Stock-Based Compensation

9 Months Ended

Mar. 31, 2020

14. Stock-based compensation

Stock option and restricted stock activity

Options

The following table summarizes stock option activity for the nine months ended March 31, 2020 and 2019:


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

Outstanding - June 30, 2019			864 579	7,81	7,05	-	2,62
	Granted - October 2019		561 000	3,07	10,00	676	1,20
	Forfeited		(93 928)	7,50	-	-	2,81
		Outstanding - March 31, 2020	1 331 651	5,83	7,83	-	2,01

Outstanding - June 30, 2018			809 274	13,99	2,67	370	4,20
	Granted – September 2018		600 000	6,20	10,00	1 212	2,02
	Forfeited		(278 386)	19,16	-	-	5,00
		Outstanding - March 31, 2019	1 130 888	8,60	6,33	-	2,70

No stock options were awarded during the three months ended March 31, 2020 and 2019. During the nine months ended March 31, 2020, 561,000 stock options were awarded to employees. During the nine months ended March 31, 2019, 600,000 stock options were awarded to executive officers and employees. During the three and nine months ended March 31, 2020, an executive officer forfeited 53,928 stock options and employees forfeited 40,000 stock options with strike prices ranging from $3.07 to $11.23 per share following termination of their employment with the Company. During the three months ended March 31, 2019, employees forfeited 78,386 stock options following termination of their employment with the Company. During the nine months ended March 31, 2019, employees and executive officers forfeited 278,386 stock options, including 200,000 stock options forfeited by executive officers that were granted in August 2008 with a strike price of $24.46 per share, as these 200,000 stock options expired unexercised.

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 750-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 table below presents the range of assumptions used to value stock options granted during the nine months ended March 31, 2020 and 2019:

	Nine months ended
	March 31,
	2020	2019
Expected volatility	57%	44%
Expected dividends	0%	0%
Expected life (in years)	3	3
Risk-free rate	1,57%	2,75%

14. Stock-based compensation (continued)

Stock option and restricted stock activity (continued)

Options

The following table presents stock options vested and expected to vest as of March 31, 2020:

							Number ofshares			Weighted average exercise price($)			Weighted average remaining contractual term(in years)
	Vested and expecting to vest - March 31, 2020						1 331 651			5,83			7,83

These options have an exercise price range of $3.07 to $11.23.

The following table presents stock options that are exercisable as of March 31, 2020:

	Number ofshares	Weighted average exercise price($)	Weighted average remaining contractual term(in years)

Exercisable - March 31, 2020	474 986	8,77	5,44

No stock options became exercisable during the three months ended March 31, 2020, or during the three and nine months ended March 31, 2019, respectively. However, during the nine months ended March 31, 2020, 170,335 stock options became exercisable. The Company issues new shares to satisfy stock option exercises.

14. Stock-based compensation (continued)

Stock option and restricted stock activity (continued)

Restricted stock

The following table summarizes restricted stock activity for the nine months ended March 31, 2020 and 2019:

				Number of shares of restricted stock	Weighted average grant date fair value($’000)




Non-vested – June 30, 2019				583 908	3 410
	Granted – February 2020			568 000	2 300
	Total vested			(18 908)	70
		Vested – March 2020		(11 408)	42
		Vested – March 2020 - accelerated vesting		(7 500)	28
Forfeitures				(17 500)	65
		Non-vested – March 31, 2020		1 115 500	5 354

Non-vested – June 30, 2018				765 411	6 162
Granted – September 2018				148 000	114
Total vested - August 2017				(64 003)	503
		Vested – August 2018		(52 594)	459
		Vested – March 2019		(11 409)	44
	Forfeitures			(18 000)	70
			Non-vested – March 31, 2019	831 408	5 496

The February 2020 grants comprise 113,600 shares of restricted stock awarded to executive officers that are subject to time-based vesting and 454,400 shares of restricted stock awarded to executive officers that are subject to performance and time-based vesting. The September 2018 grants comprise 148,000 shares of restricted stock awarded to executive officers that are subject to market and time-based vesting. During the three and nine months ended March 31, 2020, 11,408 shares of restricted stock, representing approximately half of the 22,817 shares granted to our Chief Financial Officer on March 1, 2018, vested on March 1, 2020. During the three and nine months ended March 31, 2020, 7,500 shares (50% of the original award) of restricted stock with time-based vesting conditions were forfeited by an executive officer upon the disposal of Net1 Korea. The Company’s Board of Directors accelerated the vesting of the other half of the award and 7,500 vested. The 52,594 shares of restricted stock awarded to non-employee directors in August 2017 vested on August 23, 2018, and 11,409 shares of restricted stock, representing approximately half of the 22,817 shares granted to our Chief Financial Officer on March 1, 2018, vested on March 1, 2019. During the three and nine months ended March 31, 2019, 18,000 shares of restricted stock with time-based vesting conditions were forfeited by employees upon their termination from the Company.

14. Stock-based compensation

Stock option and restricted stock activity (continued)

Restricted stock (continued)

Performance Conditions - Restricted Stock Granted in February 2020

The 454,400 shares of restricted stock awarded to executive officers in February 2020 are subject to time-based and performance-based vesting conditions and vest in full only on the date, if any, that the following conditions are satisfied: (1) the achievement of an agreed return on average net equity per year during a measurement period commencing from July 1, 2021, through June 30, 2023, and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. Net equity is calculated as total equity attributable to the Company’s shareholders plus redeemable common stock, in conformity with GAAP. The net equity as of June 30, 2021, was set as the base year for the measurement period. The average net equity is calculated as the simple average between the opening net equity and closing net equity during each fiscal year within the measurement period. The targeted return per year within the measurement period is derived from GAAP net income attributable to the Company per fiscal year.

The performance-based awards vest based on the achievement of the following targeted return on average net equity during the measurement period, of:

8% per year: 50% vest;

14% per year: 100% vest.

No shares of restricted stock will vest at a return on average net equity of less than 8%. Calculation of the award based on the returns between 8% and 14% will be interpolated on a linear basis. The Company’s Remuneration Committee may use its discretion to adjust any component of the calculation of the award on a fact-by-fact basis, for instance, as the result of an acquisition.

Market Conditions - Restricted Stock Granted in September 2018

The 148,000 shares of restricted stock awarded to executive officers in September 2018 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 2021 and ending on December 31, 2021 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 55% increase, compounded annually, in the price of the Company’s common stock on Nasdaq over the $6.20 closing price on September 7, 2018. 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%

The fair value of these shares of restricted stock was calculated using a Monte Carlo simulation of a stochastic volatility process. The choice of a stochastic volatility process as an extension to the standard Black Scholes process was driven by both observations of larger than expected moves in the daily time series for the Company’s VWAP price, but also the observation of the strike structure of volatility (i.e. skew and smile) for out-of-the money calls and out-of-the money puts versus at-the-money options for both the Company’s stock and NASDAQ futures.

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. In its calculation of the fair value of the restricted stock, the Company used an average volatility of 37.4% for the VWAP price, a discounting based on USD overnight indexed swap rates for the grant date, and no future dividends. The average volatility was extracted from the time series for VWAP prices as the standard deviation of log prices for the three years preceding the grant date. The mean reversion of volatility and the volatility of volatility parameters of the stochastic volatility process were extracted by regressing log differences against log levels of volatility from the time series for at-the-money options 30 day volatility quotes, which were available from January 2, 2018 onwards.

14. Stock-based compensation (continued)

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.

Stock-based compensation charge and unrecognized compensation cost

The Company recorded a stock-based compensation charge, net during the three months ended March 31, 2020 and 2019, of $0.3 million and $0.5 million respectively, which comprised:

						Allocated to cost of goods sold,		Allocated to
						IT processing,		selling, general
				Total		servicing and		and
				charge		support		administration
Three months ended March 31, 2020
	Stock-based compensation charge		$	492	$	-	$	492
	Reversal of stock compensation charge related to stock options and restricted stock forfeited			(145)		-		(145)
		Total - three months ended March 31, 2020	$	347	$	-	$	347

Three months ended March 31, 2019
	Stock-based compensation charge		$	578	$	-	$	578
	Reversal of stock compensation charge related to stock options and restricted stock forfeited			(91)		-		(91)
		Total - three months ended March 31, 2019	$	487	$	-	$	487

14. Stock-based compensation (continued)

The Company recorded a stock-based compensation charge, net during the nine months ended March 31, 2020 and 2019, of $1.2 million and $1.7 million respectively, which comprised:

						Allocated to cost of goods sold,		Allocated to
						IT processing,		selling, general
				Total		servicing and		and
				charge		support		administration
Nine months ended March 31, 2020
	Stock-based compensation charge		$	1 315	$	-	$	1 315
	Reversal of stock compensation charge related to stock options and restricted stock forfeited		$	(145)	$	-	$	(145)
		Total - nine months ended March 31, 2020	$	1 170	$	-	$	1 170

Nine months ended March 31, 2019
	Stock-based compensation charge		$	1 763	$	-	$	1 763
	Reversal of stock compensation charge related to stock options and restricted stock forfeited		$	(91)		-	$	(91)
		Total - nine months ended March 31, 2019	$	1 672	$	-	$	1 672

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, 2020, the total unrecognized compensation cost related to stock options was approximately $1.1 million, which the Company expects to recognize over approximately three years. As of March 31, 2020, the total unrecognized compensation cost related to restricted stock awards was approximately $2.8 million, which the Company expects to recognize over approximately three years.

As of March 31, 2020 and June 30, 2019, respectively, the Company recorded a deferred tax asset of approximately $0.3 million and $0.2 million, related to the stock-based compensation charge recognized related to employees of Net1. As of March 31, 2020, and June 30, 2019, respectively, the Company recorded a valuation allowance of approximately $0.3 million and $0.2 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.