Equity-Accounted Investments And Other Long-Term Assets

9 Months Ended

Mar. 31, 2020

Equity-Accounted Investments And Other Long-Term Assets [Abstract]

Equity-Accounted Investments And Other Long-Term Assets

7. Equity-accounted investments and other long-term assets

Refer to Note 9 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2019, for additional information regarding its equity-accounted investments and other long-term assets.

Equity-accounted investments

The Company’s ownership percentage in its equity-accounted investments as of March 31, 2020, and June 30, 2019, was as follows:

	March 31,		June 30,
		2020	2019
Bank Frick & Co AG (“Bank Frick”)		35%	35%
DNI		27%	30%
Finbond Group Limited (“Finbond”)		31%	29%
Carbon Tech Limited (“Carbon”), formerly OneFi Limited		25%	25%
Revix (“Revix”)		25%	-
SmartSwitch Namibia (Pty) Ltd (“SmartSwitch Namibia”)		50%	50%
V2 Limited (“V2”)		50%	50%
Walletdoc Proprietary Limited (“Walletdoc”)		20%	20%

DNI

In February 2020, the Company’s ownership percentage in DNI reduced from approximately 30% to 27% following the issuance by DNI of additional ordinary no par value shares. The Company did not acquire additional ordinary shares in DNI and therefore its ownership percentage was diluted. The terms and conditions of the option referred to below were unaffected by the additional issuance by DNI.

During the three and nine months ended March 31, 2020, the Company recorded earnings from DNI that resulted in the carrying value of DNI exceeding the amount that the Company could receive pursuant to the call option granted to DNI in May 2019. As a result, during the three and nine months ended March 31, 2020, the Company has recorded an impairment loss of $0,5 million and $1,5 million. The Company also recorded an impairment loss of $11,5 million related to the difference between the fair value of consideration received on April 1, 2020, and the carrying value of DNI, including $11,3 million included in accumulated other comprehensive loss as of March 31, 2020.

In May 2019, Net1 Applied Technologies South Africa Proprietary Limited (“Net1 SA”) granted an option to DNI, or its nominee, to acquire the 30,394,765 DNI shares Net1 SA held. The option strike price was calculated as ZAR 2,827 billion ($158,0 million, translated at exchange rates applicable as of March 31, 2020) less any special distribution made by DNI multiplied by Net1 SA’s retained interest (i.e. assuming no special distribution, the strike price for the retained interest is ZAR 859,3 million, or $48,0 million, translated at exchange rates applicable as of March 31, 2020). It was permissible for the call option to be split into smaller denominations, but Net1 SA could not be left with less than 20% unless the whole remaining interest was disposed of. DNI was entitled to nominate another party to exercise the call option in the place of DNI, provided that the nominated party acquires call options representing at least 2.5% of DNI’s voting and participation interests.

The option was exercised on March 31, 2020. DNI nominated MIC Investment Holdings Proprietary Limited (“MIC”) to exercise a portion of the option to acquire 26,886,310 of the 30,394,765 DNI shares for ZAR 760.0 million ($42.5 million, translated at exchange rates applicable as of March 31, 2020) from Net1 SA. The transaction closed on April 1, 2020 and MIC settled the option consideration in cash. On March 31, 2020, and together with the MIC transaction, DNI exercised a portion of the option to acquire the remaining 3,508,455 DNI shares from Net1 SA for ZAR 99.2 million ($5.5 million, translated at exchange rates applicable as of March 31, 2020) through the issue of a note to Net1 SA. The transaction also closed on April 1, 2020.

The note is unsecured. The note principal is repayable in 18 equal monthly installments of ZAR 5.5 million ($0.3 million, translated at exchange rates applicable as of March 31, 2020) commencing on October 31, 2020. Interest is charged at a fixed rate of 7.25% per annum and accrues monthly from October 1, 2020 and is repayable together with the principal payments. The Company adjusted the 12-month JIBAR interest rate of 6.33% quoted by Rand Merchant Bank by 0.30% to derive a 24-month rate of 6.63% which has been used to determine the present value of the ZAR 99.2 million note. The present value of the note as of March 31, 2020, using the derived interest rate and the expected cash repayments was ZAR 95.7 million ($5.4 million, translated at exchange rates applicable as of March 31, 2020).

The Company estimates transaction costs of approximately $1.0 million.

7. Equity-accounted investments and other long-term assets

The following table presents the calculation of the expected loss on disposal of DNI on April 1, 2020:

				April 1
				2020
Loss on sale of DNI:
Consideration received in cash on April 1, 2020 - 26,886,310 shares			$	42 481
Consideration received with note on April 1, 2020 - present value of note - 3,508,455 shares				5 350
Less: transaction costs				(1 006)
Less: carrying value of DNI				(36 508)
Less: release of foreign currency translation reserve from accumulated other comprehensive loss				(11 323)
	Loss on sale of DNI before tax			(1 006)
	Capital gains tax related to sale of DNI⁽¹⁾			-
		Loss on disposal of DNI after tax	$	(1 006)

(1) Net1 SA recorded a valuation allowance related to capital losses previously generated but not utilized. The Company utilized approximately $12.0 million of these unutilized capital losses as a result of the disposal of its remaining interest in DNI in April 2020 and, therefore, the equivalent portion of the valuation allowance created was released.

Bank Frick

On October 2, 2019, the Company exercised its option to acquire an additional 35% interest in Bank Frick from the Frick Family Foundation. The Company had agreed to pay an amount, the “Option Price Consideration”, for an additional 35% interest in Bank Frick, which represented the higher 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 would have only transferred on payment of the Option Price Consideration, which was expected to 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 was agreed or finally determined. On April 9, 2020, the Company, through its wholly owned subsidiary, Net1 Holdings LI AG, entered into a termination agreement pursuant to which the option to acquire a further 35% of Bank Frick was cancelled. On April 15, 2020, the Company paid a termination fee of CHF 17.0 million ($17.5 million) to the Frick Family to cancel the option.

The Company considered the termination of the exercise of the option to acquire a further 35% of Bank Frick an impairment indicator. The Company recorded an impairment loss of $18.3 million during the three and nine months ended March 31, 2020, related to the other-than-temporary decrease in Bank Frick’s value, which represented the difference between the determined fair value of the Company’s interest in Bank Frick and the Company carrying value (before the impairment). The Company, with the assistance of external consultants, considered a multiple based valuation approach in respect of the March 31, 2020 balance sheet date. The Company believes that a price to book methodology is the most appropriate for a valuing a bank, but also took into account a price earnings approach to support the primary methodology. An appropriate peer group was selected based on the activities of Bank Frick and after applying a regression analysis to compensate for differences in the return on equity in the peer group a price to book ratio of 1.15 times was determined, but the multiple ranged from 0.7 times to 4.7 times. The Company determined to use a price to book multiple of approximately 0.9 times to value its investment in Bank Frick as of March 31, 2020. The Company used a multiple at the lower end of the peer group range as a result of Bank Frick’s size (based on net asset value) and product mix relative to the peer group. The Company’s 35% portion of approximately 0.9 times Bank Frick’s March 31, 2020, net asset value was lower than the Company’s carrying value in Bank Frick as of March 31, 2020. On April 13, 2020, the Company received a cash dividend of approximately CHF 1.3 million ($1.3 million, translated at exchange rates applicable as of March 31, 2020).

Finbond

As of March 31, 2020, the Company owned 268 820 933 shares in Finbond representing approximately 30,6% of its issued and outstanding ordinary shares. Finbond is listed on the Johannesburg Stock Exchange and its closing price on March 31, 2020, the last trading day of the month, was ZAR 2,27 per share. The market value of the Company’s holding in Finbond on March 31, 2020, was ZAR 0,6 billion ($34,1 million translated at exchange rates applicable as of March 31, 2020). On or about March 9, 2020, Finbond repurchased 47 million of its shares for ZAR 2.91123 per share, or a total consideration of ZAR 136.8 million, in cash, from other Finbond shareholders which resulted in an increase in the Company’s shareholding in Finbond. On August 2, 2019, the Company, pursuant to its election, received an additional 1,148,901 shares in Finbond as a capitalization share issue in lieu of a dividend.

7. Equity-accounted investments and other long term assets (continued)

Equity-accounted investments (continued)

V2 Limited

In August 2019, the Company made a further equity contribution of $1.3 million to V2 Limited (“V2”) and in January 2020 it made its final committed equity contribution of $1.3 million bringing the total equity contribution to $5.0 million. The Company has also committed to provide V2 with a working capital facility of $5.0 million, which is subject to the achievement of certain pre-defined objectives. The Company believes that V2 has promising prospects, however, as it is in its early developmental stage, has missed a key revenue milestone in February 2020 and delivery of its business plan has been delayed, its financial results are therefore worse than anticipated. The Company believes that V2’s net asset value represents its fair value because it does not currently have supportable forecasts available to perform other valuation models, including a discounted cash flow. The carrying value of the Company’s investment in V2 (before the impairment) is higher than its portion of V2’s net asset value. Therefore, the Company recorded an impairment loss of $2.5 million during the three and nine months ended March 31, 2020, related to the other-than-temporary decrease in V2’s value.

Summarized below is the movement in equity-accounted investments and loans provided to equity-accounted investments during the nine months ended March 31, 2020:

					DNI		Bank Frick		Finbond		Other⁽¹⁾		Total
Investment in equity
	Balance as of June 30, 2019				$	61 030	$	47 240	$	35 300	$	7 398	$	150 968
		Acquisition of shares				-		-		274		2 500		2 774
		Stock-based compensation				-		-		71		-		71
		Comprehensive (loss) income:				(9 744)		(17 924)		2 718		(3 447)		(28 397)
			Other comprehensive income			-		-		2 227		-		2 227
			Equity accounted (loss) earnings			(9 744)		(17 924)		491		(3 447)		(30 624)
				Share of net income (loss)		4 676		770		491		(947)		4 990
				Amortization of acquired intangible assets		(1 874)		(569)		-		-		(2 443)
				Deferred taxes on acquired intangible assets		524		136		-		-		660
				Impairment		(13 070)		(18 261)		-		(2 500)		(33 831)
		Dividends received				(1 787)		-		(274)		(338)		(2 399)
		Foreign currency adjustment⁽²⁾				(12 991)		684		(7 947)		(364)		(20 618)
	Balance as of March 31, 2020				$	36 508	$	30 000	$	30 142	$	5 749	$	102 399

Investment in loans:
	Balance as of June 30, 2019				$	-	$	-	$	-	$	148	$	148
		Loans granted				-		-		-		711		711
		Allowance for doubtful loans				-		-		-		(719)		(719)
		Foreign currency adjustment⁽²⁾				-		-		-		(24)		(24)
	Balance as of March 31, 2020				$	-	$	-	$	-	$	116	$	116

									Equity		Loans		Total
Carrying amount as of :
		June 30, 2019							$	150 968	$	148	$	151 116
		March 31, 2020							$	102 399	$	116		102 515

(1) Includes primarily Carbon, Revix, SmartSwitch Namibia, V2 and Walletdoc;
(2) The foreign currency adjustment represents the effects of the fluctuations of the South African rand, Swiss franc, Nigerian naira
and Namibian dollar, and the U.S. dollar on the carrying value.

Other long-term assets

Summarized below is the breakdown of other long-term assets as of

		March 31,			June 30,
			2020		2019

Total equity investments		$	26 993	$	26 993
	Investment in 15% of Cell C, at fair value (Note 6)		-		-
	Investment in 13% of MobiKwik		26 993		26 993
Total held to maturity investments			-		-
	Investment in 7.625% of Cedar Cellular Investment 1 (RF) (Pty) Ltd 8.625% notes		-		-
Policy holder assets under investment contracts (Note 9)			465		619
Reinsurance assets under insurance contracts (Note 9)			922		1 163
	Total other long-term assets	$	28 380	$	28 775

Summarized below are the components of the Company’s equity securities without readily determinable fair value and held to maturity investments as of

				Cost basis		Unrealized holding		Unrealized holding		Carrying
				Cost basis		gains		losses		value
Equity securities:
	Investment in Mobikwik		$	26 993	$	-	$	-	$	26 993
Held to maturity:
	Investment in Cedar Cellular notes			-		-		-		-
		Total	$	26 993	$	-	$	-	$	26 993

Summarized below are the components of the Company’s equity securities without readily determinable fair value and held to maturity investments as of June 30, 2019:

				Cost basis		Unrealized holding		Unrealized holding		Carrying
				Cost basis		gains		losses		value
Equity securities:
	Investment in MobiKwik		$	26 993	$	-	$	-	$	26 993
Held to maturity:
	Investment in Cedar Cellular notes			-		-		-		-
		Total	$	26 993	$	-	$	-	$	26 993

No interest income from the Cedar Cellular note was recorded during the three and nine months ended March 31, 2020. The Company recognized interest income of $0.6 million and $2.0 million, related to the Cedar Cellular notes during the three and nine months ended March 31, 2019, respectively. Interest on this investment will only be paid, at Cedar Cellular’s election, on maturity in August 2022. The Company’s effective interest rate on the Cedar Cellular note was 24.82% as of March 31, 2019.

As of March 31, 2019, the Company did not expect to recover the entire amortized cost basis of the Cedar Cellular notes due to a reduction in the amount of future cash flows expected to be collected from the debt security. The Company did not expect to generate any cash flows from the debt security prior to the maturity date in August 2022, and, at that time, expected to recover approximately $16.0 million at maturity. The Company calculated the present value of the expected cash flows to be collected from the debt security by discounting these cash flows at the interest rate implicit in the security upon acquisition (at a rate of 24.82%) as of March 31, 2019. The present value of the expected cash flows of $7.0 million was less than the amortized cost basis recorded of $9.6 million (before the March 2019 impairment for the three months ended March 31, 2019) and $12.4 million (before the cumulative 2019 impairments for the nine months ended March 31, 2019). Accordingly, the Company recorded an other-than-temporary impairment related to a credit loss of $2.6 million and $5.4 million during the three and nine months ended March 31, 2019, respectively. The impairment of $2.6 million and $5.4 million is included in the caption—Impairment of Cedar Cellular note in the unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019, respectively.

7. Equity-accounted investments and other long term assets (continued)

Other long-term assets (continued)

Contractual maturities of held to maturity investments

Summarized below is the contractual maturity of the Company’s held to maturity investment as of March 31, 2020:

Cost basis

Estimated fair value⁽¹⁾

Due in one year or less

Due in one year through five years ⁽²⁾

Due in five years through ten years

Due after ten years

Total

(1) The estimated fair value of the Cedar Cellular note has been calculated utilizing the Company’s portion of the security provided to the Company by Cedar Cellular, namely, Cedar Cellular’s investment in Cell C.

(2) The cost basis is zero ($0.0 million).