Equity-Accounted Investments And Other Long-Term Assets

12 Months Ended

Jun. 30, 2020

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

Equity-Accounted Investments And Other Long-Term Assets

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

Equity-accounted investments

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

	June 30,	June 30,
	2020	2019
Bank Frick & Co AG (“Bank Frick”)	35%	35%
DNI	-	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

As of June 30,2019, the Company owned 30% of the voting and economic rights of 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.The Company sold its remaining interest in DNI in April 2020.

Sale of remaining interest in April 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 June 30,2020). 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 June 30, 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 portion of the note that is expected to be repaid during the twelve months following June 30, 2020, has been included in accounts receivable, net and other receivables in the consolidated balance sheet as of June 30, 2020 (refer to Note 5). The remaining amount (the long-term portion) has been included in other long-term assets in the consolidated balance sheet as of June 30, 2020 (refer also to the section “Other long-term assets” below).

The Company incurred transaction costs of approximately $1.0 million.

The following table presents the calculation of the 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				$	42 477
Consideration received with note on April 1, 2020 - present value of note - 3,508,455 shares					5 354
Less: transaction costs					(1 010)
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				(1 010)
	Taxes related to sale of DNI				-
		Capital gains tax related to sale of DNI(1)			2 475
		Utilization of capital loss carryforwards(1)			(2 475)
			Loss on disposal of DNI after tax	$	(1 010)

(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.

Sale of 8% in May 2019

On May 3, 2019, Net1 SA entered into a transaction with FirstRand Bank Limited, acting through its Rand Merchant Bank division (“RMB”), in terms of which Net1 SA reduced its shareholding in DNI from 38% to 30% through the sale of 7,605,235 ordinary “A” shares in DNI for a transaction consideration of ZAR 215.0 million ($15.0 million) (the “RMB Disposal”). The parties used a cashless settlement process on closing. The transaction closed on May 3, 2019, and the Company used the proceeds from the sale of these DNI shares and ZAR 15.0 million of its existing cash reserves to settle its outstanding long-term borrowings of ZAR 230.0 million in full.

The following table presents the calculation of the gain on disposal of DNI on May 3, 2019:

				May 2019 Disposal of 8% retained interest in DNI
May 3, 2019 fair value of consideration received				$	15 011
	Less: equity-method interest sold (Note 10)				(14 996)
	Less: released from accumulated other comprehensive loss – foreign currency translation reserve (as restated) (Note 1 and Note 16)				162
		May 2019 gain recognized on disposal, before tax			177
		Capital loss related to disposal(1)			-
			Gain recognized on disposal, after tax, as of May 3, 2019	$	177

(1) The disposal of the 8% interest in DNI resulted in a capital loss for tax purposes of approximately $23.9 million and the Company provided a valuation allowance of $23.9 million against this capital loss because it did not have any capital gains to offset against this amount at the time.

DNI impairments recorded during the year ended June 30,2020

During year ended June 30,2020, the Company recorded impairment losses of $13,1 million. These impairment losses included (i) an amount of $11,5 million related to the difference between the fair value of consideration received on April 1, 2020 following the sale of its remaining interest, and the carrying value of DNI as of March 31, 2020, which included $11,3 million included in accumulated other comprehensive loss as of March 31, 2020, and (ii) an amount of $1,6 million representing the excess of recorded earnings from DNI over its carrying value, calculated as the amount that the Company could receive pursuant to the call option granted to DNI in May 2019.

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 quarter 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 June 30,2020).

Finbond

As of June 30,2020, 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 June30, 2020, the last trading day of the month, was ZAR 2,30 per share. The market value of the Company’s holding in Finbond on June 30,2020, was ZAR 0,6 billion ($35,7 million translated at exchange rates applicable as of June 30,2020). 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.

Most of South Africa’s listed financial institutions have experienced significant share price volatility since June 30, 2020. Finbond’s quoted market price has declined significantly since June 30, 2020. As of August 31, 2020, Finbond’s quoted market price was ZAR 1.47, which indicates a fair value for Finbond as of August 31, 2020, below the Company’s June 30, 2020, carrying value. The Company is unable to determine at this time whether the decline in Finbond’s quoted market price is other-than-temporary and will perform an analysis, as deemed necessary, at its next reporting date

10.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, and in June 2020 it provided $0.5 million to V2 under this facility.For its quarter ended March 2020, the Company recorded an impairment loss of $2.5 million, related to the other-than-temporary decrease in V2’s value.The Company believed that V2’s March 2020 net asset value represented its fair value because it did not have supportable forecasts available at that time to perform other valuation models, including a discounted cash flow. The carrying value of the Company’s investment in V2 (before the impairment) was higher than its portion of V2’s net asset value and therefore the Company recorded the impairment loss.

Summarized below is the movement in equity-accounted investments during the years ended June 30, 2020 and 2019, which includes the investment in equity and the investment in loans provided to equity-accounted investees:

					Bank Frick		Finbond		DNI		Other(1)		Total
Investment in equity
	Balance as of June 30, 2018 - as reported				$	48 129	$	28 982	$	-	$	5 865	$	82 976
		Correction of Finbond error (Note 1)				-		(2 540)		-		-		(2 540)
		Balance as of June 30, 2018 - as restated				48 129		26 442		-		5 865		80 436
		Remeasurement of 8% of DNI (Note 3)				-		-		14 849		-		14 849
		Remeasurement of 30% of DNI (Note 3)				-		-		59 346		-		59 346
		Acquisition of shares				-		1 920		-		2 989		4 909
		Stock-based compensation				-		117		-		-		117
		Comprehensive (loss) income:				(1 542)		6 870		865		(684)		5 509
			Other comprehensive income			-		4 251		-		-		4 251
			Equity accounted (loss) earnings			(1 542)		2 619		865		(684)		1 258
				Share of net income (loss) (Note 1)		1 109		2 315		1 380		(684)		4 120
				Amortization of acquired intangible assets		(747)		-		(715)		-		(1 462)
				Deferred taxes on acquired intangible assets		180		-		200		-		380
				Dilution resulting from corporate transactions		-		304		-		-		304
				Other		(2 084)		-		-		-		(2 084)
		Dividends received				-		(1 920)		(864)		(454)		(3 238)
		Return of investment				-		-		-		(284)		(284)
		Sale of 8% of DNI				-		-		(14 996)		-		(14 996)
		Foreign currency adjustment (Note 1)(2)				653		(818)		1 830		(34)		1 631
		Balance as of June 30, 2019				47 240		32 611		61 030		7 398		148 279
		Acquisition of shares				-		274		-		2 500		2 774
		Stock-based compensation				-		71		-		-		71
		Comprehensive (loss) income:				(17 273)		4 067		(9 744)		(4 365)		(27 315)
			Other comprehensive income			-		2 227		-		-		2 227
			Equity accounted (loss) earnings			(17 273)		1 840		(9 744)		(4 365)		(29 542)
				Share of net income (loss)		1 421		1 857		4 676		(1 865)		6 089
				Amortization of acquired intangible assets		(569)		-		(1 874)		-		(2 443)
				Deferred taxes on acquired intangible assets		136		-		524		-		660
				Dilution resulting from corporate transactions		-		(17)		-		-		(17)
				Impairment		(18 261)		-		(13 070)		(2 500)		(33 831)
		Dividends received				(1 308)		(274)		(1 787)		(454)		(3 823)
		Sale of DNI				-		-		(36 508)		-		(36 508)
		Foreign currency adjustment(2)				1 080		(5 873)		(12 991)		(478)		(18 262)
	Balance as of June 30, 2020				$	29 739	$	30 876	$	-	$	4 601	$	65 216
Investment in loans:
	Balance as of June 30, 2018				$	-	$	-	$	-	$	3 152	$	3 152
		Transfer to accounts receivables, net				-		-		-		(3 000)		(3 000)
		Foreign currency adjustment(2)				-		-		-		(4)		(4)
	Balance as of June 30, 2019					-		-		-		148		148
		Loans granted				-		-		-		1 230		1 230
		Allowance for doubtful loans				-		-		-		(730)		(730)
		Foreign currency adjustment(2)				-		-		-		(28)		(28)
	Balance as of June 30, 2020				$	-	$	-	$	-	$	620	$	620
									Equity		Loans		Total
Carrying amount as of :
		June 30, 2019							$	148 279	$	148	$	148 427
		June 30, 2020							$	65 216	$	620	$	65 836

(1) Includes Carbon, SmartSwitch Namibia, V2 and Walletdoc;

(2) The foreign currency adjustment represents the effects of the fluctuations of the South African rand, Nigerian naira and Namibian dollar, against the U.S. dollar on the carrying value.

Summary financial information of equity-accounted investments

Summarized below is the financial information of equity-accounted investments (during the Company’s reporting periods in which investments were carried using the equity-method, unless otherwise noted) as of the stated reporting period of the investee and translated at the applicable closing or average foreign exchange rates (as applicable):

			Bank Frick		Finbond(1)		DNI		Other(2)
Balance sheet, as of				June 30		February 28		June 30		Various
	Current assets(3)
		2020	$	n/a	$	n/a	$	n/a	$	19 910
		2019		n/a		n/a		35 608		17 781
	Long-term assets
		2020		1 042 366		294 734		n/a		6 145
		2019		1 013 677		232 047		39 851		2 304
	Current liabilities(3)
		2020		n/a		n/a		n/a		7 824
		2019		n/a		n/a		25 757		8 492
	Long-term liabilities
		2020		940 948		112 331		n/a		18 076
		2019		915 050		127 352		7 324		4 654
	Non-controlling interest
		2020		-		10 452		n/a		(73)
		2019		-		11 696		1 100		25
Statement of operations, for the period ended				June 30(4)		February 28		June 30(5)		Various
	Revenue
		2020		37 864		161 378		68 983		7 862
		2019		41 126		174 177		15 898		33 807
		2018		33 814		161 915		n/a		10 955
	Operating income (loss)
		2020		4 815		17 483		24 563		(5 064)
		2019		3 633		20 355		5 814		(753)
		2018		776		25 079		n/a		826
	Income (loss) from continuing operations
		2020		4 053		14 449		17 092		(5 116)
		2019		3 169		17 761		4 306		(915)
		2018		617		16 475		n/a		152
	Net income (loss)
		2020		4 053		6 433		15 772		(5 014)
		2019		3 169		9 385		4 481		(1 029)
		2018	$	617	$	9 311	$	n/a	$	152

(1) Finbond balances included were derived from its publicly available information and presented for its years ended February. The amounts as of February 28, 2019 and for the years ended February 28, 2019 and 2018, respectively, have been restated for the error described in Note 1;

(2) Includes Carbon, SmartSwitch Namibia, Revix, Walletdoc and V2, as appropriate. Balance sheet information for Carbon, SmartSwitch Namibia, Revix and V2 is as of June 30, 2020 and 2019, and Walletdoc as of February 29, 2020 and February 28, 2020, respectively. Statement of operations information for Carbon, SmartSwitch Namibia, Revix, and V2 for the year ended June 30, and Walletdoc for the year ended February 29/28 (as appropriate);

(3) Bank Frick and Finbond are banks and do not present current and long-term assets and liabilities. All assets and liabilities of these two entities are included under the long-term caption;

(4) Statement of operations information for 2018 for Bank Frick is for the period from October 1, 2017 to June 30, 2018;

(5) Statement of operations information for DNI is for the period from July 1, 2019 to March 31, 2020, and April 1, 2019 to June 30, 2019.

Other long-term assets

Summarized below is the breakdown of other long-term assets as of June 30,2020, and June 30,2019:

		June 30,		June 30,
		2020		2019
Total equity investments		$	26 993	$	26 993
	Investment in 15% of Cell C, at fair value (Note 7)		-		-
	Investment in 12% (2019: 13%) of MobiKwik		26 993		26 993
	Investment in 87.50% of CPS (Note 3)		-		-
Total held to maturity investments			-		-
	Investment in 7.625% of Cedar Cellular Investment 1 (RF) (Pty) Ltd 8.625% notes		-		-
Long-term portion of amount due from DNI related to sale of remaining interest in DNI			2 857		-
Policy holder assets under investment contracts (Note 12)			490		619
Reinsurance assets under insurance contracts (Note 12)			1 006		1 163
	Total other long-term assets	$	31 346	$	28 775

(1) The Company determined that MobiKwik and CPS do not have readily determinable fair values and therefore elected to record these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company accounted for its investment in MobiKwik at cost as of June 30, 2018.

Cell C

On August 2, 2017, the Company, through its subsidiary, Net1SA, purchased 75,000,000 class “A” shares of Cell C for an aggregate purchase price of ZAR 2.0 billion ($151.0 million) in cash. The Company funded the transaction through a combination of cash and the facilities described in Note 13. Net1 SA has pledged, among other things, its entire equity interest in Cell C as security for the South African facilities described in Note 13 used to partially fund the acquisition of Cell C. The Company’s investment in Cell is carried at fair value. Refer to Note 7for additional information regarding changes in the fair value of Cell C.

MobiKwik

The Company signed a subscription agreement with MobiKwik, which is one of India’s largest independent mobile payments networks, with over 100 million users and 2.3 million merchants. Pursuant to the subscription agreement, the Company agreed to make an equity investment of up to $40.0 million in MobiKwik over a 24-month period. The Company made an initial $15.0 million investment in August 2016 and a further $10.6 million investment in June 2017, under this subscription agreement. During the year ended June 30, 2019, the Company paid $1.1 million to subscribe for additional shares in MobiKwik. As of June 30, 2020 and 2019, respectively, the Company owned approximately 12% and 13% of MobiKwik’s issued share capital.

CPS

The Company deconsolidated its investment in CPS in May 2020, refer to Note 3. As of June 30, 2020, the Company owned 87.50% of CPS’ issued share capital.

Cedar Cellular

No interest income from the Cedar Cellular note was recorded during the year ended June 30,2020. The Company recognized interest income of $2.4 million and $1.4 million, related to the Cedar Cellular notes during the year ended June 30, 2019 and 2018, 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 June 30,2019.

The Company does not expect to recover the 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 compared to previous expectations. The Company does not expect to generate any cash flows from the debt security at maturity in August 2022 or prior to the maturity date due to the current challenges facing the business and the uncertainties over the future value of the current equity in Cell C. Accordingly, the Company believes it is unlikely that Cedar Cellular will generate sufficient cash inflows to settle any outstanding accumulated interest and principal due to the note holders on maturity in August 2022.

The Company’s cannot calculate an effective interest rate on the Cedar Cellular note because the carrying value is currently zero ($0.0 million) as of June 30, 2020 and 2019. The Company therefore cannot calculate 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%) because there are no future cash flows to discount. The present value of the expected cash flows of zero ($0.0 million) is less than the amortized cost basis recorded of $12.8 million (before the cumulative 2019 impairments for the year ended June 30, 2019). Accordingly, the Company recorded an other-than-temporary impairment related to a credit loss of $12.8 million during the year ended June 30, 2019. The impairment of $12.8 million is included in the caption “Impairment of Cedar Cellular note” in the consolidated statement of operations for the year ended June 30, 2019.

Summarized below are the components of the Company’s equity securities without readily determinable fair value and held to maturity investments as of June 30,2020:

				Cost basis		Unrealized holding		Unrealized holding		Carrying
						gains		losses		value
Equity securities:
	Investment in Mobikwik		$	26 993	$	-	$	-	$	26 993
	Investment in CPS			-		-		-		-
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 ofJune 30,2019:

				Cost basis		Unrealized holding		Unrealized holding		Carrying
						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

Contractual maturities of held to maturity investments

Summarized below is the contractual maturity of the Company’s held to maturity investment as ofJune 30,2020:

			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).