What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-09 compared with 2021-11-08 · 323 added, 142 removed, 155 unchanged (75% of the section changed)

12 unchanged sentences

Recent Developments

Agreement to acquire a controlling interest in the Connect Group

On October 31, 2021, we entered into an agreement to acquire a controlling stake in the Connect Group.

Subject to the terms and conditions set forth in the transaction agreement, the sellers will receive consideration of ZAR 3,683,559,419, which includes 3,065,883 shares of common stock to be issued in three tranches on each of the first, second and third anniversaries of the closing.

The transaction also includes a purchase price escalator that is intended to reflect an assumed increase in Enterprise Value (as defined in the agreement) from March 1, 2021, through closing at the rate of 3.05% per annum.

The transaction agreement includes customary covenants from the sellers and closing conditions, including obtaining regulatory approvals, and will be settled using a combination of cash, shares of our common stock as noted above, and external debt.

We have signed non-binding term sheets for a ZAR 2.35 billion ($154.4 million) debt package with Rand Merchant Bank, a division of FirstRand Bank Limited.

These include a credit enhancement mechanism of ZAR 350 million ($23.0 million), which will be provided by investment funds managed by our largest shareholder, Value Capital Partners (Pty) Ltd, on commercially agreed terms, which include a contingent subscription for new shares.

If certain conditions related to our debt financing are not satisfied by their respective due dates for fulfilment for any reason, we have agreed to pay to the Sellers an amount of ZAR 50,000,000.

If certain undertakings by the sellers are not completed by their respective due dates for fulfilment for any reason and the transaction agreement is terminated, the seller responsible for such failure will pay us an amount of ZAR 50,000,000.

Refer to the discussion under “Part II—Item 1A.—Risk Factors— Failure to complete, or delays in completing, the Connect Group acquisition, could materially and adversely affect our results of operations and stock price.” and “We may not realize some or all of the anticipated benefits from the Connect Group acquisition.” for risks related to transaction.

Update on the Consumer business

We remain focused on returning our Consumer business to breakeven by June 2022, followed by profitability in the following half year.

Positive momentum was achieved, through continued execution on the three levers that were communicated in the previous quarter’s results:

Increasing active EPE account numbers, through driving customer acquisition;

Improving ARPU, underpinned by increased cross selling;

Optimizing the cost structure, in line with a focus on customer centricity.

Progress on driving Customer Acquisition

The quarter ended with just under 1.1 million active EPE accounts.

Focused investment into our sales capability delivered over 126,000 new gross enrollments.

Activation rates on new accounts are in line with previous trends of 45% to 50% after three months from account opening.

A new product EPE lite was piloted, enrolling approximately 20,000 new accounts during the quarter, outperforming initial projections.

EPE lite is competitively placed with a ZAR 5.00 ($0.33) membership fee and attractive features for the entry level low-cost transactional account market.

Progress on Cross Selling

With a focus on upskilling and refocusing our employees on customer acquisition and cross-selling, 90% of all sales employees have been retrained to enable them to sell all our financial services products.

Penetration into the lending book averaged 38%, with approximately 221,000 new loans originated in the quarter, of which 52% were originated in the month of December.

The insurance book provides an ongoing opportunity to execute on our cross-selling strategy, with low penetration levels averaging 19% of the active account base, well below the target rate of 45%.

In November 2021, the rebranded core insurance product Smart1 was launched, with an insurable value of up to ZAR 30,000.

Over 6,000 new standalone polices were enrolled during the quarter.

Progress on Cost Optimization

Our cost optimization program, delivered cost savings of ZAR 53.5 million ($3.5 million) during the quarter, as a result of the closure of the mobile paypoint infrastructure and various other cost reduction initiatives.

In order to optimize the overall cost base and to move the business towards a more sales-focused and client solution driven financial services organization, we launched Project Spring.

Project Spring will focus on the restructuring of the financial services business and the rationalization of the distribution network.

Pursuant to Project Spring, a detailed review of the distribution network was performed, to identify underperforming branches and optimize our points of presence, while a significant exercise is underway to ensure our ATM footprint meets the needs of our customer base.

The section 189A retrenchment process with employees, as a result of Project Spring initiatives, commenced in January 2022.

Together with the cost initiatives already being implemented, combined, our total cost optimization program is targeted to deliver in excess of ZAR 300.0 million ($19.5 million) in annual cost savings.

Update on Merchant business

The merchant business was negatively impacted by delayed hardware sales in the NUETS terminal supply business, due to the global chip shortage.

However, the demand for product remains strong, with continued support from key customers for payment devices ordered.

The balance of orders are expected to be fulfilled in the remaining two quarters, with a resultant rebound in revenue.

If the Connect Group acquisition closes, it will form part of the Merchant business and the combined group will be best placed to deliver growth into our business to business (“B2B”) strategy, through the servicing of small and micro enterprises.

Enhancements to the management team

The group welcomes the enhancements to our management team, who offer a wealth of experience in their respective fields:

Basie Kok joined us effective February 2, 2022, as the new Chief Technology Officer.

Basie has over 15 years of technology experience and is a seasoned entrepreneur who co-founded the wiGroup.

Karabo Mothibi joined us effective February 1, 2022 as the new head of Human Capital.

He has over 18 years extensive experience in Human Resources, with proven success in partnering with business leaders to support, achieve and further corporate goals.

Simphiwe Pakathi joined us effective December 1, 2021 as the new head of Sales and Distribution in our Consumer division.

Simphiwe has over 18 years of experience in the Financial Services industry across the African continent.

The new head of Risk and Compliance is Denzel Landie, who will be joining the group on February 14, 2022.

Denzel has over 17 years’ experience in risk and compliance across multiple banking institutions.

On December 8, 2021, our board approved the appointment of Naeem Kola as our Group CFO, effective March 1, 2022.

Alex Smith will step down as CFO on this date and will take up his role of Group Chief Accounting Officer, a new role in the company.

MobiKwik filed its draft red herring prospectus in July 2021, with the original intention of completing its initial public offering in November 2021.

MobiKwik decided to delay its initial public offering given prevailing market conditions and is anticipating concluding the listing during calendar year 2022.

MobiKwik has been focusing on its BNPL offering and has seen significant growth in that area in the last year.

The investment in Cell C is held at a carrying value of $0 (zero) as of December 31, 2021.

Cell C remains focused on its recapitalization and implementing various initiatives to improve its operational performance.

While it remains in default on its various lending arrangements, Cell C and its lenders continue to work constructively and we understand that they are making steady progress towards its recapitalization.

Blue Label Telecoms, the largest Cell C shareholder, announced in August that it has signed term sheets with various lenders to facilitate the recapitalization.

Impact of COVID-19

We do not believe the COVID-19 pandemic has had a significant impact our South African operations since the initial lockdown period which occurred between March 2020 and June 2020.

We do not believe the COVID-19 pandemic has had a significant impact on our South African operations since the initial lockdown period which occurred between March 2020 and June 2020.

South Africa operates with a five-level COVID-19 alert system, with Level 1 being the least restrictive and Level 5 being the most restrictive and is currently in adjusted Level 1.

The South African government commenced its vaccination program in early calendar 2021, with a stated goal of vaccinating 67% of the South African population by the end of the calendar year 2021.

At the end of October around 38% of the adult population had been vaccinated, indicating that the goal is unlikely to be achieved.

Expectations are that a fourth wave will affect the country in the coming months.

Business and operations

During the quarter our operations largely operated as normal though there is an indirect impact from the lower economic activity in the South African economy.

Our insurance business is the only operation seeing a clear impact from a higher level of benefit claims which continues to persist.

We continue to incur direct expenditure on the purchase of sanitizers, masks and gloves for our employees and for the use of customers in our branches, but this is not significant in the context of our cost base.

Where possible, we have continued to provide the necessary facilities (computer equipment, data cards, etc.) for our employees to operate remotely and continue to encourage them to do so where this is practical and effective.

We continue to provide the necessary protective equipment and sanitization facilities for those employees that operate within our offices and operating locations.

Cash resources and liquidity

We believe we have sufficient cash reserves to support us through the next twelve months.

We do not believe there will be any further significant adverse effects on our liquidity from the pandemic, unless there is a resumption of the higher level of restrictions seen in April and May 2020 in South Africa.

We believe that our South African insurance business is adequately capitalized to address the higher claim levels it is currently experiencing.

While we have not incurred significant disruptions thus far from the COVID-19 outbreak, we are unable to accurately predict the impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact on our customers and other factors identified in Part I, Item 1A.

As of February 8, 2022, 41.8% of the adult population had been fully vaccinated.

While we have not experienced significant disruptions thus far from the COVID-19 outbreak, we are unable to accurately predict the impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact on our customers and other factors identified in Part I, Item 1A.

“Risk Factors— We are unable to ascertain the full impact the COVID-19 pandemic will have on our future financial position, operations, cash flows and stock price” in our Annual Report on Form 10-K for the year ended June 30, 2021.

We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition.

Financial Services Activities in South Africa

We continue to focus our South African financial inclusion activities on a business-to-consumer, or B2C, model.

We believe our EPE bank account, known in the communities it serves as ‘the green card’, has a strong brand position in our target market and benefits from significant loyalty.

We have been working on enhancing its presence through localized marketing which, when combined with some of the challenges of other service providers into this market, we expect to result in a return to growing customer numbers.

During the last quarter the focus has been on upskilling and refocusing our employees on customer acquisition and cross-selling of our various products.

This is a significant initiative that is being driven by a new team of provincial heads who have the necessary experience of implementing and managing a sales driven culture.

Many of these new provincial heads only joined the business during the last quarter and while we are already seeing improvements in sales activity, the real benefits will only be seen in the coming months.

Gross customer additions for the quarter were approximately 124,000 compared to the 43,000 of the previous quarter, while net additions amounted to 102,000 customers compared to the 33,000 of the previous quarter.

This improvement was despite the impact of the social unrest experienced in parts of South Africa during July, with a number of branches damaged.

This constrained some of our sales activities but the impact was short term.

Based on historic data, our expectation is for 45% to 50% of these accounts to become active within three months of opening.

Processing Activities in South Africa

Our processing activities in South Africa are focused around our ATM network, which largely services a consumer base, and our transaction processing for businesses, anchored around our EasyPay offering.

Transaction volumes in our ATM business were down by 12% on the previous quarter and by 10% on the prior year, but this was largely due to the impact of the social unrest – volumes had largely recovered in September 2021.

This part of our business was affected by the social unrest with over 10% of our ATMs destroyed.

While we now have a smaller ATM fleet, our focus is on improving transaction volumes to compensate for this, with a focus on expanding the presence of our ATMs in various retailers.

As articulated in respect of our revised strategy, we aim to grow our business to business, or B2B, operations through the servicing of small and micro enterprises.

Our B2B operations performed broadly in line with expectations with throughput growing by 4% compared to the previous quarter and transaction volumes by 11%.

Opportunities related to the expansion of the processing business into the small and micro enterprises space have been identified and are being progressed.

International Activities

India – In July 2021, MobiKwik filed its draft red herring prospectus with the appropriate Indian regulator related to its proposed initial public offering process.

We did not identify any observable price changes in orderly transactions for similar or identical equity securities issued by MobiKwik during the first quarter of fiscal 2022 and therefore did not change the carrying value of our investment.

Status of Cell C recapitalization

Cell C – We continued to carry the value of our Cell C investment at $0 (zero) as of September 30, 2021.

Cell C remains focused on its recapitalization and implementing various initiatives to improve its operational performance.

While it remains in default on its various lending arrangements, Cell C and its lenders continue to work constructively and are making steady progress towards its recapitalization.

Reallocation of certain activities among operating segments

Refer to Note 17 of the unaudited condensed consolidated financial statements for information regarding changes to the Company’s reportable segments during the three and six months ended December 31, 2021.

Critical Accounting Policies

13 unchanged sentences

Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of accounting pronouncements adopted, including the dates of adoption and the effects on our unaudited condensed consolidated financial statements.

Recent accounting pronouncements not yet adopted as of September 30, 2021

Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of September 30, 2021, including the expected dates of adoption and effects on our financial condition, results of operations and cash flows.

Recent accounting pronouncements not yet adopted as of December 31, 2021

Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of December 31, 2021, including the expected dates of adoption and effects on our financial condition, results of operations and cash flows.

Currency Exchange Rate Information

2 unchanged sentences

Three months ended

September 30,

Six months ended

$ average exchange rate

6 unchanged sentences

dollars on a monthly basis.

Thus, the average rates used to translate this data for the three months ended September 30, 2022 and 2021, vary slightly from the averages shown in the table above.

Thus, the average rates used to translate this data for the three months ended December 31, 2022 and 2021, vary slightly from the averages shown in the table above.

The translation rates we use in presenting our results of operations are the rates shown in the following table:

Three months ended

September 30,

Six months ended

Income and expense items:

9 unchanged sentences

A reconciliation between total operating segment revenue and revenue presented in our unaudited condensed consolidated financial statements is included in Note 17 to those statements.

Our CODM evaluates segment performance based on segment earnings before interest, tax, depreciation and amortization (“EBITDA”), adjusted for items mentioned in the next sentence (“Segment Adjusted EBITDA”).

We do not allocate depreciation and amortization, impairment of goodwill or other intangible assets, certain lease charges (“Lease adjustments”), non-recurring items (including gains or losses on disposal of investments, fair value adjustments to equity securities, fair value adjustments to currency options), interest income, interest expense, income tax expense or loss from equity-accounted investments to our reportable segments.

The Lease adjustments reflects lease charge excluded from the calculation of Segment Adjusted EBITDA and are therefore reported as a reconciling item to reconcile the reportable segments Segment Adjusted EBITDA to the Company’s loss before income tax expense.

A reconciliation of this Segment Adjusted EBITDA to the nearest GAAP measure (net income (loss) before income tax) is included in Note 17 to our unaudited condensed consolidated financial statements.

We analyze our business and operations in terms of three inter-related but independent operating segments:

(1) Processing, (2) Financial services and (3) Technology.

(1) Consumer, (2) Merchant and (3) Other.

In addition, corporate and corporate office activities that are impracticable to allocate directly to any of the other operating segments, as well as any inter-segment eliminations, are included in Corporate/Eliminations.

First quarter of fiscal 2022 compared to first quarter of fiscal 2021

The following factors had a significant impact on our results of operations during the first quarter of fiscal 2022 as compared with the same period in the prior year:

Second quarter of fiscal 2022 compared to second quarter of fiscal 2021

The following factors had a significant impact on our results of operations during the second quarter of fiscal 2022 as compared with the same period in the prior year:

Lower revenue:

Our revenues decreased 14% in ZAR primarily due to fewer prepaid airtime and hardware sales and lower transaction fee revenue;

Our revenues decreased 4% in ZAR primarily due to lower hardware sales as a result of the global chip shortage and fewer prepaid airtime sales.

The benefit of the increase in active accounts was offset by lower ATM transactions as the number of active ATMs decreased as we go through a relocation process;

Lower operating losses:

Operating losses have reduced by 9% in ZAR compared with the prior period primarily due to the closure of IPG and lower legal and consulting fees (excluding those related to the Connect Group transaction).

We continue to experience operating losses because of depressed revenues and have embarked on a plan to reduce operating expenses, including closing our mobile payment infrastructure;

Operating losses decreased, delivering an improvement of 38% in ZAR compared with the prior period primarily due to the closure of loss-making IPG and the implementation of various cost reduction initiatives in our Consumer business;

Significant transaction costs:

We expensed $1.5 million of transaction costs related to the Connect Group acquisition;

Foreign exchange movements:

dollar was 13% weaker against the ZAR during the first quarter of fiscal 2022, which impacted our reported results.

dollar was 1% stronger against the ZAR during the second quarter of fiscal 2022, which impacted our reported results.

Consolidated overall results of operations

3 unchanged sentences

In United States Dollars

Three months ended September 30,

(as restated) (A)

Three months ended December 31,

Cost of goods sold, IT processing, servicing and support

1 unchanged sentence

Depreciation and amortization

Transaction costs related to Connect Group acquisition

Operating loss

Change in fair value of equity securities

Unrealized loss related to fair value adjustment to currency options

Loss on disposal of equity-accounted investment

Interest income

4 unchanged sentences

Loss from equity-accounted investments

Net (loss) income attributable to us

(A) Revenue and cost of goods sold, IT processing, servicing and support have been restated for the error described in Note 1 to the unaudited condensed consolidated financial statements .

There was no impact on operating loss as a result of the restatement.

Net loss attributable to us

In South African Rand

Three months ended September 30,

(as restated) (A)

Three months ended December 31,

Cost of goods sold, IT processing, servicing and support

1 unchanged sentence

Depreciation and amortization

Transaction costs related to Connect Group acquisition

Operating loss

Change in fair value of equity securities

Unrealized loss related to fair value adjustment to currency options

Loss on disposal of equity-accounted investment

Interest income

4 unchanged sentences

Loss from equity-accounted investments

Net (loss) income attributable to us

(A) Revenue and cost of goods sold, IT processing, servicing and support have been restated for the error described in Note 1 to the unaudited condensed consolidated financial statements .

There was no impact on operating loss as a result of the restatement.

The decrease in revenue was primarily due to fewer prepaid airtime and hardware sales and lower transaction fee revenue, which was partially offset by higher lending revenues.

The decrease in cost of goods sold, IT processing, servicing and support was primarily due to lower cost of prepaid airtime and hardware sales, which was partially offset by higher costs related to transaction fees and an increase in insurance-related claims experience.

In ZAR, the decrease in selling, general and administration expense was primarily due to lower IPG-related expenses incurred following its closure and lower legal and consulting fees, which was partially offset by the year-over-year impact of inflationary increases on employee-related expenses.

Depreciation and amortization decreased primarily due to lower overall depreciation related to tangible assets that were fully depreciated during the first quarter of fiscal 2021.

Our operating loss margin for the first quarter of fiscal 2022 and 2021 was (32.5%) and (30.7%), respectively.

Net loss attributable to us

The decrease in revenue was primarily due to fewer hardware sales, reduced prepaid airtime sales and lower lending revenue, which was partially offset by higher processing fees, insurance revenue and higher account holder fees.

The decrease in cost of goods sold, IT processing, servicing and support was primarily due to the implementation of various cost reduction initiatives in our Consumer business, lower cost of hardware sales and prepaid airtime, which was partially offset by an increase in insurance-related claims experience.

In ZAR, the decrease in selling, general and administration expense was due to both lower IPG-related expenses incurred following its closure and some benefits from our cost reduction initiatives, which were partially offset by an increase in our allowance for doubtful finance loans receivable recorded during the second quarter of fiscal 2022 following strong loan originations in December 2021, higher employee-related expenses related to the growth in our senior management team, and the year-over-year impact of inflationary increases on employee-related expenses.

Depreciation and amortization decreased primarily due to lower overall depreciation related to tangible assets that were fully depreciated during the last 12 months.

Transaction costs related to Connect Group acquisition includes fees paid to external service providers associated with the contract drafting and negotiations;

legal, financial and tax due diligence activities performed;

warranty and indemnity insurance related to the transaction;

and other advisory services procured;

as well as our portion of the fees paid to competition authorities related to the regulatory filings made in various jurisdictions.

Our operating loss margin for the second quarter of fiscal 2022 and 2021 was (25.3%) and (40.5%), respectively.

We discuss the components of operating loss margin under “—Results of operations by operating segment.”

Interest on surplus cash decreased to $0.4 million (ZAR 5.7 million) from $0.6 million (ZAR 10.2 million), primarily due to lower average daily cash balances and lower average interest rates applied to daily cash balances during the first quarter of fiscal 2022.

The change in fair value of equity securities during the second quarter of fiscal 2021, represents a non-cash fair value adjustment gain related to MobiKwik.

We continue to carry our investment in Cell C at $0 (zero).

Refer to Note 5 to our unaudited condensed consolidated financial statements for the methodology and inputs used in the fair value calculation for MobiKwik and Note 4 for the methodology and inputs used in the fair value calculation for Cell C.

Unrealized loss related to fair value adjustment to currency options represents non-cash mark-to-market adjustments to foreign exchange option contracts entered into in November 2021 in order to manage the risk of currency volatility and to fix the USD amount to be utilized for part of the purchase consideration settlement.

The option contracts mature in February 2022.

Refer to Note 4 to our unaudited condensed consolidated financial statements for additional information related to these currency options.

Interest on surplus cash decreased to $0.3 million (ZAR 4.8 million) from $0.7 million (ZAR 11.1 million), primarily due to lower average daily cash balances during the second quarter of fiscal 2022.

Interest expense increased to $0.8 million (ZAR 11.8 million) from $0.7 million (ZAR 10.5 million), primarily as a result of a higher utilization of our ATM facilities to fund our ATMs.

Fiscal 2022 tax expense was $0.2 million (ZAR 2.7 million) compared to a tax benefit of $(1.1) million (ZAR (18.3) million) in fiscal 2021.

Our effective tax rate for fiscal 2022 was impacted by the tax charge related to our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities.

Our effective tax rate for fiscal 2021 was impacted by the reversal of the deferred tax liability related to one of our equity-accounted investments following its impairment, which was partially offset by the tax charge related to our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities.

Bank Frick was sold in the third quarter of fiscal 2021 and was accounted for using the equity method during the first quarter of fiscal 2021.

Fiscal 2022 tax expense was $0.1 million (ZAR 1.5 million) compared to $3.5 million (ZAR 53.6 million) in fiscal 2021.

Our effective tax rate for fiscal 2022 was impacted by the tax effect of the change in the fair value of our equity securities, the tax expense recorded by our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities (including the unrealized loss on the foreign currency options).

Our effective tax rate for fiscal 2021 was impacted by the tax effect on the change in the fair value of our equity securities, which is at a lower tax rate than the South African statutory rate, the tax charge related to our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities.

Bank Frick was sold in the third quarter of fiscal 2021 and was accounted for using the equity method during the second quarter of fiscal 2021.

Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first quarter and its annual results during our fourth quarter.

The table below presents the relative (loss) earnings from our equity accounted investments:

Three months ended September 30,

Share of net loss

Three months ended December 31,

Share of net income

4 unchanged sentences

In United States Dollars

Three months ended September 30,

(as restated)

Three months ended December 31,

Operating Segment

Consolidated revenue:

Financial services

Operating segments

1 unchanged sentence

Total consolidated revenue

Consolidated operating (loss) income:

Financial services

Operating segments

Segment Adjusted EBITDA

Corporate/eliminations

Lease adjustments

Depreciation and amortization

Total consolidated operating loss

(1) Consolidated revenue-Processing-All others for the three months ended September 30, 2020 has been restated for the error described in Note 1 to the unaudited condensed consolidated financial statements .

There was no impact on operating loss as a result of the restatement.

In South African Rand

Three months ended September 30,

(as restated)

Three months ended December 31,

Operating Segment

Consolidated revenue:

Financial services

Operating segments

1 unchanged sentence

Total consolidated revenue

Consolidated operating (loss) income:

Financial services

Operating segments

Segment Adjusted EBITDA

Corporate/eliminations

Lease adjustments

Depreciation and amortization

Total consolidated operating loss

There was no impact on operating loss as a result of the restatement.

Excluding IPG, segment revenue decreased primarily due to fewer prepaid airtime sales and a reduction in volume-driven transaction fees, including as a result of the South African banking industry’s decision to waive fees charged to customers for utilizing other banks’ ATMs in August and September 2021.

Excluding IPG, Processing’s operating loss has been impacted by the lower revenue.

Our operating loss margin (calculated as operating (loss) income divided by revenue) for the first quarter of fiscal 2022 and 2021 was (33.4%) and (32.4%), respectively.

Excluding IPG, our operating loss margin for the Processing segment was (21.3%) during the first quarter of fiscal 2021.

Financial services

Segment revenue increased due to higher account fee revenue following an increase in the number of EPE accounts, an increase in lending revenue as a result of improved lending activity, and an increase in insurance revenues from an increase in business written.

The increase in operating loss is primarily due to the increase in insurance-related claims experienced this quarter attributed to the COVID-19 pandemic as well as higher employee costs compared with the prior period.

Our operating loss margin for the first quarter of fiscal 2022 and 2021 was (28.2%) and (28.7%), respectively.

Segment revenue decreased due to fewer hardware sales compared to the prior period.

Operating income for the first quarter of fiscal 2022 was directly impacted by the lower revenue compared with fiscal 2021.

Our operating income margin for the Technology segment was 12.5% and 28.6% during the first quarter of fiscal 2022 and 2021, respectively.

Segment revenue increased primarily due to higher insurance revenue and moderately higher account holder fees, which was partially offset by moderately lower lending revenue and lower ATM transaction volumes.

Segment EBITDA loss has decreased primarily due to the implementation of various cost reduction initiatives, which was partially offset by an increase in insurance-related claims experience and an increase in our allowance for doubtful finance loans receivable recorded during the second quarter of fiscal 2022 following strong loan originations in December 2021.

Our EBITDA loss margin (calculated as EBITDA loss divided by revenue) for the second quarter of fiscal 2022 and 2021 was (27.4%) and (32.1%), respectively.

Segment revenue decreased due to fewer hardware sales as a result of the global chip shortage and fewer prepaid airtime sales, which was partially offset by higher processing fees.

The decrease in segment EBITDA is primarily due to the lower revenue.

Our EBITDA margin for the second quarter of fiscal 2022 and 2021 was 5.6% and 8.1%, respectively.

Other includes the activities of IPG in fiscal 2021 and our other business outside South Africa, principally Botswana.

Segment revenue decreased due to lower revenue following the closure of IPG in fiscal 2021.

We recorded an EBITDA contribution during the second quarter of fiscal 2022 following the closure of our loss-making activities performed through IPG.

Our EBITDA (loss) margin for the Other segment was 31.1% and (494.2%) during the second quarter of fiscal 2022 and 2021, respectively.

Corporate/Eliminations

1 unchanged sentence

expenses incurred related to corporate actions;

expenditure related to compliance with the Sarbanes-Oxley Act of 2002;

expenditures related to compliance with the Sarbanes-Oxley Act of 2002;

non-employee directors’ fees;

employee and executive bonuses;

certain employee and executive bonuses;

stock-based compensation;

directors and officer’s insurance premiums;

telecommunications expenses;

and elimination entries.

Our corporate expenses for fiscal 2022 decreased compared with fiscal 2021 due to lower legal and consulting fees incurred.

We expect to incur additional expenses related to the Connect Group transaction in the second quarter of fiscal 2022.

elimination entries;

and from fiscal 2022 our group CEO’s compensation.

Our corporate expenses for fiscal 2022 decreased compared with fiscal 2021 due to the inclusion of an allowance on doubtful loans receivable from equity-accounted investments of $0.7 million created during the second quarter of fiscal 2021.

Our corporate expenses for fiscal 2022 includes transaction related expenses of $1.5 million (ZAR 22.9 million) related to the Connect Group acquisition.

We expect to incur additional expenses related to the Connect Group transaction in the third quarter of fiscal 2022.

First half of fiscal 2022 compared to first half of fiscal 2021

The following factors had a significant impact on our results of operations during the first half of fiscal 2022 as compared with the same period in the prior year:

Lower revenue:

Our revenues decreased 4% in ZAR, primarily due to lower hardware sales as a result of the global chip shortage and fewer prepaid airtime sales, which was partially offset by higher processing fees.

The benefit of the increase in active accounts was offset by lower ATM transactions as the number of active ATMs decreased as we go through a relocation process;

Lower operating losses:

Operating losses decreased, delivering an improvement of 28% in ZAR compared with the prior period primarily due to the closure of IPG and the implementation of various cost reduction initiatives in our Consumer business;

Significant transaction costs:

We expensed $1.7 million of transaction costs related to the Connect Group acquisition;

Foreign exchange movements:

dollar was 1% weaker against the ZAR during the first half of fiscal 2022, which impacted our reported results.

Consolidated overall results of operations

This discussion is based on the amounts prepared in accordance with U.S.

The following tables show the changes in the items comprising our statements of operations, both in U.S.

dollars and in ZAR:

In United States Dollars

Six months ended December 31,

Cost of goods sold, IT processing, servicing and support

Selling, general and administration

Depreciation and amortization

Transaction costs related to Connect Group acquisition

Operating loss

Change in fair value of equity securities

Unrealized loss related to fair value adjustment to currency options

Loss on disposal of equity-accounted investment

Interest income

Interest expense

Loss before income tax expense

Income tax expense

Net loss before loss from equity-accounted investments

Loss from equity-accounted investments

Net loss attributable to us

In South African Rand

Six months ended December 31,

Cost of goods sold, IT processing, servicing and support

Selling, general and administration

Depreciation and amortization

Transaction costs related to Connect Group acquisition

Operating loss

Change in fair value of equity securities

Unrealized loss related to fair value adjustment to currency options

Loss on disposal of equity-accounted investment

Interest income

Interest expense

Loss before income tax expense

Income tax expense

Net loss before loss from equity-accounted investments

Loss from equity-accounted investments

Net loss attributable to us

The decrease in revenue was primarily due to fewer hardware sales and prepaid airtime sales, which was partially offset by higher processing fees, insurance revenue and modestly higher transaction fees and lending revenue.

The decrease in cost of goods sold, IT processing, servicing and support was primarily due to the implementation of various cost reduction initiatives in our Consumer business, lower cost of hardware sales and prepaid airtime, which was partially offset by higher costs related to transaction fees and an increase in insurance-related claims experience.

In ZAR, the decrease in selling, general and administration expenses was primarily due to lower IPG-related expenses incurred following its closure, which was partially offset by higher employee-related expenses related to the growth in our senior management team, and the year-over-year impact of inflationary increases on employee-related expenses.

Depreciation and amortization decreased primarily due to lower overall depreciation related to tangible assets that were fully depreciated during the last twelve months.

Transaction costs related to Connect Group acquisition includes fees paid to external service providers associated with the contract drafting and negotiations;

legal, financial and tax due diligence activities performed;

warranty and indemnity insurance related to the transaction;

and other advisory services procured;

as well as our portion of the fees paid to competition authorities related to the regulatory filings made in various jurisdictions.

Our operating loss margin for the first half of fiscal 2022 and 2021 was (26.3%) and (32.8%), respectively.

We discuss the components of operating loss margin under “—Results of operations by operating segment.”

The change in fair value of equity securities during the first half of fiscal 2021, represents a non-cash fair value adjustment gain related to MobiKwik.

We continue to carry our investment in Cell C at $0 (zero).

Refer to Note 4 to our unaudited condensed consolidated financial statements for additional information related to these currency options.

Interest on surplus cash decreased to $0.7 million (ZAR 10.5 million) from $1.3 million (ZAR 21.9 million), primarily due to lower average daily cash balances and lower average interest rates applied to daily cash balances during the first half of fiscal 2022.

Interest expense increased to $1.6 million (ZAR 23.7 million) from $1.4 million (ZAR 23.5 million), primarily as a result of a higher utilization of our ATM facilities to fund our ATMs.

Fiscal 2022 tax expense was $0.3 million (ZAR 4.3 million) compared to $2.4 million (ZAR 39.2 million) in fiscal 2021.

Bank Frick was sold in the third quarter of fiscal 2021 and was accounted for using the equity method during the first half of fiscal 2021.

Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first quarter and its annual results during our fourth quarter.

The table below presents the relative (loss) earnings from our equity accounted investments:

Six months ended December 31,

Share of net loss

Share of net income

Share of net loss

Refer to Note 5 to our unaudited condensed consolidated financial statements for additional information related to the impairment of Finbond and our other equity-accounted investments.

Results of operations by operating segment

The composition of revenue and the contributions of our business activities to operating (loss) income are illustrated below:

In United States Dollars

Six months ended December 31,

Operating Segment

Consolidated revenue:

Operating segments

Corporate/Eliminations

Total consolidated revenue

Segment Adjusted EBITDA

Corporate/eliminations

Lease adjustments

Depreciation and amortization

Total consolidated operating loss

In South African Rand

Six months ended December 31,

Operating Segment

Consolidated revenue:

Operating segments

Corporate/Eliminations

Total consolidated revenue

Segment Adjusted EBITDA

Corporate/eliminations

Lease adjustments

Depreciation and amortization

Total consolidated operating loss

The underlying decrease in revenue was primarily due to lower processing fees, partially offset by higher insurance revenue and account holder fees, and moderately higher lending revenues.

Segment EBITDA loss has increased primarily due to an increase in insurance-related claims experience, which was partially offset by the implementation of various cost reduction initiatives.

Our EBITDA loss margin for the first half of fiscal 2022 and 2021 was (41.4%) and (37.3%), respectively.

Segment revenue decreased due to fewer hardware sales as a result of the global chip shortage and reduced prepaid airtime sales, which was partially offset by higher processing fees.

The decrease in segment EBITDA is primarily due to the lower revenue.

Our EBITDA margin for the first half of fiscal 2022 and 2021 was 8.6% and 12.5%, respectively.

Segment revenue decreased due to lower revenue following the closure of IPG in fiscal 2021.

We recorded an EBITDA contribution during the second quarter of fiscal 2022 following the closure of our loss-making activities performed through IPG.

Our EBITDA margin for the Other segment was 32.3% and (286.4%) during the first half of fiscal 2022 and 2021, respectively.

Corporate/Eliminations

Our corporate expenses for fiscal 2022 decreased compared with fiscal 2021 due to higher consulting fees incurred in fiscal 2021 and the inclusion of an allowance on doubtful loans receivable from equity-accounted investments of $0.7 million.

Our corporate expenses for fiscal 2022 includes transaction related expenses of $1.7 million (ZAR 25.1 million) related to the Connect Group acquisition.

Presentation of quarterly revenue and EBITDA by segment for fiscal 2021 and 2020

The tables below present quarterly revenue and EBITDA generated by our three reportable segments for fiscal 2021 and 2020, and reconciliations to consolidated revenue and operating (loss) income, as well as the U.S.

dollar/ ZAR exchange rates applicable per fiscal quarter and year:

In United States Dollars

Consolidated revenue:

Operating segments

Corporate/Eliminations

Total consolidated revenue

Segment Adjusted EBITDA

Corporate/eliminations

Lease adjustments

Depreciation and amortization

Total consolidated operating loss

Income and expense items:

In United States Dollars

Consolidated revenue:

Operating segments

Corporate/Eliminations

Total consolidated revenue

Segment Adjusted EBITDA

Corporate/eliminations

Lease adjustments

Depreciation and amortization

Total consolidated operating loss

Income and expense items:

Liquidity and Capital Resources

At September 30, 2021, our cash and cash equivalents were $188.5 million and comprised of U.S.

dollar-denominated balances of $162.5 million, ZAR-denominated balances of ZAR 0.4 billion ($23.7 million), and other currency deposits, primarily Botswana pula, of $2.3 million, all amounts translated at exchange rates applicable as of September 30, 2021.

The decrease in our unrestricted cash balances from June 30, 2021, was primarily due to weak trading activities and utilization of cash reserves to fund our operations.

At December 31, 2021, our cash and cash equivalents were $182.4 million and comprised of U.S.

dollar-denominated balances of $159.4 million, ZAR-denominated balances of ZAR 0.3 billion ($21.0 million), and other currency deposits, primarily Botswana pula, of $2.0 million, all amounts translated at exchange rates applicable as of December 31, 2021.

The decrease in our unrestricted cash balances from June 30, 2021, was primarily due to growth in our financial loans receivable book in December 2021, and utilization of cash reserves to fund our operations, partially offset by the receipt of $7.5 million related to the sale of Bank Frick in fiscal 2021.

We generally invest any surplus cash held by our South African operations in overnight call accounts that we maintain at South African banking institutions, and any surplus cash held by our non-South African companies in U.S.

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When considering whether to borrow under our financing facilities, we consider the cost of capital, cost of financing, opportunity cost of utilizing surplus cash and availability of tax efficient structures to moderate financing costs.

We have entered into a definite agreement to acquire the entities (the Connect Group) described in Note 20 to our unaudited condensed consolidated financial statements for ZAR 3.7 billion which will be funded through a combination of our existing cash reserves, issue of our common stock, and bank financing of ZAR 1.1 billion.

Available short-term borrowings

Summarized below are our short-term facilities available and utilized as of September 30, 2021:

Summarized below are our short-term facilities available and utilized as of December 31, 2021:

Total short-term facilities available, comprising:

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Interest rate, based on South African prime rate less 1.15% (4)

(1) Overdraft may only be used to fund mobile ATMs and upon utilization is considered restricted cash.

(1) Overdraft may only be used to fund ATMs and upon utilization is considered restricted cash.

(2) Indirect and derivative facilities may only be used for guarantees, letters of credit and forward exchange contracts to support guarantees issued by Nedbank to various third parties on our behalf.

(3) Increased to 7.50% on January 28, 2022, following an increase in the South African repo rate.

(4) Increased to 6.35%, on January 28, 2022, following an increase in the South African repo rate

Restricted cash

We have credit facilities with RMB and Nedbank in order to access cash to fund our ATMs in South Africa.

Our cash, cash equivalents and restricted cash presented in our unaudited condensed consolidated statement of cash flows as of September 30, 2021, includes restricted cash of approximately $51.6 million related to cash withdrawn from our various debt facilities to fund ATMs.

Our cash, cash equivalents and restricted cash presented in our unaudited condensed consolidated statement of cash flows as of December 31, 2021, includes restricted cash of approximately $48.0 million related to cash withdrawn from our various debt facilities to fund ATMs.

This cash may only be used to fund ATMs and is considered restricted as to use and therefore is classified as restricted cash on our unaudited condensed consolidated balance sheet.

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The funds included in these bank accounts are restricted as they may not be withdrawn without the express permission of Nedbank.

Cash flows from operating activities

First quarter

Net cash used in operating activities during the first quarter of fiscal 2022 was $7.9 million (ZAR 116.1 million) compared to $29.9 million (ZAR 501.2 million) during the first quarter of fiscal 2021 .

Excluding the impact of income taxes, our cash used in operating activities during the first quarter of fiscal 2022 was impacted by the cash losses incurred by the majority of our continuing operations.

There were no significant tax payments made or refunds received during the first quarter of fiscal 2022.

During the first quarter of fiscal 2021, we paid South African tax of $0.2 million (ZAR 3.4 million) related to our 2020 tax year.

Second quarter

Net cash used in operating activities during the second quarter of fiscal 2022 was $13.8 million (ZAR 212.0 million) compared to $12.0 million (ZAR 185.3 million) during the second quarter of fiscal 2021 .

Excluding the impact of income taxes, our cash used in operating activities during the second quarter of fiscal 2022 was impacted by the utilization of cash to grow our financial loans receivable book in December 2021, but partially offset by lower cash losses incurred by the majority of our continuing operations.

During the second quarter of fiscal 2022, we paid our first provisional South African tax payments of $0.4 million (ZAR 6.9 million) related to our 2022 tax year and received tax refunds of $0.2 million (ZAR 2.9 million).

During the second quarter of fiscal 2021, we paid our first provisional South African tax payments of $0.7 million (ZAR 10.1 million) related to our 2021 tax year.

Taxes paid during the second quarter of fiscal 2022 and 2021 were as follows:

Three months ended December 31,

First provisional payments

Tax refund received

Total South African taxes paid (received)

Foreign taxes paid

Total tax paid

We expect to pay additional provisional payments in South Africa of approximately $0.1 million (ZAR 2.2 million translated at exchange rates applicable as of December 31, 2021) related to our 2022 tax year in the third quarter of fiscal 2022.

Net cash used in operating activities during the first half of fiscal 2022 was $21.7 million (ZAR 325.4 million) compared to $41.9 million (ZAR 689.3 million) during the first half of fiscal 2021 .

Excluding the impact of income taxes, our cash used in operating activities during the first half of fiscal 2022 was impacted by the cash losses incurred by the majority of our continuing operations, which in aggregate was lower than in fiscal 2021.

During the first half of fiscal 2022, we paid our first provisional South African tax payments of $0.4 million (ZAR 6.9 million) related to our 2022 tax year and received tax refunds of $0.2 million (ZAR (3.2) million) .

During the first half of fiscal 2021, we paid our first provisional South African tax payments of $0.7 million (ZAR 10.1 million) related to our 2021 tax year.

During the first half of fiscal 2021, we paid South African tax of $0.2 million (ZAR 3.4 million) related to our 2020 tax year.

We also paid taxes totaling $15.3 million in other tax jurisdictions, primarily in the U.S.

Taxes paid during the first quarter of fiscal 2022 and 2021 were as follows:

Three months ended September 30,

Taxes paid during the first half of fiscal 2022 and 2021 were as follows:

Six months ended December 31,

First provisional payments

Taxation paid related to prior years

Tax refund received

Total South African taxes paid (received)

Total South African taxes paid

Foreign taxes paid

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Cash flows from investing activities

First quarter

Cash used in investing activities for the first quarter of fiscal 2022 included capital expenditures of $0.7 million (ZAR 10.2 million), primarily due to the roll out of our new express branches.

Cash used in investing activities for the first quarter of fiscal 2021 included capital expenditures of $0.3 million (ZAR 4.6 million), primarily due to the acquisition of computer equipment and leasehold improvements in South Africa.

Second quarter

Cash used in investing activities for the second quarter of fiscal 2022 included capital expenditures of $0.2 million (ZAR 2.9 million), primarily due to the acquisition of computer equipment.

During the second quarter of fiscal 2022, we received a scheduled payment of $7.5 million related to the sale of Bank Frick in fiscal 2021.

Cash used in investing activities for the second quarter of fiscal 2021 included capital expenditures of $3.0 million (ZAR 46.8 million), primarily due to the acquisition of motor vehicles, which largely comprised a fleet of customized mobile ATMs used to deliver a service to rural communities.

During the second quarter of fiscal 2021 we received the outstanding amounts due on the deferred sale proceeds related to the April 2020 sale of DNI, which has now been paid in full.

We also extended loan funding of $1.0 million to V2 and $0.2 million to Revix.

Cash used in investing activities for the first half of fiscal 2022 included capital expenditures of $0.9 million (ZAR 13.3 million), primarily due to the roll out of our new express branches and the acquisition of computer equipment.

During the first half of fiscal 2022 we received a scheduled payment of $7.5 million related to the sale of Bank Frick in fiscal 2021

Cash used in investing activities for the first half of fiscal 2021 included capital expenditures of $3.3 million (ZAR 54.3 million), primarily due to the acquisition of motor vehicles, which largely comprised a fleet of customized mobile ATMs used to deliver a service to rural communities, computer equipment and leasehold improvements in South Africa.

We received $20.1 million related to the sale of our Korean business in March 2020 following the successful refund application of the amounts withheld and paid to the South Korean tax authorities pursuant to that transaction.

We also received the first of the eighteen scheduled repayments due on the deferred sale proceeds related to the April 2020 sale of DNI.

We received the total amount due on the deferred sale proceeds related to the April 2020 sale of DNI.

We also extended loan funding of $1.0 million to V2 and $0.2 million to Revix.

Cash flows from financing activities

First quarter

During the first quarter of fiscal 2022 , we utilized approximately $138.9 million from our South African overdraft facilities to fund our ATMs and repaid $98.9 million of these facilities.

During the first quarter of fiscal 2021, we utilized approximately $69.1 million from our South African overdraft facilities to fund our ATMs, and repaid $76.9 million of these facilities.

Second quarter

During the second quarter of fiscal 2022 , we received $0.7 million from the exercise of stock options, and utilized approximately $172.4 million from our South African overdraft facilities to fund our ATMs and repaid $172.8 million of these facilities.

During the second quarter of fiscal 2021, we utilized approximately $137.3 million from our South African overdraft facilities to fund our ATMs and repaid $88.3 million of these facilities.

During the first half of fiscal 2022 , we received $0.7 million from the exercise of stock options, and utilized approximately $311.4 million from our South African overdraft facilities to fund our ATMs and repaid $271.7 million of these facilities.

During the first half of fiscal 2021, we utilized approximately $206.5 million from our South African overdraft facilities to fund our ATMs and repaid $165.1 million of these facilities.

Off-Balance Sheet Arrangements

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Capital Expenditures

We expect capital spending for the second quarter of fiscal 2022 to primarily include limited investments into our ATM infrastructure and branch network in South Africa.

Our capital expenditures for the first quarter of fiscal 2022 and 2021 are discussed under “—Liquidity and Capital Resources—Cash flows from investing activities.” All of our capital expenditures for the past three fiscal years were funded through internally generated funds.

We had outstanding capital commitments as of September 30, 2021, of $1.0 million.

We expect capital spending for the third quarter of fiscal 2022 to primarily include limited investments into our ATM infrastructure and branch network in South Africa.

Our capital expenditures for the second quarter of fiscal 2022 and 2021 are discussed under “—Liquidity and Capital Resources—Cash flows from investing activities.” All of our capital expenditures for the past three fiscal years were funded through internally generated funds.

We had outstanding capital commitments as of December 31, 2021, of $1.0 million.

We expect to fund these expenditures through internally generated funds and available facilities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis