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Acquisition And Disposal Of Controlling Interest In DNI | 9 Months Ended
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Mar. 31, 2019
Acquisition And Disposal Of Controlling Interest In DNI [Abstract] |
Acquisition And Disposal Of Controlling Interest In DNI | 2. Acquisition and disposal of controlling interest in DNI 2018 acquisition The Company's acquisition of a controlling interest in DNI-4PL Contracts Proprietary Limited ("DNI") is described in Note 3 to the Company's audited consolidated financial statements included in its Annual Report on Form 10-K/A for the year ended June 30, 2018. During the three and nine months ended March 31, 2019, the Company determined that certain customer relationships of $7.0 million should not have been separately identified and recorded as intangible assets because there were no separately identified cash flows related to these customer relationships. These customer relationships, net of deferred taxes of $2 million, should been recorded as a component of goodwill. During the three months ended March 31, 2019, the Company determined that DNI is a discontinued operation. The table below presents the DNI balances included on the Company's consolidated balance sheet as of June 30, 2018, as well as the amended preliminary purchase price allocation ("PPA") of the DNI acquisition, translated at the foreign exchange rates applicable on the date of acquisition:
|  | DNI – discontinued operation |
|  | as of June 30, 2018 |
|  | Initial |  |  |  |  |  | Amended |
|  | DNI PPA |  |  | Amendment |  |  | DNI PPA |
Current assets of discontinued operation: | $ | 22,482 |  | $ | - |  | $ | 22,482 |
Cash and cash equivalents |  | 2,979 |  |  | - |  |  | 2,979 |
Accounts receivable (Note 4) |  | 16,235 |  |  | - |  |  | 16,235 |
Finance loans receivable (Note 4) |  | 742 |  |  | - |  |  | 742 |
Inventory (Note 5) |  | 2,526 |  |  | - |  |  | 2,526 |
Long-term assets of discontinued operation: |  | 241,729 |  |  | (1,951 | ) |  | 239,778 |
Property, plant and equipment |  | 1,317 |  |  | - |  |  | 1,317 |
Equity-accounted investment (Note 8) |  | 339 |  |  | - |  |  | 339 |
Goodwill (Note 9) |  | 114,161 |  |  | 5,017 |  |  | 119,178 |
Intangible assets (Note 9) |  | 104,003 |  |  | (6,968 | ) |  | 97,035 |
Deferred tax assets |  | 561 |  |  | - |  |  | 561 |
Other long-term assets (Note 8) |  | 21,348 |  |  | - |  |  | 21,348 |
Current liabilities of discontinued operation: |  | (20,914 | ) |  | - |  |  | (20,914 | )
Accounts payables |  | (13,949 | ) |  | - |  |  | (13,949 | )
Other payables |  | (6,349 | ) |  | - |  |  | (6,349 | )
Current portion of long-term borrowings (Note 11) |  | (616 | ) |  | - |  |  | (616 | )
Long-term liabilities of discontinued operation: |  | (37,412 | ) |  | 1,951 |  |  | (35,461 | )
Other long-term liabilities |  | (8,291 | ) |  | - |  |  | (8,291 | )
Deferred tax liabilities |  | (29,121 | ) |  | 1,951 |  |  | (27,170 | )
Fair value of assets and liabilities on acquisition | $ | 205,885 |  | $ | - |  | $ | 205,885 |
The Company recorded intangible asset amortization, deferred taxes and non-controlling interest entries related to these customer relationships that should have been included in goodwill during the six months ended December 31, 2018. The Company has reversed these entries during the three and nine months ended March 31, 2019. The table below presents the impact of reversal of these entries on the Company's unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2019 and the caption in which the impact is included:
|  | Three and
|  | nine months
|  | ended
|  | March 31,
|  | 2019
Reversal of intangible asset amortization - decrease depreciation and amortization | $ | 506
Deferred tax impact related to reversal of intangible asset amortization - decrease income tax benefit |  | 142
Increase in non-controlling interest | $ | 164
2019 disposal of a controlling interest in DNI Transaction to sell 17% during the three and nine months ended March 31, 2019 On February 28, 2019, the Company through its wholly owned subsidiary, Net1 Applied Technologies South Africa Proprietary Limited ("Net1 SA"), entered into a transaction with JAA Holdings Proprietary Limited, a limited liability private company duly incorporated in the Republic of South Africa, and PK Gain Investment Holdings Proprietary Limited, a limited liability private company duly incorporated in the Republic of South Africa, in terms of which Net1 SA reduced its shareholding in DNI from 55% to 38%. The transaction closed on March 31, 2019. The parties used a cashless settlement process on closing, refer to Note 16. Net1 SA used the proceeds from the sale of the DNI shares to settle its ZAR 400 million ($27.6 million, translated at exchange rates applicable as of March 31, 2019) obligation to DNI to subscribe for an additional share as part of the contingent consideration settlement process. As of March 31, 2019, the Company owned 38% of the voting and economic rights of DNI. The Company accounted for its 38% investment in DNI using the equity method, refer to Note 8. The Company no longer controls DNI and deconsolidated its investment in DNI effective March 31, 2019. In April 2019, the Company's management approved and commenced a process to sell its retained interest in DNI, which includes the transactions described above. Transaction to sell 8% in May 2019 (subsequent to March 31, 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 further 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 ($14.8 million, translated at exchange rates applicable as of March 31, 2019) (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, refer to Note 11. On May 3, 2019, Net1 SA entered into an agreement pursuant to which it granted a call option to DNI to acquire Net1 SA's remaining 30% interest in DNI. The option expires on December 31, 2019, but may be exercised at any time prior to expiration. The option strike price is calculated as ZAR 2.827 billion ($195.2 million, translated at exchange rates applicable as of March 31, 2019) 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 30% retained interest is ZAR 859.3 million, or $59.3 million, translated at exchange rates applicable as of March 31, 2019). The call option may be split into smaller denominations, but Net1 SA cannot be left with less than 20% unless the whole remaining interest is disposed of. DNI may 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 table below presents the impact of the deconsolidation of DNI and the calculation of the net loss recognized on deconsolidation:
|  |  |  |  |  |  |  | Equity method |  |  |  |
|  |  |  |  |  |  |  | investment as of |  |  |  |
|  |  |  |  |  |  |  | March 31, 2019 |  |  |  |
|  |  |  |  |  |  |  | (Refer also Note 8) |  |  |  |
|  |  |  |  |  |  |  | 8% |  |  |  |  |  |  |
|  |  |  |  |  |  |  | retained |  |  |  |  |  |  |
|  |  |  |  |  |  |  | interest |  |  |  |  |  | Attributed |
|  |  |  |  |  |  |  | sold in |  |  | 30% |  |  | to non- |
|  |  |  |  | 17% |  |  | May |  |  | retained |  |  | controlling |
|  | Total |  |  | sold |  |  | 2019 |  |  | interest |  |  | interest |
Fair value of consideration received | $ | 27,626 |  | $ | 27,626 |  | $ | - |  | $ | - |  | $ | - |
Fair value of retained interest of 30% in DNI(1) |  | 74,195 |  |  | - |  |  | 14,849 |  |  | 59,346 |  |  | - |
Carrying value of non-controlling interest |  | 88,934 |  |  | - |  |  | - |  |  | - |  |  | 88,934 |
Subtotal |  | 190,755 |  |  | 27,626 |  |  | 14,849 |  |  | 59,346 |  |  | 88,934 |
Less: carrying value of DNI, comprising |  | 195,895 |  |  | 34,311 |  |  | 14,540 |  |  | 58,110 |  |  | 88,934 |
Cash and cash equivalents |  | 2,114 |  |  | 354 |  |  | 158 |  |  | 633 |  |  | 969 |
Accounts receivable, net |  | 24,577 |  |  | 4,116 |  |  | 1,841 |  |  | 7,358 |  |  | 11,262 |
Finance loans receivable, net |  | 1,030 |  |  | 173 |  |  | 77 |  |  | 308 |  |  | 472 |
Inventory |  | 893 |  |  | 149 |  |  | 66 |  |  | 268 |  |  | 410 |
Property, plant and equipment, net |  | 1,265 |  |  | 212 |  |  | 95 |  |  | 379 |  |  | 579 |
Equity-accounted investments (Note 8) |  | 242 |  |  | 41 |  |  | 19 |  |  | 72 |  |  | 110 |
Goodwill (Note 9) |  | 113,003 |  |  | 18,924 |  |  | 8,466 |  |  | 33,834 |  |  | 51,779 |
Intangible assets, net |  | 80,769 |  |  | 13,526 |  |  | 6,051 |  |  | 24,183 |  |  | 37,009 |
Deferred income taxes |  | 28 |  |  | 5 |  |  | 2 |  |  | 8 |  |  | 13 |
Other long-term assets |  | 26,553 |  |  | 4,447 |  |  | 1,989 |  |  | 7,950 |  |  | 12,167 |
Accounts payable |  | (5,186 | ) |  | (868 | ) |  | (389 | ) |  | (1,553 | ) |  | (2,376 | )
Other payables(2) |  | (16,484 | ) |  | (2,760 | ) |  | (1,235 | ) |  | (4,936 | ) |  | (7,553 | )
Income taxes payable |  | (2,482 | ) |  | (416 | ) |  | (186 | ) |  | (743 | ) |  | (1,137 | )
Deferred income taxes |  | (22,083 | ) |  | (3,698 | ) |  | (1,654 | ) |  | (6,612 | ) |  | (10,119 | )
Long-term debt (Note 11) |  | (10,150 | ) |  | (1,700 | ) |  | (760 | ) |  | (3,039 | ) |  | (4,651 | )
Released from accumulated other comprehensive |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
income – foreign currency translation reserve (Note 13) |  | 1,806 |  |  | 1,806 |  |  | - |  |  | - |  |  | - |
Loss recognized on disposal, before tax, comprising |  | (5,140 | ) |  | (6,685 | ) |  | 309 |  |  | 1,236 |  |  | - |
Related to sale of 17% of DNI |  | (6,685 | ) |  | (6,685 | ) |  | - |  |  | - |  |  |  |
Related to fair value adjustment of retained interest |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
in 38% of DNI |  | 1,545 |  |  | - |  |  | 309 |  |  | 1,236 |  |  |  |
Taxes related to gain recognized on disposal(3) |  | - |  |  | 505 |  |  | (3,836 | ) |  | 3,331 |  |  |  |
Loss recognized on disposal, after tax | $ | (5,140 | ) | $ | (7,190 | ) | $ | 4,145 |  | $ | (2,095 | ) |  |  |
(1) The fair value of the retained interest in 38% of DNI of $74.2 million ($14.9 million plus $59.3 million has been calculated using the implied fair value of DNI pursuant to the RMB Disposal and has been calculated as ZAR 215.0 million divided by 7.605235% multiplied by 38%, translated to dollars at the March 31, 2019, rate of exchange. The fair value of the retained interest in DNI is included in equity-accounted investment on the unaudited condensed consolidated balance sheet as of March 31, 2019. (2) Other payables include a short-term loan of ZAR 60.5 million ($4.2 million, translated at exchange rates applicable as of March 31, 2019) due to the Company and included in accounts receivable, net on the Company's unaudited condensed consolidated balance sheet as of March 31, 2019. The loan is repayable in full on or before June 30, 2019. Interest on the loan is charged at the South African prime rate. (3) Amounts presented are net of a valuation allowance provided. The disposal of DNI results in a capital loss for tax purposes of approximately $1.5 million and the Company has provided a valuation allowance of $1.5 million against this capital loss because it does not have any capital gains to offset against this amount. On an individual basis, the transaction to dispose of 17% of DNI resulted in a capital gain of $0.5 million and the re-measurement of the retained 38% interest has resulted in a capital loss of $2.0 million ($5.3 million (8% transaction) less $3.3 million (30% transaction)). The valuation allowance of $1.5 million has been provided against the $5.3 million, for a net amount presented in the table above of $3.8 million ($5.3 million less $1.5 million). Discontinued operation The Company has determined that the disposal of its controlling interest in DNI represents a discontinued operation because it represents a strategic shift that will have a major effect on the Company's operations and financial results as a result of the sale of a significant portion of its investment in DNI. The facts and circumstances leading to the disposal of a controlling interest are described above. The loss related to the disposal of a controlling interest in DNI is presented above. DNI was allocated to the Company's financial inclusion and applied technologies operating segment and the amortization of intangible assets identified and recognized related to the DNI acquisition were allocate to corporate/eliminations. The impact of the disposal of a controlling interest on the Company's operating segments is presented in Note 18. The Company retains a continuing involvement in DNI through its 38% interest in DNI (refer above and to Note 8). The Company expects to retain an interest in DNI for less than 12 months. As disclosed above, the Company sold an 8% interest in DNI in May 2019, and has entered into an agreement under which it has provided a call option to DNI to repurchase the remaining 30% interest in DNI. The Company did not record any earnings under the equity method related to its retained 38% investment in DNI during the three and nine months ended March 31, 2019. The Company has not presented revenues and expenses between the Company and DNI, and cash inflows or outflows from or to DNI after the disposal transaction because the Company closed the transaction to sell a controlling interest in DNI on March 31, 2019. The table below presents the impact of the deconsolidation of DNI on certain major captions to the Company's unaudited condensed consolidated statement of operations and unaudited condensed consolidated statement of cash flows for three and nine months ended March 31, 2019 and 2018, that have not been separately presented on those statements:
| DNI
|  | Three months ended |  |  | Nine months ended
|  | March 31, |  |  | March 31,
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018
Unaudited condensed consolidated statement of operations |  |  |  |  |  |  |  |  |  |  |
Discontinued: |  |  |  |  |  |  |  |  |  |  |
Revenue | $ | 17,842 |  | $ | - |  | $ | 56,337 |  | $ | -
Cost of goods sold, IT processing, servicing and support |  | 7,502 |  |  | - |  |  | 27,667 |  |  | -
Selling, general and administration |  | 1,935 |  |  | - |  |  | 4,295 |  |  | -
Depreciation and amortization |  | 2,427 |  |  | - |  |  | 8,026 |  |  | -
Impairment loss |  | 5,305 |  |  | - |  |  | 5,305 |  |  | -
Operating income |  | 673 |  |  | - |  |  | 11,044 |  |  | -
Interest income |  | 208 |  |  | - |  |  | 707 |  |  | -
Interest expense |  | 396 |  |  | - |  |  | 812 |  |  | -
Net income before tax |  | (4,655 | ) |  | - |  |  | 5,799 |  |  | -
Income tax expense |  | 146 |  |  | - |  |  | 3,124 |  |  | -
Net income before earnings from equity-accounted investments |  | (4,801 | ) |  | - |  |  | 2,675 |  |  | -
Earnings from equity-accounted investments(1)(2) | $ | 73 |  | $ | 3,291 |  | $ | 15 |  | $ | 5,202
Unaudited condensed consolidated statement of cash flows |  |  |  |  |  |  |  |  |  |  |
Discontinued: |  |  |  |  |  |  |  |  |  |  |
Total net cash (used in) provided by operating activities(3) | ($ | 393 | ) | $ | - |  | $ | 6,635 |  | $ | 1,765
Total net cash (used in) provided by investing activities | ($ | 319 | ) | $ | - |  | ($ | 516 | ) | $ | -
(1) Earnings from equity-accounted investments for the three and nine months ended March 31, 2019, represents earnings attributed to equity-accounted investment owned by DNI and included in the Company's results as a result of the consolidation of DNI. (2) Earnings from equity-accounted investments for the three and nine months ended March 31, 2018, represents DNI earnings (net of amortization of acquired intangibles and related deferred tax) attributed to the Company as a result of the Company using the equity method to account for its investment in DNI during the period. (3) Total net cash (used in) provided by operating activities for the three and nine months ended March 31, 2018, represent dividends received from DNI during these periods.

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