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, 2016 and 2015:

				Weighted
			Weighted	average		Weighted
			average	remaining	Aggregate	average
			exercise	contractual	intrinsic	grant date
	Number of		price	term	value	fair value
	shares		($)	(in years)	($'000)	($)

Outstanding – June 30, 2016	2,077,524		15.92	3.65	926
Expired unexercised	(474,443	)	22.51
Outstanding – September 30,
2016	1,603,081		13.98	4.50	452

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

No stock options were awarded during the three months ended September 30, 2016 or 2015, respectively. There were no forfeitures during the three months ended September 30, 2016 or 2015; however, during the three months ended September 30, 2016, 474,443 stock options awarded in August 2016, expired unexercised.

The following table presents stock options vested and expecting to vest as of September 30, 2016:

			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, 2016	1,603,081	13.98	4.50	452

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, 2016:

			Weighted
		Weighted	average
		average	remaining	Aggregate
		exercise	contractual	intrinsic
	Number of	price	term	value
	shares	($)	(in years)	($'000)
Exercisable – September 30, 2016	1,448,278	14.28	4.11	452

During the three months ended September 30, 2016 and 2015, respectively, 154,803 and 330,967 stock options became exercisable. No stock options were exercised during the three months ended September 30, 2016. The Company received approximately $3.8 million from the exercise of 323,645 stock options, during the three months ended September 30, 2015. 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 31, 2016 and 2015:

	Number of		Weighted
	shares of		average grant
	restricted		date fair value
	stock		($'000)
Non-vested – June 30, 2016	589,447		7,622
Granted – August 2016	387,000		4,145
Vested – August 2016	(72,091	)	735
Non-vested – September 30, 2016	904,356		11,142

Non-vested – June 30, 2015	341,529		1,759
Granted – August 2015	319,492		581
Vested – August 2015	(71,574	)	1,435
Non-vested – September 30, 2015	589,447		7,622

The August 2016 grants comprise 350,000 and 37,000 shares of restricted stock awarded to executive officers and non-employee directors, respectively. The shares of restricted stock awarded to executive officers in August 2016 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, 2019. If that condition is satisfied, then the shares will vest based on the level of Fundamental EPS the Company achieves for the fiscal year ended June 30, 2019 ("2019 Fundamental EPS"), as follows:

One-third of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.60;
Two-thirds of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.80; and
All of the shares will vest if the Company achieves 2019 Fundamental EPS of $3.00.

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

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 than $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 shares of the Company's common stock quoted on The Nasdaq Global Select Market on the date of grant. The Company has reversed the stock-based compensation charge recognized to date related to the 301,537 shares of restricted stock because it believes that it is unlikely that the 2018 Fundamental EPS target will be achieved due to the dilutive impact on the fundamental EPS calculation as a result of issuance of the approximate 10 million shares to the IFC in May 2016.

The fair value of restricted stock vesting during the three months ended September 30, 2016 and 2015, respectively, was $0.7 million and $1.4 million.

Stock-based compensation charge and unrecognized compensation cost

The Company has recorded a stock-based compensation (reversal) charge, net of ($1.3 million) and $0.7 million, respectively, during the three months ended September 30, 2016 and 2015, 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, 2016
Stock-based compensation charge	$	503		$	-	$	503
Reversal of stock compensation charge related to
restricted stock		(1,827	)		-		(1,827	)
Total – three months ended September 30, 2016.	$	(1,324	)	$	-	$	(1,324	)

Three months ended September 30, 2015
Stock-based compensation charge	$	726		$	-	$	726
Total – three months ended September 30, 2015.	$	726		$	-	$	726

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, 2016, the total unrecognized compensation cost related to stock options was approximately $0.6 million, which the Company expects to recognize over approximately one year. As of September 30, 2016, the total unrecognized compensation cost related to restricted stock awards was approximately $4.5 million, which the Company expects to recognize over approximately two years. This amount excludes the total unrecognized compensation cost as of September 30, 2016, related to restricted stock awards that the Company expects will not vest due to it not achieving the 2018 Fundamental EPS of approximately $6.0 million. As of September 30, 2016, the cumulative unrecorded stock-based compensation charge related to these awards of restricted stock that the Company has determined are expected not to vest and has not expensed in its consolidated statement of operations is approximately $2.5 million (which amount includes the $1.8 million reversed).

As of September 30, 2016 and June 30, 2016, respectively, the Company has recorded a deferred tax asset of approximately $1.5 million and 1.8 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.