The year that tested our strength

CHIEF FINANCIAL OFFICER REPORT

OVERVIEW

Cost reduction and maintaining margins have been a high priority for the Group during the current financial year. Various divisions in the group embarked on cost cutting measures to counter the impact of Covid-19 on their operations since the President’s declaration of National State of Disaster in March 2020 as well as the extension of National State of Disaster to 15 April 2021. The impact of these has been and is currently being experienced. We have also experienced reduced customers spend on technology due to the overall depressed economic environment.

The ongoing negative media facing the Group has resulted in an adverse effect on the brand of the AYO Group and has affected the Group’s ability to reach its full potential. As a result of the negative media, on 3 May 2021, First National Bank (“FNB”), AYO’s bankers terminated the Company’s transactional banking facilities. AYO has been able to use third party payment options to manage this closure.

The Group has been resilient through these trying times and has been able to produce its current results through maintaining good rapports with suppliers and customers; embarking on cost reduction initiatives where possible; as well as managing working capital.

GROUP PERFORMANCE

Statement of profit or loss

The Group has seen revenues decrease from R2.8 billion to R1.7 billion, a 41% decline. This decline is as a result of the loss of the Master Service Agreement (“MSA”) with a significant customer and the non-renewal of several significant contracts in the managed services division. On 1 March 2021, AYO acquired 100% of Kathea Communication Solutions Proprietary Limited (“Kathea Communications”). Kathea Communications contributed R92 million to this year’s Group revenues. Despite the significant decrease in revenues, a gross profit percentage of 26% was achieved in the current year, this is a 4% increase from the prior year.

The increase is due to several reasons, namely:

• significant non-recurring, once-off contracts in the prior year which yielded lower margins;
• the remaining contracts have higher margins;
• Legal costs of R21 million relating to the litigations facing the Company;
• the managed services and cyber security segments have seen a shift in their product mixes with a greater proportion of software sales as compared to hardware sales. The shift has resulted in higher margins as software revenues generally generate higher gross margins; and
• consistent assessment and managing of cost of purchases through negotiation to ensure costs are as low as possible.

Other operating income has seen as significant decrease from R69 million in the prior year to R11 million in the current year as the prior year included R59.9 million in compensation due to the cancellation of the MSA.

As COVID-19 has resulted in a shrink in the economy, AYO’s investments were no exception to the impact of the economic downturn. Accounting adjustments relating to credit loss allowances have been raised relating to debtors and various investments, totaling R84 million. These adjustments are due to IFRS requirements however, management believes there is value in these businesses and expects to recoup these credit loss allowances in the foreseeable future.

Operating expenses increased by 12% from R692 million to R778 million. The operating expenses have increased due to the following:

• Retrenchment costs of R7 million as a result of staff reductions due to termination of the MSA;
• Additional amortization on the right of use assets of R7 million due to additional leases;
• Legal costs of R21 million relating to the litigations facing the Company;
• A R2.5 million corporate finance and advisory fee for the conclusion of the Kathea Communications deal; and
• Impairment losses of R26 million were incurred in the managed services division due to difficult market conditions and the expiration of certain maintenance contracts for IT equipment which could no longer be used.

Finance income has decreased to R164 million from R241 million. The interest earned from banks and cash balances has seen the most significant decline predominantly due to the closure of AYO’s banking facilities as well as the cash utilisation. As a resulting of the banking difficulties, funds have been invested in various investment houses holding listed and unlisted stocks that yield fair value gains rather than interest income.

The decrease in the revenue, increased operating expenses and the decreased in the interest income have resulted in the loss before tax of R201 million, compared to a profit before tax of R103 million in the prior financial year. Although the Group has an overall loss before tax, some subsidiaries generated profits, resulting in the tax expense of R57 million in the current year. The overall position for the year is a net loss of R258 million.

Statement of financial position

The Group boasts a strong balance sheet with significant cash reserves at year end. The acquisition of Kathea Communications boosted the Group’s balance sheet and resulted in additional goodwill, brands and distribution rights being recognised in the Group. Financial assets as well as other investments made by the Group grew significantly due to increases in their performance resulting in increases in their fair values

On 31 August 2021, management made the strategic decision to dispose of Puleng Technologies Proprietary Limited, an asset forming part of the cyber security division in line with the Group’s strategy. The asset is disclosed as an asset held for sale in the balance sheet.

FUTURE OUTLOOK

The Group expects to continue to nurture relationships with current customers and suppliers to ensure that it grows current contracts and exploits its current opportunities to the best of its abilities. In line with its go-to-market strategy, the Group will continue to look for opportunities to acquire or partner with companies in disruptive technologies.

AYO continues to seek commercial engagement with one of its significant shareholders, the PIC, to ensure continued support for AYO’s vision.

The Group is currently embarking on a product and service restructure and is looking to offer more innovative solutions in order to stabilize income generation and ensure annuity income.

APPRECIATION

I would like to thank my colleagues on the Board for their guidance, leadership and support during this challenging year, as well as the Group’s finance team for their commitment, hard work and support.

Isaiah Tatenda Bundo

Chief Financial Officer

17 December 2021