Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2021, and the unaudited condensed consolidated financial statements and the accompanying notes included in this Form 10-Q.
Forward-looking statements
Some of the statements in this Form 10-Q constitute forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, implied or inferred by these forward-looking statements. Such factors include, among other things, those listed under Item 1A.—“Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2021. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially. We undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.
You should read this Form 10-Q and the documents that we reference herein and the documents we have filed as exhibits hereto and thereto and which we have filed with the United States Securities and Exchange Commission completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Recent Developments
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; and
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.
39
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.
Investments
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 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. 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.
40
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
Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities, including the ongoing uncertainty in the current economic environment due to the outbreak of COVID-19. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires management’s judgment based on a variety of assumptions and other determinants such as historical experience, current and expected market conditions and certain scientific evaluation techniques.
Critical accounting policies are those that reflect significant judgments or uncertainties and may potentially result in materially different results under different assumptions and conditions. We have identified the following critical accounting policies that are described in more detail in our Annual Report on Form 10-K for the year ended June 30, 2021:
Valuation of investment in Cell C;
Recoverability of equity-accounted investments and other equity securities;
Business combinations and the recoverability of goodwill;
Intangible assets acquired through acquisitions;
Deferred taxation;
Stock-based compensation; and
Accounts receivable and allowance for doubtful accounts receivable.
Recent accounting pronouncements adopted
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 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
Actual exchange rates
The actual exchange rates for and at the end of the periods presented were as follows:
Table 1
Three months ended
Six months ended
Year ended
December 31,
December 31,
June 30,
2021
2020
2021
2020
2021
ZAR : $ average exchange rate
15.4320
15.6252
15.0283
16.2666
15.4146
Highest ZAR : $ rate during period
16.2968
16.6447
16.2968
17.6866
17.6866
Lowest ZAR : $ rate during period
14.4684
14.5456
14.1630
14.5456
13.4327
Rate at end of period
15.9306
14.6606
15.9306
14.6606
14.3010
41
Translation exchange rates for financial reporting purposes
We are required to translate our results of operations from ZAR to U.S. dollars on a monthly basis. 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
Six months ended
Year ended
Table 2
December 31,
December 31,
June 30,
2021
2020
2021
2020
2021
Income and expense items: $1 = ZAR
15.3800
15.4653
14.9748
16.4675
15.7162
Balance sheet items: $1 = ZAR
15.9306
14.6606
15.9306
14.6606
14.3010
Results of Operations
The discussion of our consolidated overall results of operations is based on amounts as reflected in our unaudited condensed consolidated financial statements which are prepared in accordance with U.S. GAAP. We analyze our results of operations both in U.S. dollars, as presented in the unaudited condensed consolidated financial statements , and supplementally in ZAR, because ZAR is the functional currency of the entities which contribute the majority of our revenue and is the currency in which the majority of our transactions are initially incurred and measured. Due to the significant impact of currency fluctuations between the U.S. dollar and the ZAR on our reported results and because we use the U.S. dollar as our reporting currency, we believe that the supplemental presentation of our results of operations in ZAR is useful to investors to understand the changes in the underlying trends of our business.
Our operating segment revenue presented in “—Results of operations by operating segment” represents total revenue per operating segment before intercompany eliminations. 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.
42
We analyze our business and operations in terms of three inter-related but independent operating segments: (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.
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 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 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; and
Foreign exchange movements: The U.S. dollar was 1% stronger against the ZAR during the second quarter 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. GAAP.
The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:
Table 3
In United States Dollars
Three months ended December 31,
2021
2020
$ ’000
$ ’000
change
Revenue
31,114
32,305
(4%)
Cost of goods sold, IT processing, servicing and support
20,580
24,339
(15%)
Selling, general and administration
17,746
22,097
(20%)
Depreciation and amortization
726
1,074
(32%)
Transaction costs related to Connect Group acquisition
1,489
-
nm
Operating loss
(9,427)
(15,205)
(38%)
Change in fair value of equity securities
-
15,128
nm
Unrealized loss related to fair value adjustment to currency options
2,429
-
nm
Loss on disposal of equity-accounted investment
-
13
nm
Interest income
313
717
(56%)
Interest expense
765
677
13%
Loss before income tax expense
(12,308)
(50)
24,516%
Income tax expense
98
3,468
(97%)
Net loss before loss from equity-accounted investments
(12,406)
(3,518)
253%
Loss from equity-accounted investments
-
(1,016)
nm
Net loss attributable to us
(12,406)
(4,534)
174%
43
Table 4
In South African Rand
Three months ended December 31,
2021
2020
ZAR ’000
ZAR ’000
change
Revenue
478,533
499,607
(4%)
Cost of goods sold, IT processing, servicing and support
316,520
376,410
(16%)
Selling, general and administration
272,933
341,737
(20%)
Depreciation and amortization
11,165
16,610
(33%)
Transaction costs related to Connect Group acquisition
22,901
-
nm
Operating loss
(144,986)
(235,150)
(38%)
Change in fair value of equity securities
-
233,959
nm
Unrealized loss related to fair value adjustment to currency options
37,358
-
nm
Loss on disposal of equity-accounted investment
-
201
nm
Interest income
4,814
11,089
(57%)
Interest expense
11,766
10,470
12%
Loss before income tax expense
(189,296)
(773)
24,388%
Income tax expense
1,508
53,634
(97%)
Net loss before loss from equity-accounted investments
(190,804)
(54,407)
251%
Loss from equity-accounted investments
-
(15,713)
nm
Net loss attributable to us
(190,804)
(70,120)
172%
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.”
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.
44
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:
Table 5
Three months ended December 31,
2021
2020
$ %
$ ’000
$ ’000
change
Bank Frick
-
498
nm
Share of net income
-
498
nm
Finbond
-
(806)
nm
Impairment
-
(806)
nm
Other
-
(708)
nm
Share of net loss
-
(160)
nm
Impairment
-
(548)
nm
Total loss from equity-accounted investments
-
(1,016)
nm
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating (loss) income are illustrated below:
Table 6
In United States Dollars
Three months ended December 31,
2021
% of
2020
% of
% change
Operating Segment
$ ’000
total
$ ’000
total
Consolidated revenue:
Consumer
16,639
53%
16,259
50%
2%
Merchant
14,102
45%
15,206
47%
(7%)
Other
396
1%
878
3%
(55%)
Subtotal: Operating segments
31,137
99%
32,343
100%
(4%)
Corporate/Eliminations
(23)
1%
(38)
-
(39%)
Total consolidated revenue
31,114
100%
32,305
100%
(4%)
EBITDA:
Consumer
(4,551)
58%
(5,214)
40%
(13%)
Merchant
795
(10%)
1,227
(9%)
(35%)
Other
123
(2%)
(4,339)
33%
nm
Segment Adjusted EBITDA
(3,633)
46%
(8,326)
64%
(56%)
Corporate/eliminations
(4,235)
54%
(4,743)
36%
(11%)
Subtotal
(7,868)
100%
(13,069)
100%
(40%)
Less: Lease adjustments
833
1,062
Less: Depreciation and amortization
726
1,074
Total consolidated operating loss
(9,427)
(15,205)
45
Table 7
In South African Rand
Three months ended December 31,
2021
% of
2020
% of
% change
Operating Segment
ZAR ’000
total
ZAR ’000
total
Consolidated revenue:
Consumer
255,908
53%
251,450
50%
2%
Merchant
216,889
45%
235,165
47%
(8%)
Other
6,090
1%
13,579
3%
(55%)
Subtotal: Operating segments
478,887
99%
500,194
100%
(4%)
Corporate/Eliminations
(354)
1%
(587)
-
(40%)
Total consolidated revenue
478,533
100%
499,607
100%
(4%)
EBITDA:
Consumer
(69,994)
58%
(80,636)
40%
(13%)
Merchant
12,227
(10%)
18,976
(9%)
(36%)
Other
1,892
(2%)
(67,104)
33%
nm
Segment Adjusted EBITDA
(55,875)
46%
(128,764)
64%
(57%)
Corporate/eliminations
(65,134)
54%
(73,352)
36%
(11%)
Subtotal
(121,009)
100%
(202,116)
100%
(40%)
Less: Lease adjustments
12,812
16,424
Less: Depreciation and amortization
11,166
16,610
Total consolidated operating loss
(144,987)
(235,150)
Consumer
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.
Merchant
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
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
Our corporate expenses generally include acquisition-related intangible asset amortization; expenses incurred related to corporate actions; expenditures related to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors’ fees; certain employee and executive bonuses; stock-based compensation; legal fees; audit fees; directors and officer’s insurance premiums; 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.
46
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; and
Foreign exchange movements: The U.S. 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. GAAP.
The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:
Table 8
In United States Dollars
Six months ended December 31,
2021
2020
$ ’000
$ ’000
change
Revenue
65,618
67,441
(3%)
Cost of goods sold, IT processing, servicing and support
44,787
50,799
(12%)
Selling, general and administration
38,188
40,625
(6%)
Depreciation and amortization
1,621
1,997
(19%)
Transaction costs related to Connect Group acquisition
1,674
-
nm
Operating loss
(20,652)
(25,980)
(21%)
Change in fair value of equity securities
-
15,128
nm
Unrealized loss related to fair value adjustment to currency options
2,429
-
nm
Loss on disposal of equity-accounted investment
-
13
nm
Interest income
702
1,328
(47%)
Interest expense
1,581
1,424
11%
Loss before income tax expense
(23,960)
(10,961)
119%
Income tax expense
284
2,378
(88%)
Net loss before loss from equity-accounted investments
(24,244)
(13,339)
82%
Loss from equity-accounted investments
(1,156)
(20,153)
(94%)
Net loss attributable to us
(25,400)
(33,492)
(24%)
Table 9
In South African Rand
Six months ended December 31,
2021
2020
ZAR ’000
ZAR ’000
change
Revenue
982,616
1,110,585
(12%)
Cost of goods sold, IT processing, servicing and support
670,676
836,532
(20%)
Selling, general and administration
571,858
668,991
(15%)
Depreciation and amortization
24,274
32,886
(26%)
Transaction costs related to Connect Group acquisition
25,068
-
nm
Operating loss
(309,260)
(427,824)
(28%)
Change in fair value of equity securities
-
249,120
nm
Unrealized loss related to fair value adjustment to currency options
36,374
-
nm
Loss on disposal of equity-accounted investment
-
214
nm
Interest income
10,512
21,869
(52%)
Interest expense
23,675
23,450
1%
Loss before income tax expense
(358,797)
(180,499)
99%
Income tax expense
4,253
39,160
(89%)
Net loss before loss from equity-accounted investments
(363,050)
(219,659)
65%
Loss from equity-accounted investments
(17,311)
(331,870)
(95%)
Net loss attributable to us
(380,361)
(551,529)
(31%)
47
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 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. 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. 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, which was partially offset by the reversal of the deferred tax liability related to one of our equity-accounted investments following its impairment.
48
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:
Table 10
Six months ended December 31,
2021
2020
$ %
$ ’000
$ ’000
change
Finbond
(1,156)
(20,267)
(94%)
Share of net loss
(1,156)
(2,617)
(56%)
Impairment
-
(17,650)
nm
Bank Frick
-
979
nm
Share of net income
-
979
nm
Other
-
(865)
nm
Share of net loss
-
(317)
nm
Impairment
-
(548)
nm
(1,156)
(20,153)
(94%)
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:
Table 11
In United States Dollars
Six months ended December 31,
2021
% of
2020
% of
% change
Operating Segment
$ ’000
total
$ ’000
total
Consolidated revenue:
Consumer
33,803
52%
31,631
47%
7%
Merchant
31,174
48%
33,452
50%
(7%)
Other
823
1%
2,434
4%
(66%)
Subtotal: Operating segments
65,800
100%
67,517
100%
(3%)
Corporate/Eliminations
(182)
-
(76)
-
139%
Total consolidated revenue
65,618
100%
67,441
100%
(3%)
EBITDA:
Consumer
(14,005)
81%
(11,785)
53%
19%
Merchant
2,680
(16%)
4,198
(19%)
(36%)
Other
266
(2%)
(6,970)
32%
nm
Segment Adjusted EBITDA
(11,059)
64%
(14,557)
66%
(24%)
Corporate/eliminations
(6,215)
36%
(7,539)
34%
(18%)
Subtotal
(17,274)
100%
(22,096)
100%
(22%)
Less: Lease adjustments
1,757
1,887
Less: Depreciation and amortization
1,621
1,997
Total consolidated operating loss
(20,652)
(25,980)
49
Table 12
In South African Rand
Six months ended December 31,
2021
% of
2020
% of
% change
Operating Segment
ZAR ’000
total
ZAR ’000
total
Consolidated revenue:
Consumer
506,193
52%
520,884
47%
(3%)
Merchant
466,824
48%
550,871
50%
(15%)
Other
12,324
1%
40,082
4%
(69%)
Subtotal: Operating segments
985,341
100%
1,111,837
100%
(11%)
Corporate/Eliminations
(2,725)
-
(1,252)
-
118%
Total consolidated revenue
982,616
100%
1,110,585
100%
(12%)
EBITDA:
Consumer
(209,722)
81%
(194,069)
53%
8%
Merchant
40,132
(16%)
69,131
(19%)
(42%)
Other
3,983
(2%)
(114,778)
32%
nm
Segment Adjusted EBITDA
(165,607)
64%
(239,716)
66%
(31%)
Corporate/eliminations
(93,068)
36%
(124,148)
34%
(25%)
Subtotal
(258,675)
100%
(363,864)
100%
(29%)
Less: Lease adjustments
26,311
31,074
Less: Depreciation and amortization
24,274
32,886
Total consolidated operating loss
(309,260)
(427,824)
Consumer
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.
Merchant
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.
Other
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.
50
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:
Table 13
Fiscal 2021
In United States Dollars
Quarter 1
Quarter 2
Quarter 3
Quarter 4
F2021
$ '000
$ '000
$ '000
$ '000
$ '000
Consolidated revenue:
Consumer
15,372
16,259
16,236
18,282
66,149
Merchant
18,246
15,206
12,171
15,855
61,478
Other
1,556
878
421
463
3,318
Subtotal: Operating segments
35,174
32,343
28,828
34,600
130,945
Corporate/Eliminations
(38)
(38)
-
(83)
(159)
Total consolidated revenue
35,136
32,305
28,828
34,517
130,786
EBITDA:
Consumer
(6,571)
(5,214)
(7,610)
(6,908)
(26,303)
Merchant
2,971
1,227
273
257
4,728
Other
(2,631)
(4,339)
(3,315)
(89)
(10,374)
Segment Adjusted EBITDA
(6,231)
(8,326)
(10,652)
(6,740)
(31,949)
Corporate/eliminations
(2,796)
(4,743)
(1,404)
(4,485)
(13,428)
Subtotal
(9,027)
(13,069)
(12,056)
(11,225)
(45,377)
Less: Lease adjustments
825
1,062
1,104
1,157
4,148
Less: Depreciation and amortization
923
1,074
1,132
1,218
4,347
Total consolidated operating loss
(10,775)
(15,205)
(14,292)
(13,600)
(53,872)
Income and expense items: $1 = ZAR
16.7738
15.4653
14.9575
14.1687
15.7162
Table 14
Fiscal 2020
In United States Dollars
Quarter 1
Quarter 2
Quarter 3
Quarter 4
F2020
$ '000
$ '000
$ '000
$ '000
$ '000
Consolidated revenue:
Consumer
21,674
18,618
18,491
12,215
70,998
Merchant
23,564
19,502
14,677
10,916
68,659
Other
1,199
850
1,564
1,428
5,041
Subtotal: Operating segments
46,437
38,970
34,732
24,559
144,698
Corporate/Eliminations
(221)
(52)
(118)
(8)
(399)
Total consolidated revenue
46,216
38,918
34,614
24,551
144,299
EBITDA:
Consumer
(2,784)
(2,809)
(3,889)
(4,507)
(13,989)
Merchant
2,778
1,471
1,710
(783)
5,176
Other
(1,969)
(2,979)
(3,043)
(4,024)
(12,015)
Segment Adjusted EBITDA
(1,975)
(4,317)
(5,222)
(9,314)
(20,828)
Corporate/eliminations
(2,304)
(3,931)
(510)
(2,028)
(8,773)
Subtotal
(4,279)
(8,248)
(5,732)
(11,342)
(29,601)
Less: Lease adjustments
833
998
991
842
3,664
Less: Depreciation and amortization
1,324
1,174
1,153
996
4,647
Less: Impairments
-
-
6,336
-
6,336
Total consolidated operating loss
(6,436)
(10,420)
(14,212)
(13,180)
(44,248)
Income and expense items: $1 = ZAR
14.7520
14.6022
15.3667
17.2810
17.5686
51
Liquidity and Capital Resources
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. dollar-denominated money market accounts.
Historically, we have financed most of our operations, research and development, working capital, and capital expenditures, as well as acquisitions and strategic investments, through internally generated cash and our financing facilities. 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 December 31, 2021:
Table 15
RMB
Nedbank
$ ’000
ZAR ’000
$ ’000
ZAR ’000
Total short-term facilities available, comprising:
Overdraft restricted as to use (1)
87,881
1,400,000
15,693
250,000
Total overdraft
87,881
1,400,000
15,693
250,000
Indirect and derivative facilities (2)
-
-
9,827
156,556
Total short-term facilities available
87,881
1,400,000
25,520
406,556
Utilized short-term facilities:
Overdraft restricted as to use (1)
47,960
764,034
-
-
Indirect and derivative facilities (2)
-
-
9,827
156,556
Interest rate, based on South African prime rate (3)
7.25%
Interest rate, based on South African prime rate less 1.15% (4)
6.10%
(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 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.
We have also entered into cession and pledge agreements with Nedbank related to certain of our Nedbank credit facilities and we have ceded and pledged certain bank accounts to Nedbank. The funds included in these bank accounts are restricted as they may not be withdrawn without the express permission of Nedbank. 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 $9.8 million that has been ceded and pledged.
52
Cash flows from operating activities
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:
Table 16
Three months ended December 31,
2021
2020
2021
2020
$
$
ZAR
ZAR
‘000
‘000
‘000
‘000
First provisional payments
437
677
6,933
10,084
Tax refund received
(192)
-
(2,851)
-
Total South African taxes paid (received)
245
677
4,082
10,084
Foreign taxes paid
34
88
540
1,391
Total tax paid
279
765
4,622
11,475
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.
First half
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 half of fiscal 2022 and 2021 were as follows:
Table 17
Six months ended December 31,
2021
2020
2021
2020
$
$
ZAR
ZAR
‘000
‘000
‘000
‘000
First provisional payments
437
677
6,933
10,084
Taxation paid related to prior years
-
205
-
3,423
Tax refund received
(217)
(12)
(3,227)
(205)
Total South African taxes paid
220
870
3,706
13,302
Foreign taxes paid
70
15,301
1,065
255,841
Total tax paid
290
16,171
4,771
269,143
Cash flows from investing activities
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.
53
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.
First half
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 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
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.
First half
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
We have no off-balance sheet arrangements.
Capital Expenditures
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.
54
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.