12. Stock-based compensation

Stock option and restricted stock activity

Options

The following table summarizes stock option activity for the three months ended September 30, 2015 and 2014:


				Weighted				Weighted
			Weighted	Average				Average
			average	Remaining		Aggregate		Grant
			exercise	Contractual		Intrinsic		Date Fair
	Number of		price	Term		Value		Value
	shares		($)	(in years)	($'	000	)	($)

Outstanding – June 30, 2015	2,401,169		15.34	4.74		11,516
Exercised	(323,645	)	11.62			2,669
Outstanding – September
30, 2015	2,077,524		15.92	4.33		7,509

Outstanding – June 30, 2014	2,710,392		14.16	5.38		3,909
Granted under Plan: August
2014	464,410		11.23	10.00		2,113		4.55
Exercised	(688,633	)	8.24			3,697
Outstanding – September
30, 2014	2,486,169		15.24	5.45		1,820

No stock options were awarded during the three months ended September 30, 2015. The fair value of each option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the assumptions noted in the following table. The estimated expected volatility is calculated based on the Company's 250 day volatility. The estimated expected life of the option was determined based on historical behavior of employees who were granted options with similar terms. The Company has estimated no forfeitures for options awarded in August 2014.

The table below presents the range of assumptions used to value options granted during the three months ended September 30, 2015 and 2014:


	Three months ended
		September 30,
	2015	2014
Expected volatility	n/a	60	%
Expected dividends	n/a	0	%
Expected life (in years)	n/a	3
Risk-free rate	n/a	1.0	%

There were no forfeitures during each of the three months ended September 30, 2015 and 2014.

The following table presents stock options vested and expecting to vest as of September 30, 2015:


			Weighted
		Weighted	Average
		average	Remaining		Aggregate
		exercise	Contractual		Intrinsic
	Number of	price	Term		Value
	shares	($)	(in years)	($'	000	)
Vested and expecting to vest
– September 30, 2015	2,077,524	15.92	4.33		7,509

These options have an exercise price range of $7.35 to $24.46.

The following table presents stock options that are exercisable as of September 30, 2015:

			Weighted
		Weighted	Average
		average	Remaining		Aggregate
		exercise	Contractual		Intrinsic
	Number of	price	Term		Value
	shares	($)	(in years)	($'	000	)
Exercisable – September 30, 2015	1,764,931	16.93	3.55		5,496

During the three months ended September 30, 2015 and 2014, respectively, 330,967 and 273,633 stock options became exercisable. During the three months ended September 30, 2015, the Company received approximately $3.8 million from the exercise of 323,645 stock options. During the three months ended September 30, 2014, the Company received approximately $1.0 million from the exercise of 116,395 stock options. The remaining 572,238 stock options were exercised through recipients delivering 336,584 shares of the Company's common stock to the Company on September 9, 2014, to settle the exercise price due. The Company issues new shares to satisfy stock option exercises.

Restricted stock

The following table summarizes restricted stock activity for the three months ended September 30, 2015 and 2014:

				Weighted
	Number of			Average
	Shares of			Grant Date
	Restricted			Fair Value
	Stock		($'	000	)
Non-vested – June 30, 2015	341,529			1,759
Granted – August 2015	319,492			581
Vested – August 2015	(71,574	)		6,406
Non-vested – September 30, 2015	589,447			7,622

Non-vested – June 30, 2014	385,778			3,534
Granted – August 2014	141,707			581
Vested – August 2014	(74,152	)		828
Non-vested – September 30, 2014	453,333			3,568

The August 2015 grants comprise 301,537 and 17,955 shares of restricted stock awarded to employees and non-employee directors, respectively. The shares of restricted stock awarded to employees in August 2015 are subject to time-based and performance-based vesting conditions. In order for any of the shares to vest, the recipient must remain employed by the Company on a full-time basis on the date that it files its Annual Report on Form 10-K for the fiscal year ended June 30, 2018. If that condition is satisfied, then the shares will vest based on the level of Fundamental EPS the Company achieves for the fiscal year ended June 30, 2018 ("2018 Fundamental EPS"), as follows:

One-third of the shares will vest if the Company achieves 2018 Fundamental EPS of $2.88;
Two-thirds of the shares will vest if the Company achieves 2018 Fundamental EPS of $3.30; and
All of the shares will vest if the Company achieves 2018 Fundamental EPS of $3.76.

At levels of 2018 Fundamental EPS greater $2.88 and less than $3.76, the number of shares that will vest will be determined by linear interpolation relative to 2018 Fundamental EPS of $3.30. Any shares that do not vest in accordance with the above-described conditions will be forfeited. All shares of restricted stock have been valued utilizing the closing price of the Company's stock quoted on The Nasdaq Global Select Market on the date of grant.

The August 2014 grants comprise 127,626 and 14,081 shares of restricted stock awarded to employees and non-employee directors, respectively. The shares of restricted stock awarded to employees in August 2014 will vest in full only on the date, if any, the following conditions are satisfied: (1) the closing price of the Company's common stock equals or exceeds $19.41 (subject to appropriate adjustment for any stock split or stock dividend) for a period of 30 consecutive trading days during a measurement period commencing on the date that the Company files its Annual Report on Form 10-K for the fiscal year ended 2017 and ending on December 31, 2017 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited.

The shares of restricted stock, other than the shares awarded to employees in August 2014, have been valued utilizing the closing price of the Company's stock quoted on The Nasdaq Global Select Market on the date of grant. The shares of restricted stock awarded to employees in August 2014 are effectively forward starting knock-in barrier options with a strike price of zero. The fair value of these shares of restricted stock was calculated utilizing an adjusted Monte Carlo simulation discounted cash flow model which was developed for the purpose of the valuation of these shares. For each simulated share price path, the market share price condition was evaluated to determine whether or not the shares would vest under that simulation. The "adjustment" to the Monte Carlo simulation model incorporates a "jump diffusion" process to the standard Geometric Brownian Motion simulation, in order to capture the discontinuous share price jumps observed in the Company's share price movements on stock exchanges on which it is listed. Therefore, the simulated share price paths capture the idiosyncrasies of the observed Company share price movements.

In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the final vested value on maturity is the share price on vesting date. The value of the grant is the average of the discounted vested values. The Company used an expected volatility of 76.01%, an expected life of approximately three years, a risk-free rate of 1.27% and no future dividends in its calculation of the fair value of the shares of restricted stock awarded to employees in August 2014. Estimated expected volatility was calculated based on the Company's 30 day VWAP share price using the exponentially weighted moving average of returns.

The fair value of restricted stock vesting during the three months ended September 30, 2015 and 2014, respectively, was $1.4 million and $0.8 million.

Stock-based compensation charge and unrecognized compensation cost

The Company has recorded a stock-based compensation charge of $0.7 million and $0.9 million, respectively, during the three months ended September 30, 2015 and 2014, which comprised:

				Allocated to cost
				of goods sold, IT		Allocated to
				processing,		selling, general
		Total		servicing and		and
		charge		support		administration
Three months ended September 30, 2015
Stock-based compensation charge	$	726	$	-	$	726
Total – three months ended September 30, 2015.	$	726	$	-	$	726

Three months ended September 30, 2014
Stock-based compensation charge	$	916	$	-	$	916
Total – three months ended September 30, 2014.	$	916	$	-	$	916

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

As of September 30, 2015, the total unrecognized compensation cost related to stock options was approximately $1.5 million, which the Company expects to recognize over approximately three years. As of September 30, 2015, the total unrecognized compensation cost related to restricted stock awards was approximately $1.2 million, which the Company expects to recognize over approximately two years.

As of September 30, 2015 and June 30, 2015, respectively, the Company has recorded a deferred tax asset of approximately $1.5 million and $1.6 million related to the stock-based compensation charge recognized related to employees and directors of Net1 as it is able to deduct the grant date fair value for taxation purposes in the United States.