13. Stock-based compensation

Stock option and restricted stock activity

Options

The following table summarizes stock option activity for the nine months ended March 31, 2018 and 2017:

				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, 2017	846,607		13.87	3.80	486
Forfeitures	(37,333	)	11.23
Outstanding – March 31, 2018	809,274		13.99	2.92	427

Outstanding – June 30, 2016	2,077,524		15.92	3.65	926
Exercised	(68,740	)	9.15		882
Expired unexercised	(474,443	)	22.51
Outstanding – March 31, 2017 .	1,534,341		14.19	3.88	2,150

No stock options were awarded during the three and nine months ended March 31, 2018 or 2017. There were no forfeitures during the three months ended March 31, 2018. During the nine months ended March 31, 2018, employees forfeited 37,333 stock options. There were no forfeitures during the three and nine months ended March 31, 2017; however, during the nine months ended March 31, 2017, 474,443 stock options awarded in August 2006, expired unexercised.

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

The following table presents stock options that are exercisable as of March 31, 2018:

			Weighted
		Weighted	average
		average	remaining		Aggregate
		exercise	contractual		intrinsic
	Number of	price	term		value
	shares	($)	(in years)	($'	000	)
Exercisable – March 31, 2018	809,274	13.99	2.92		427

No stock options became exercisable during the three months ended March 31, 2018 and 2017, respectively. During the nine months ended March 31, 2018 and 2017, respectively, 105,982 and 154,803 stock options became exercisable. The Company issues new shares to satisfy stock option exercises.

Restricted stock

The following table summarizes restricted stock activity for the nine months ended March 31, 2018 and 2017:

	Number of		Weighted
	shares of		average grant
	restricted		date fair value
	stock		($'000)
Non-vested – June 30, 2017	505,473		11,173
Granted – August 2017	588,594		4,288
Granted – March 2018	22,817		234
Vested – August 2017	(56,250	)	527
Forfeitures	(30,635	)	358
Forfeitures – August and November 2014 awards with market conditions	(95,326	)	1,133
Non-vested – March 31, 2018	934,673		9,608

Non-vested – June 30, 2016	589,447		7,622
Granted – August 2016	387,000		4,145
Vested – August 2016	(72,091	)	735
Non-vested – March 31, 2017	904,356		11,142

The August 2017 grants comprise (i) 326,000 shares of restricted stock awarded to executive officers and employees that are subject to time-based vesting, (ii) 210,000 shares of restricted stock awarded to executive officers that are subject to market and time-based vesting, and (iii) 52,594 shares of restricted stock awarded to non-employee directors. The March 2018 grant relates to an award made to the Company's new Chief Financial Officer. The August 2016 grants comprise 350,000 and 37,000 shares of restricted stock awarded to executive officers and non-employee directors, respectively.

The 326,000 shares of restricted stock will only vest if the recipient is employed by the Company on a full-time basis on August 23, 2020. The 52,594 shares of restricted stock awarded to non-employee directors will only vest if the recipient is a director on August 23, 2018. The 22,817 shares of restricted stock vest in two tranches, 11,409 will vest on March 1, 2019, and 11,408 will vest on March 1, 2020, subject to the Chief Financial Officer's continued employment.

Market Conditions - Restricted Stock Granted in August 2017

The 210,000 shares of restricted stock awarded to executive officers in August 2017 are subject to time-based and performance-based ( a market condition) vesting conditions and vest in full only on the date, if any, that the following conditions are satisfied: (1) the price of the Company's common stock must equal or exceed certain agreed VWAP levels (as described below) during a measurement period commencing on the date that it files its Annual Report on Form 10-K for the fiscal year ended 2020 and ending on December 31, 2020 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 $23.00 price target represents an approximate 35% increase, compounded annually, in the price of the Company's common stock on Nasdaq over the $9.38 closing price on August 23, 2017. The VWAP levels and vesting percentages related to such levels are as follows:

Below $15.00 (threshold)—0%
At or above $15.00 and below $19.00—33%
At or above $19.00 and below $23.00—66%
At or above $23.00—100%

These 210,000 shares of restricted stock are effectively forward starting knock-in barrier options with multi-strike prices of zero. The fair value of these shares of restricted stock was calculated utilizing a Monte Carlo simulation 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. A standard Geometric Brownian motion process was used in the forecasting of the share price instead of a "jump diffusion" model, as the share price volatility was more stable compared to the highly volatile regime of previous years. 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 44.0%, an expected life of approximately three years, a risk-free rate ranging between 1.275% to 1.657% and no future dividends in its calculation of the fair value of the restricted stock. The estimated expected volatility was calculated based on the Company's 30 day VWAP share price using the exponentially weighted moving average of returns.

Performance Conditions - Restricted Stock Granted in August 2016

In August 2016 the Company awarded 350,000 shares of restricted stock to executive officers. In May 2017, the Company agreed to accelerate the vesting of 200,000 of these shares of restricted stock granted to the Company's former Chief Executive Officer. The remaining 150,000 shares continue to be 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.

Performance Conditions - Restricted Stock Granted in August 2015

In August 2015 the Company awarded 301,537 shares of restricted stock to executive officers and employees. These shares of restricted stock 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.

During the three and nine months ended March 31, 2017, the Company reversed the stock-based compensation charge recognized to date related to the 301,537 shares of restricted stock because it believed that it was unlikely that the 2018 Fundamental EPS target would 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.

Vesting of all non-employee director shares issued prior to June 30, 2017

Grants of restricted stock to non-employee directors made during fiscal 2017, as well as those grants made in prior years, originally vested over a three-year period. After the end of fiscal 2017, the Company's board consulted with Pay Governance, an independent compensation consultant, and determined that one-year vesting of restricted stock grants is a more common compensation practice for independent directors and therefore, amended the terms of outstanding awards to vest one-year after grant. As a result of this amendment, 61,995 shares of restricted stock held by the non-employee directors as of June 30, 2017, were fully-vested.

Forfeiture of restricted stock awarded in August and November 2014 that did not achieved targeted market conditions

During the three and nine months ended March 31, 2018, restricted stock with market conditions awarded in August and November 2014, were forfeited, because the target market conditions were not achieved. The stock-based compensation charge related to these awards was not reversed upon forfeiture because these awards contained market conditions.

The fair value of restricted stock vesting during the nine months ended March 31, 2018 and 2017, respectively, was $0.5 million and $0.7 million.

Stock-based compensation charge and unrecognized compensation cost

The Company recorded a stock-based compensation charge during each of the three months ended March 31, 2018 and 2017 of $0.6 million, which comprised:

			Allocated to cost
			of goods sold, IT		Allocated to
			processing,		selling, general
		Total	servicing and		and
		charge	support		administration
Three months ended March 31, 2018
Stock-based compensation charge	$	575	$-	$	575
Total – three months ended March 31, 2018	$	575	$-	$	575

Three months ended March 31, 2017
Stock-based compensation charge	$	621	$-	$	621
Total – three months ended March 31, 2017	$	621	$-	$	621

The Company recorded a stock-based compensation charge (reversal) during the nine months ended March 31, 2018 and 2017 of $2.0 million and ($0.07 million), respectively, which comprised:

					Allocated to cost
					of goods sold, IT		Allocated to
					processing,		selling, general
		Total			servicing and		and
		charge			support		administration
Nine months ended March 31, 2018
Stock-based compensation charge	$	2,052		$	-	$	2,052
Reversal of stock compensation charge related to
stock options forfeited		(42	)		-		(42	)
Total – nine months ended March 31, 2018	$	2,010		$	-	$	2,010

Nine months ended March 31, 2017
Stock-based compensation charge	$	1,759		$	-	$	1,759
Reversal of stock compensation charge related to
restricted stock		(1,827	)		-		(1,827	)
Total – nine months ended March 31, 2017	$	(68	)	$	-	$	(68	)

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

As of March 31, 2018, there was no unrecognized compensation cost related to stock options because all stock options granted have vested. As of March 31, 2018, the total unrecognized compensation cost related to restricted stock awards was approximately $4.0 million, which the Company expects to recognize over approximately two years. This amount excludes the total unrecognized compensation cost as of March 31, 2018, of approximately $3.9 million, related to restricted stock awards that the Company expects will not vest due to it not achieving the 2018 Fundamental EPS. As of March 31, 2018, 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 $3.2 million.

As of March 31, 2018 and June 30, 2017, the Company recorded a deferred tax asset of approximately $0.7 million and $0.9 million, respectively, related to the stock-based compensation charge recognized related to employees of Net1. As of March 31, 2018, the Company has a valuation allowance of approximately $0.7 million related to the deferred tax asset because it does not believe that the stock-based compensation deduction would be utilized as it does not anticipate generating sufficient taxable income in the United States. The Company deducts the difference between the market value on date of exercise by the option recipient and the exercise price from income subject to taxation in the United States.