstanding ordinary shares immediately after the rights offering.

For additional financial information regarding Bank Frick and Finbond, please refer to Note 9 to our consolidated financial statements.

During fiscal 2018 we also invested a further $1.0 million in convertible notes issued by OneFi, an equity method investment in which we currently own 25%. OneFi is the first neo bank in Sub-Saharan Africa offering loans, fixed savings and payments services to its customers via its proprietary 100%-mobile app platform, Paylater. In 2018, alone OneFi processed over 1 million loans using its machine learning algorithms that preclude the need for any human interaction.

OneFi is expanding its product line to include credit cards, insurance and personal finance management in keeping with its mission to provide financial services to the next billion and will expand to two other countries in West Africa by the endmillions of the year. We are excited by and supportivecustomers. MobiKwik itself has performed ahead of the expanded OneFi business model. Similar to the other major neo bank platforms such as Revolut, N26 and Nubank, OneFi’s ability to impact and revolutionize the financial services sectors in the markets in which it operates should not be underestimated.

International Payments Group

During fiscal 2018, we completed the re-organization of IPG by consolidating all our e-money licenses and international card issuing, acquiring and processing activities (excluding South Korea and India) under a single management structure. IPG completed certain key product developments during the year, including its unique multicurrency-issuing platform and new card management system, which are currently undergoing certification. In addition, IPG is working in close collaboration with Bank Frick and other specialist departments in the Net1 group to develop bespoke blockchain-based solutions, including a highly secure but easily accessible crypto-asset storage solution for crypto-asset investors and exchanges.

India

We launched our Virtual Card project with MobiKwik in April 2018. Initially, we had to control the number of users added dailyexpectations, primarily due to limitations resulting from a merger by our issuing bank partner. We have seen very positive trends in the take up and usage among the registered user base, which currently stands at 65,000 users. Approximately 70% of the spend on virtual card is at locations where the MobiKwik wallet is not accepted, thereby adding meaningful valueits successful transition to its acceptance network.

MobiKwik has rapidly transformed itself from being a pure digital wallet player to a digital financial services provider, which more closely alignsprovider. In June 2019, MobiKwik recorded unaudited annualized revenue of $55 million, up from $17 million in June 2018. It has been contribution margin positive since October 2018 and was close to our strategy. Their lending business, launched about six months ago, has seen rapid adoptionEBITDA breakeven at the end of June 2019. Digital financial services now account for approximately 25% of MobiKwik’s total monthly revenue, compared to zero during the previous fiscal year and by numberit is currently disbursing in excess of 70,000 new loans issued daily, MobiKwik has already become one of the largest digital lenders in India.per month.

Critical Accounting Policies

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

43Valuation of investment in Cell C

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

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

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

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

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

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Business Combinations and the Recoverability of Goodwill

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

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

The determination of the fair value of a reporting unit requires us to make significant judgments and estimates. In determining the fair value of reporting units, we consider the earnings before interest, taxation, depreciation and amortization, or EBITDA, and the EBITDA multiples applicable to peer and industry comparables of the reporting units. We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. In addition, we make judgments and assumptions in allocating assets and liabilities to each of our reporting units. The results of our impairment tests during fiscal 20182019 indicated that the fair value of our reporting units exceeded their carrying values, and therefore our reporting units were not at risk of potential impairment, with the exception of the $19.9$14.4 million of goodwill impaired during the third quarter of fiscal 2018 and goodwill of $1.1 million allocated2019, as discussed in Note 10 to a business that ceased trading during the year.our audited consolidated financial statements.

Intangible Assets Acquired Through Acquisitions

The fair values of the identifiable intangible assets acquired through acquisitions were determined by management using the purchase method of accounting. We completed acquisitions during fiscal 2018 2017 and 20162017 where we identified and recognized intangible assets. We have used the relief from royalty method, the multi-period excess earnings method, the income approach and the cost approach to value acquisition-related intangible assets. In so doing, we made assumptions regarding expected future revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates, exchange rates, cash tax charges and useful lives.

The valuations were based on information available at the time of the acquisition and the expectations and assumptions that have been deemed reasonable by us. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows. To the extent actual cash flows vary, revisions to the useful life or impairment of intangible assets may be necessary.

Valuation and For instance, in fiscal 2019, we recorded an impairment loss of marketable securities

Our investments in available-for-sale equity securities are reported at fair value. Unrealized gains and losses$5.3 million related to changesintangible assets acquired (customer relationships) in the fair valueDNI acquisition as a result of available-for-sale equity securities are recognized in accumulated other comprehensive income, net of tax. Changes inCell C entering into a roaming arrangement with another South African mobile telecommunications network provider which extended Cell C’s network coverage. This arrangement impacted the fair value of available-for-sale equity securities impact our reported net income only when such securities are sold or an other-than-temporary impairment isidentified customer relationship recognized. Realized gains and losses on the sale of equity securities will be calculated with reference to its original cost.

We regularly review the carrying value of our available-for-sale equity securities to determine whether it is other-than-temporarily impaired, which would require us to record an impairment charge in the period in which such determination is made. In making this determination, we consider, among other things, the extent and the duration of the decline; the reasons for the decline in value (i.e. credit event, currency or interest-rate related); and the financial condition of and near term-prospects of the issuer of the security. Our assessment of whether an equity security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security, which would have an adverse impact on our financial condition and operating results.

Deferred Taxation

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

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Management then has to assess the likelihood that deferred tax assets are more likely than not to be realized in the foreseeable future. A valuation allowance is created if it is determined that a deferred tax asset will not be realized in the foreseeable future. Any change to the valuation allowance would be charged or credited to income in the period such determination is made. In assessing the need for a valuation allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered. During fiscal 2019, fiscal 2018 we recorded a net decrease of $22.9 million to our valuation allowance and during fiscal 2017, and 2016, respectively, we recorded a net increase of $0.1$68.6 million, $9.6 million and $16.3$0.1 million to our valuation allowance. As of June 30, 20182019 and 2017,2018, the valuation allowance related to deferred tax assets was $16.1$116.4 million and $39.0$48.7 million, respectively.

Stock-based Compensation

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

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We utilize the Cox Ross Rubinstein binomial model to measure the fair value of stock options granted to employees and directors. We have also utilized a bespoke adjusted Monte Carlo simulation discounted cash flow model to measure the fair value of restricted stock with market conditions granted to employees and directors. The stock-based compensation cost related to these valuations has been recognized on a straight line basis. These valuation models require estimates of a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. Our management has estimated forfeitures based on historic employee behavior under similar compensation plans. The fair value of stock options is affected by the assumptions selected. Net stock-based compensation expense from continuing operations was $0.4 million, $2.6 million $2.0 million and $3.6$2.0 million for fiscal 2019, 2018 2017 and 2016,2017, respectively.

Accounts Receivable and Allowance for Doubtful Accounts Receivable

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

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

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

Microlending

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

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

45Accounting for transactions following September 2019 Supreme Court ruling

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

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

            On September 30, 2019, the Supreme Court delivered its ruling in the matter, declining CPS' appeal and awarding costs against CPS. CPS is liable to repay SASSA ZAR 317.0 million, plus interest from June 2014 to date of payment. As a result, we have recorded the liability at June 30, 2019, of $34.0 million (ZAR 479.4 million, translated at exchange rates applicable as of June 30, 2019, comprising a revenue refund of $19.7 million (ZAR 277.6 million), accrued interest of $11.4 million (ZAR 161.0 million), unclaimed indirect taxes of $2.8 million (ZAR 39.4 million) and estimated costs of $0.1 million (ZAR 1.4 million)).

            We are discussing further legal steps with our counsel. Management does not agree with the findings of the Supreme Court and may appeal the matter with the Constitutional Court. While management believes that its arguments in defense of the matter have merit, it has had to apply its judgment, including the fact that both the High Court and the Supreme Court have ruled against CPS, to determine whether to record a liability as of June 30, 2019. If management determines to further appeal the matter, it is unable to predict (a) whether the Constitutional Court will hear the matter, or (b) if they do hear the matter, the outcome of those additional proceedings.

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

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

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

Recent Accounting Pronouncements

Recent accounting pronouncements adopted

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

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

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

Recent accounting pronouncements not yet adopted as of June 30, 201843

Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of June 30, 2018, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.

New Fiscal 2018 U.S. Tax Legislation

On December 22, 2017, the “Tax Cuts and Jobs Act”, or TCJA, was enacted into law, significantly modifying U.S. federal tax laws. The TCJA reduces the federal statutory tax rate for corporations from 35% to 21% effective from January 1, 2018, eliminates alternative minimum tax for corporations, limits net operating loss carryforwards (and eliminates carrybacks), repeals indirect foreign tax credits carry-forward rules, limits the deductibility of interest expense and transitions the system of U.S. international taxation of corporations from a worldwide tax system to a territorial tax system. The transition to a territorial tax system is not expected to have a significant impact on our future consolidated effective tax rate as we generate the majority of our taxable income in tax jurisdictions with tax rates that are higher than the new federal statutory tax rate of 21% (mainly South Africa, where our income is taxed at 28%, and Korea, where our income is taxed at 22%). Refer to Note 19 of our consolidated financial statements for additional information regarding the impact of TCJA on us.

Currency Exchange Rate Information

Actual exchange ratesExchange Rates

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

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Translation Exchange Rates

We are required to translate our results of operations from ZAR to U.S. dollars on a monthly basis. Thus, the average rates used to translate this data for the years ended June 30, 2019, 2018 2017 and 2016,2017, vary slightly from the averages shown in the table above. The translation rates we use in presenting our results of operations are the rates shown in the following table:

Results of Operations

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

Our operating segment revenue presented in “—Results of operations by operating segment” represents total revenue per operating segment before intercompany eliminations. A reconciliation between total operating segment revenue and revenue presented in our audited consolidated financial statements is included in Note 2221 to those statements.

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            We consolidated DNI was acquired on June 30, 2018,for the first nine months of fiscal 2019 and has been accounted for it using the equity method up until that date. Thereforefrom April 1, 2019. DNI is excluded from the revenue and operating income analysis below.accounted for as an equity-accounted investment for 11 months of fiscal 2018. Fiscal 2017 includes Masterpayment Financial Services Limited, or MaltaCeevo FS, from November 1, 2016 and Pros Software from October 1, 2016. Fiscal 2016 includes the results of Transact24 from January 1, 2016 and Masterpayment from April 1, 2016. Refer also to Note 3 to the audited consolidated financial statements.

Fiscal 2019 Compared to Fiscal 2018

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

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

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Consolidated overall results of operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Results of operations by operating segment

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

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