Notes to the interim condensed consolidated financial statements

1 REPORTING ENTITY

EOH Holdings Limited (EOH or the Company) is a holding company domiciled in South Africa that is listed on the JSE Limited under the category Technology: Software and Computer Services. EOH is one of the largest ICT service providers in South Africa and is committed to providing the technology, knowledge, skills and organisational ability critical to the development and growth of the markets it serves. The interim condensed consolidated financial statements of EOH, as at 31 January 2021 and for the six months then ended, comprise the Company and its subsidiaries (together referred to as the Group) and the Group's investments in associates and joint ventures.

2 STATEMENT OF COMPLIANCE

The interim condensed consolidated financial statements have been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards ('IFRS') and its interpretations adopted by the International Accounting Standards Board ('IASB') and comply with the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council, and contain at a minimum the information required by IAS 34: Interim Financial Reporting, the requirements of the Companies Act 71 of 2008 of South Africa and the JSE Limited Listings Requirements.

3 BASIS OF PREPARATION

The accounting policies and methods of computation applied in the preparation of these interim condensed consolidated financial statements are consistent with those applied in the previous consolidated annual financial statements.

The interim condensed consolidated financial statements do not include all the notes of the type normally included in a set of consolidated annual financial statements. Accordingly, this report is to be read in conjunction with the consolidated annual financial statements for the year ended 31 July 2020.

The interim condensed consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments that are measured at fair value through profit or loss at the end of each reporting period.

The interim condensed consolidated financial statements are presented in South African Rand, which is the Group's presentation currency, rounded to the nearest thousand except for when otherwise indicated. The going concern basis has been used in preparing the interim condensed consolidated financial statements as the directors have a reasonable expectation that the Group will continue as a going concern for the foreseeable future. Refer to note 4 for further information.

The comparative financial information in the interim condensed consolidated financial statements has been restated based on information available at 31 January 2021. Refer to note 6 for further information.

The interim condensed consolidated financial statements have not been audited or reviewed by the Group's external auditor.

4 GOING CONCERN

The IFRS Conceptual Framework states that going concern is an underlying assumption in the preparation of IFRS financial statements. Therefore, the financial statements presume that an entity will continue in operation in the foreseeable future or, if that presumption is not valid, disclosure and a different basis of reporting are required. The board of directors ('Board') believes that, as of the date of this report, the going concern presumption is still appropriate and accordingly the interim condensed consolidated financial statements of the Group have been prepared on the going concern basis.

IAS 1 – Preparation of Financial Statements ('IAS 1') requires management to perform an assessment of the Group's ability to continue as a going concern. If management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the Group's ability to continue as a going concern, IAS 1 requires these uncertainties to be disclosed.

In conducting this assessment, the Board has taken into consideration the following factors:

  • The financial performance, condition and cash flows for the Group reflect a loss for the period of R179 million;
  • Net asset value attributable to the owners of EOH Holdings Limited at 31 January 2021 of R325 million; and
  • Cash outflows from operating activities of R165 million (including continuing and discontinued operations).

Details of the financial performance, condition and cash flows for the Group are explained in the interim condensed consolidated financial statements.

A detailed action plan for deleveraging the Group to a sustainable level and resolving the 'fit-for-purpose' cost structure was developed by the Group and its lenders and committed to in October 2019, revised in April 2020 and a more sustainable debt structure is in the process of being concluded. Since its announcement in October 2019, the deleveraging plan has been largely executed against and the directors reasonably believe it can continue to be implemented going forward in order to ensure the Group's ability to continue as a going concern.

The key deleveraging requirements of the agreement signed with the Group's lenders in April 2020 required the following milestones to be met:

  1. Delever of R500 million by 30 August 2020.
  2. Delever of an additional R700 million by 30 November 2020.
  3. Delever of an additional R400 million by 28 February 2021.
  4. 1 April 2021 full refinancing of the remaining debt.

The key deliverables implemented by the Group in relation to the deleveraging plan include:

  1. The Group met the first repayment milestone prior to the end of the 2020 financial year-end. Subsequent to year-end, R450 million of the R700 million 30 November 2020 target was met. As detailed in Note 21, the Group’s disposals process, which is key to the deleveraging plan, has been impacted by COVID-19 in terms of the time to close a deal and investors taking a conservative view on investing capital into new assets. As a result, the remaining R250 million and the additional R400 million deliverable due by 28 February 2021 were not met. The Group has concluded term sheets with lenders which include the refinancing of R650 million that was not settled in terms of the deleveraging agreement. As a result, the Group has received a waiver and extension for repayment of this amount;
  2. Liquidation and/or close management of legal entities that are financially distressed;
  3. Continued progress on the implementation of a cash pooling policy, allowing cash previously held in individual legal entities to be centrally managed. This allowed the Group’s cash to be in the right place at the right time, without increasing risk to the Group due to improved visibility and cash management systems being implemented; and
  4. Management of the Group’s onerous contracts and once-off costs which negatively impacts liquidity.

The Board’s assessment of whether the Group is a going concern was considered and the Board concluded that:

  1. The Group is solvent, and is expected to remain solvent after considering the approved budget, updated cash flow forecasts and expected longer-term performance;
  2. While the Group’s current liabilities exceeded its current assets by R1.7 billion, the Group has signed term sheets to refinance approximately R2 billion of the Group’s facilities, thus bringing the ratio of current assets to current liabilities to above one times;
  3. There is an approved budget for the following 24 months;
  4. There are cash flow forecasts for the 12-month period as well as the longer term aligned to the Group’s updated long-term forecasts with adequate consideration being taken into account of cash outflows required for onerous and legacy contracts as well as one-off costs; and
  5. The Group has sufficient access to facilities and liquidity events to fund operations for the following 12 months based on the following assumptions:
    • Improved operational performance;
    • The sale of non-core assets, which are at a relatively advanced stage;
    • The refinancing for its term and working capital facilities with its primary lending institutions, the salient commercial terms of which have been agreed by the Group with its lenders;
    • The Group’s assets are appropriately insured; and
    • There is currently no outstanding litigation, that the directors believe has not been adequately provided for, that could pressurise the Group’s ability to meet its obligations.

The Board, after considering the above as well as the risks and mitigating actions, has concluded that the Group should be able to discharge its liabilities as they fall due in the normal course of business and is therefore of the opinion that the going concern assumption is appropriate in the preparation of the interim condensed consolidated financial statements.

5 NEW AND AMENDED STANDARDS ADOPTED BY THE GROUP

No new standards or amendments were applied for the first time to the annual reporting period commencing 1 August 2020.

6 RESTATEMENT OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The previously reported, January 2020 half-year results were prepared prior to the finalisation of restatements, which finalisation only occurred during the year ended 31 July 2020. Consequently, the January 2020 results have now been restated to align with the final conclusions and restatements set out in the 2020 consolidated annual financial statements.

During the year ended 31 July 2020, management identified a number of matters which were incorrectly accounted for or presented in prior periods. Among those matters, the following two matters require restatement to the January 2020 half-year results:

  • Revenue-principal versus agent (6.1); and
  • Timing of the recognition of provision (6.2).

The 2020 interim condensed consolidated statement of profit or loss and other comprehensive income has been restated to correct the prior period errors.

The restatements had no impact on any line item in the statement of financial position as at 31 July 2020 and therefore the statement of financial position at 31 July 2020 remains as previously reported. The restatement adjustments are all non-cash adjustments and therefore do not impact cash generated before working capital changes or any other line items on the interim condensed consolidated statement of cash flows.

A brief explanation of each category of error is provided below, following which an analysis is included of the financial impact on the affected financial statement line items:

6.1 Revenue – principal versus agent
 

IFRS 15 – Revenue from Contracts with Customers (IFRS 15) requires that the Group shall determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (i.e. the Group is a principal) or to arrange for those goods or services to be provided by another party (i.e. the Group is an agent). There were a number of revenue transactions, for which the Group would have been considered to be an agent, using information available in the prior period, where such revenue had been incorrectly recognised on a gross basis (as a principal) in the prior period. This incorrect application of the accounting principles in the prior period has been adjusted as a prior period error through the reversal of revenue and cost of sales and only recognising the margin as revenue. There is no impact on gross profit, loss before tax, loss after tax and retained earnings for the prior period. No new transactions were identified in the current period where an adjustment was required to the prior period and all those contracts that were adjusted for to the prior period now are consistent with what was identified at the year-end of 2020.

6.2 Timing of recognition of provision
 

In the 2019 financial year, the Group had raised a provision for the payment of pay-as-you-earn (PAYE), which arose in one of the subsidiaries. The Group had further increased such provision in the first half of the prior year. However, in the second half of the prior year, the Group had identified that a portion of the increase in the provision recognised during the first half of the prior year should have been recognised at the end of the 2019 financial year. Reversal of the additional provision that was recognised in the first half of the prior year resulted in a decrease in liabilities as well as a decrease in the expenses and an increase in retained earnings for the first half of the prior year.

Interim condensed consolidated statement of profit or loss and other comprehensive income (extract) for the six months ended 31 January 2020

The errors have been corrected by restating each of the affected financial statement line items for the prior periods as follows:

CORRECTION OF PRIOR
PERIOD ERRORS
 
         
Figures in Rand thousand  31 January 
2020
 
   Revenue 
(principal 
versus 
agent)
   Timing of 
recognition 
of provision
 
   Represented 
as 
discontinued 
operations 
(Note 10)
   Restated 
31 January 
2020
 
  
Continuing operations 
Revenue  4 544 173     (159 131)    –     264 544     4 649 586    
Cost of sales  (3 477 294)    159 131     –     (332 145)    (3 650 308)   
Gross profit  1 066 879     –     –     (67 601)    999 278    
Net financial asset impairment losses  (198 683)    –     –     (10 688)    (209 371)   
Operating expenses  (1 596 412)    –     75 096     (26 253)    (1 547 569)   
Operating loss  (728 216)    –     75 096     (104 542)    (757 662)   
Investment income  14 002     –     –     (480)    13 522    
Share of equity-accounted profit  5 486     –     –     (5)    5 481    
Finance costs  (189 598)    –     –     (9 935)    (199 533)   
Loss before taxation  (898 326)    –     75 096     (114 962)    (938 192)   
Taxation  10 626     –     –     31 069     41 695    
Loss for the period from continuing operations  (887 700)    –     75 096     (83 893)    (896 497)   
Loss for the period from discontinued operations  (275 883)              83 893     (191 990)   
Loss for the period  (1 163 583)    –     75 096     –     (1 088 487)   
Other comprehensive income  107 674     –     –     –     107 674    
Total comprehensive loss for the period  (1 055 909)         75 096          (980 813)   
Loss attributable to: 
Owners of EOH Holdings Limited  (1 159 108)    (1 084 012)   
Non-controlling interests  (4 475)    (4 475)   
Total   (1 163 583)    (1 088 487)   
Total comprehensive (loss)/income attributable to: 
Owners of EOH Holdings Limited  (1 061 671)    (986 575)   
Non-controlling interests  5 762     5 762    
Total  (1 055 909)    (980 813)   

 

From continuing and discontinued operations (cents) 31 January 
2020 
   Restated 
31 January 
2020 
  
Loss per share  (687)    (643)   
Diluted loss per share  (687)    (643)   
Headline loss per share  (395)    (350)   
Diluted headline loss per share  (395)    (350)   

 

From continuing operations (cents) 31 January 
2020 
   Restated 
31 January 
2020 
  
Loss per share  (527)    (536)   
Diluted loss per share  (527)    (536)   
Headline loss per share  (381)    (391)   
Diluted headline loss per share  (381)    (391)   

7 REVENUE

Disaggregated revenue

Figures in Rand thousand  Unaudited 
for the 
six months to 
31 January 
2021 
   Unaudited  
restated*#
for the  
six months to  
31 January  
2020  
  
Revenue by sector 
Public sector  20%     21%    
Private sector  80%     79%    
Total  100%     100%    
Major revenue types** 
Hardware sales  384 828     825 007    
Services  3 655 788     4 554 875    
Software/licence contracts  327 306     768 126    
Rentals***  7 956     46 439    
Total  4 375 878     6 194 447    
Timing of revenue recognition 
Goods or services transferred to customers: 
– at a point in time  542 517     1 195 072    
– over time  3 833 361     4 999 375    
Total  4 375 878     6 194 447    
Continuing operations  3 766 836     4 649 586    
Discontinued operations  609 042     1 544 861    
Total  4 375 878     6 194 447    
* Comparative figures previously reported have been amended to reflect continuing operations prevailing for the six months ended 31 January 2021.
# Refer to note 6 – Restatement of interim condensed consolidated financial statements.
** In the current period revenue has been disaggregated into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The disaggregation for the prior period has been updated to align to the current period disaggregation.
*** Rentals recognised are excluded from revenue from contracts with customers and accounted for under IFRS 16 Leases.

8 HEADLINE LOSS PER SHARE

Figures in Rand thousand  Unaudited 
for the 
six months to 
31 January 
2021 
   Unaudited  
restated*#
for the  
six months to  
31 January  
2020  
  
Headline loss per share and diluted headline loss per share 
Headline loss from continuing operations (R'000) (116 527)    (658 537)    
Weighted average number of shares in issue ('000) 168 762     168 610     
Headline and diluted loss per share from continuing operations (cents) (69)    (391)    
Headline loss from continuing and discontinued operations (R'000) (100 570)    (590 444)    
Weighted average number of shares in issue ('000) 168 762     168 610     
Headline and diluted loss per share from continuing and discontinued operations (cents) (60)    (350)    
Reconciliation between earnings, headline earnings and diluted headline earnings from continuing and discontinued operations 
Loss attributable to owners of EOH Holdings Limited  (179 865)    (1 084 012)    
Adjusted for: 
Loss on disposal of property, plant and equipment  2 950     6 591     
Loss on disposal of subsidiaries and equity-accounted investments  5 024     209 162     
Impairment of goodwill  69 940     211 978     
Impairment of equity-accounted investments  1 280     62 605     
Impairment of intangible assets and property, plant and equipment  1 058     4 489     
Total tax effects on adjustments  (957)    (1 257)    
Headline loss from continuing and discontinued operations  (100 570)    (590 444)    
Reconciliation between earnings, headline earnings and diluted headline earnings from continuing operations 
Loss attributable to owners of EOH Holdings Limited  (179 865)    (1 084 012)    
Adjusted for discontinued operations (note 10) 6 702     180 541     
Continuing loss attributable to ordinary shareholders  (173 163)    (903 471)    
Continuing operations adjustments: 
Loss on disposal of property, plant and equipment  2 430     6 470     
(Profit)/loss on disposal of subsidiaries and equity-accounted investments  (17 231)    87 478     
Impairment of goodwill  69 940     114 219     
Impairment of equity-accounted investments  1 280     38 175     
Impairment of intangible assets and property, plant and equipment  1 058     58     
Total tax effects on adjustments  (841)    (1 466)    
Headline loss from continuing operations  (116 527)    (658 537)    
* Comparative figures previously reported have been amended to reflect continuing operations prevailing for the six months ended 31 January 2021.
# Refer to note 6 – Restatement of interim condensed consolidated financial statements.

9 NET FINANCIAL ASSET IMPAIRMENT LOSSES

Impairment losses on financial assets recognised in profit or loss from continuing operations were as follows:

Figures in Rand thousand  Unaudited 
for the 
six months to 
31 January 
2021 
   Unaudited 
restated*
for the 
six months to 
31 January 
2020 
  
Impairment loss on trade and other receivables  37 427     133 063    
Impairment loss on other financial assets  45 963     49 695    
Impairment loss on contract assets  –     26 613    
83 390     209 371    
* Comparative figures previously reported have been amended to reflect continuing operations prevailing for the six months ended 31 January 2021.

10 DISCONTINUED OPERATIONS

Identification and classification of discontinued operations

There were a number of businesses that were approved for sale at 31 January 2021, and for which the sale is expected to be completed within 12 months from the reporting date, as well as businesses that were already sold during the current and previous reporting periods that have met the requirements to be presented as discontinued operations and have accordingly been presented as such.

Judgement was applied in determining whether a component is a discontinued operation by assessing whether it represents a separate major line of business or geographical area of operations or is part of a single plan to dispose of a separate major line of business or geographical area of operations.

The Group’s intention to dispose of these non-core assets triggered an initial impairment assessment on the underlying assets at 31 January 2021, and the resulting impairment was allocated to the identified disposal groups (refer to note 13 – Assets held for sale).

Figures in Rand thousand  Unaudited 
for the 
six months to 
31 January 
2021 
   Unaudited 
restated*
for the 
six months to 
31 January 
2020 
  
Revenue  609 042     1 544 861    
Cost of sales  (359 341)    (1 046 505)   
Gross profit  249 701     498 356    
Net financial asset impairment losses  (6 048)    5 460    
Remeasurement to fair value less costs to sell  –     (126 620)   
Loss on disposal  (22 255)    (121 684)   
Other operating expenses  (170 933)    (413 260)   
Operating profit/(loss) 50 465     (157 748)   
Investment income  1 714     9 811    
Share of equity-accounted profits  –       
Finance costs  (25 521)    (3 924)   
Profit/(loss) before taxation  26 658     (151 856)   
Taxation  (32 540)    (40 134)   
Loss for the period from discontinued operations  (5 882)    (191 990)   
Attributable to: 
Owners of EOH Holdings Limited  (6 702)    (180 541)   
Non-controlling interests  820     (11 449)   
Loss per share (cents)
Loss per share from discontinued operations  (4)    (107)   
Diluted loss per share from discontinued operations  (4)    (107)   
Net cash flows in relation to discontinued operations 
Net decrease in cash and cash equivalents  (304 495)    153 933    
* Comparative figures previously reported have been amended to reflect continuing operations prevailing for the six months ended 31 January 2021.

Loss before taxation before including the loss on disposal and remeasurement to fair value less costs to sell was R49 million (2020: Profit of R96 million).

11 PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

The Group acquired property, plant and equipment (‘PPE’) at a cost of R30 million (year ended July 2020: R577 million) and intangible assets at a cost of R44 million (year ended July 2020: R187 million). The Group disposed of PPE with a carrying value of R35 million (year ended July 2020: R72 million) and intangible assets with a carrying value of R5 million (year ended July 2020: R19 million). Included in PPE acquired are additions of R3 million (year ended July 2020: R367 million) capitalised as right-of-use assets under IFRS 16 during the period.

An impairment charge of R1 million (year ended July 2020: R2 million) against PPE and Rnil (year ended July 2020: R26 million) against intangible assets has been recognised during the period.

12 GOODWILL

Figures in Rand thousand  Unaudited at 
31 January 
2021 
  Audited at 
31 July 
2020 
 
Cost  3 225 516    3 657 801   
Accumulated impairments  (1 704 698)   (1 484 715)  
Opening balance  1 520 818    2 173 086   
Foreign currency translation  (4 833)   8 975   
Disposals  (117 436)   (248 149)  
Impairments: discontinued operations  –    (147 870)  
Impairments: continuing operations  (69 940)   (265 224)  
Closing balance before assets held for sale  1 328 609    1 520 818   
Cost  2 870 666    3 225 516   
Accumulated impairments  (1 542 057)   (1 704 698)  
Assets held for sale  (507 677)   (604 075)  
Closing balance  820 932    916 743   
Impairment of goodwill

During the six months ended 31 January 2021, the depressed economic environment as a result of COVID-19 impacted a number of the Group’s operations, giving rise to impairments of goodwill in certain cash-generating units (‘CGUs’). Where impairment indicators were identified, the carrying amounts of the CGUs were compared to their respective recoverable amounts. These recoverable amounts were determined through value-in-use calculations discounting future cash flows.

iOCO

An impairment charge amounting to R61 million was recognised for the Compute CGU, driven mainly by delayed IT infrastructure projects and unanticipated margin pressure, both driven by the negative economic impacts of COVID-19. The goodwill balance for Compute at 31 January 2021 amounts to R151 million, after recognising the impairment charge.

NEXTEC

The Enerweb CGU has been classified as held for sale and an impairment charge amounting to R9 million was recognised on the write-down of the CGU’s carrying amount to its recoverable amount. The recoverable amount was calculated as the fair value (selling price) less cost to sell. Within the Enerweb CGU, R24.5 million of goodwill remains.

13 ASSETS HELD FOR SALE

The Group has refined its operational structure into three distinct operating units to allow for leaner and more agile core businesses with separate capital and governance structures. On 11 December 2018, the Group announced that opportunities would be explored for the sale of certain non-core assets, of which many have been sold during the year. There continues to be a number of businesses approved for sale and for which the sale is expected to be completed within 12 months from the reporting date. These businesses are classified as disposal groups held for sale and the assets and liabilities of these disposal groups have been presented as held for sale.

The major classes of assets and liabilities of the disposal groups, per reportable segment, classified as held for sale are as follows:

Figures in Rand thousand  iOCO  Nextec  IP  Unaudited 
31 January 
2021 
 
Assets 
Property, plant and equipment  –  2 098  41 775  43 873   
Goodwill and intangible assets  –  28 863  819 145  848 008   
Equity-accounted investments  5 979  –  –  5 979   
Other financial assets  –  –  43  43   
Deferred taxation  –  2 754  7 838  10 592   
Inventories  –  –  903  903   
Current taxation receivable  –  920  1 752  2 672   
Trade and other receivables  –  –  167 877  167 877   
Cash and cash equivalents  –  37 657  70 299  107 956   
Assets held for sale  5 979  72 292  1 109 632  1 187 903   
Liabilities 
Other financial liabilities  –  (253) (8 285) (8 538)  
Lease liabilities  –  (1 056) (21 266) (22 322)  
Deferred taxation  –  –  (18 612) (18 612)  
Current taxation payable  –  –  (4 913) (4 913)  
Trade and other payables and provisions  –  (20 713) (205 981) (226 694)  
Liabilities directly associated with assets held for sale  –  (22 022) (259 057) (281 079)  
Net assets directly associated with the disposal groups  5 979  50 270  850 575  906 824   
Cumulative amounts recognised in other comprehensive income 
Foreign currency translation reserve  –  –  (4 853) (4 853)  
Impairment loss for write-down to fair value less costs to sell 
Continuing operations – operating expenses  (8 553) –  –  (8 553)  
(8 553) –  –  (8 553)  

 

Figures in Rand thousand  iOCO  Nextec  IP  31 July 
2020 
 
Assets 
Property, plant and equipment  2 513  101 932  140 373  244 818   
Goodwill and intangible assets  406  88 863  860 127  949 396   
Equity-accounted investments  11 000  –  –  11 000   
Other financial assets  –  13 811  5 060  18 871   
Deferred taxation  –  21 152  9 979  31 131   
Finance lease receivables  –  1 197  479  1 676   
Inventories  –  3 804  19 472  23 276   
Current taxation receivable  2 925  2 712  14 078  19 715   
Trade and other receivables  53 547  225 513  244 680  523 740   
Cash and cash equivalents  205  171 938  156 600  328 743   
Assets held for sale  70 596  630 922  1 450 848  2 152 366   
Liabilities 
Other financial liabilities  (12 739) –  (16 777) (29 516)  
Lease liabilities  –  (27 834) (56 709) (84 543)  
Deferred taxation  –  (1 389) (30 094) (31 483)  
Current taxation payable  –  (22 364) (15 343) (37 707)  
Trade and other payables and provisions  (51 292) (319 702) (279 849) (650 843)  
Liabilities directly associated with assets held for sale  (64 031) (371 289) (398 772) (834 092)  
Net assets directly associated with the disposal groups  6 565  259 633  1 052 076  1 318 274   
Cumulative amounts recognised in other comprehensive income 
Foreign currency translation reserve  (933) (45) (20 808) (21 786)  
Impairment loss for write-down to fair value less costs to sell 
Continuing operations – operating expenses  (57 175) (32 350) –  (89 525)  
Discontinued operations  (63 108) (65 736) (60 000) (188 844)  
(120 283) (98 086) (60 000) (278 369)  

14 DISPOSAL OF SUBSIDIARIES AND EQUITY-ACCOUNTED INVESTMENTS

The Group has continued its strategy of disposing of non-core assets to assist with its deleveraging plans and remove unnecessary complexity within the Group structure. In line with this strategy the Group has disposed of its investments in a number of subsidiaries and joint ventures during the period.

Figures in Rand thousand Treatment
before
disposal
Percentage 
holding 
disposed 
Date of
disposal
Consideration-  
received or  
receivable**
Gain/(Loss)
on disposal 
Entity disposed
PCI Group Subsidiary 100%  1 Aug 2020 5 000   2 354 
DENIS Group Subsidiary 100%  30 Sep 2020 170 000   (4 845)
NEXTEC Advisory (Pty) Ltd* Subsidiary 100%  31 Oct 2020 –   22 984 
Syntell Group Subsidiary 100%# 18 Nov 2020 175 132   (8 065)
SI Analytics (Pty) Ltd Subsidiary 100%  30 Nov 2020 14 000   (1 993)
Allos SRL (Italy) Subsidiary 100%  31 Dec 2020 2 065   (10 594)
Çözümevi Yönetim Joint Venture 50%  31 Dec 2020 2 895   (1 105)
Transaction costs (3 760)
Net loss on disposal of subsidiaries and equity-accounted investments 369 092   (5 024)
* NEXTEC Advisory (Pty) Ltd has been disposed of by way of liquidation.
** Consideration reflected does not include extinguishment of debt on sale.
# The Syntell Group includes partially owned subsidiaries.

 

Figures in Rand thousand Unaudited at 
31 January 
2021 
 
Opening receivable from disposal of subsidiaries and equity-accounted investments 82 052   
Cash consideration received or receivable 369 092   
Closing receivable from disposal of subsidiaries and equity-accounted investments (40 971)  
Cash received from disposal of businesses 410 173   
Less: cash balances disposed of (214 302)  
Cash receipt from disposal of businesses, net of cash given up 195 871   

 

The carrying amount of major classes of assets and liabilities, associated with subsidiaries and equity-accounted investments disposed of during the current period, are as follows:

Figures in Rand thousand Note   Unaudited at 
31 January 
2021 
 
Assets
Property, plant and equipment 181 163   
Goodwill and intangible assets 168 697   
Equity-accounted investments 4 000   
Deferred taxation 17 414   
Inventories 26 721   
Trade and other receivables 360 862   
Cash and cash equivalents 214 302   
Liabilities
Other financial liabilities 16   (55 208)  
Lease liabilities (42 709)  
Current taxation payable (22 716)  
Trade and other payables (526 708)  

15 STATED CAPITAL

Figures in Rand thousand Unaudited at
31 January
2021
  Audited at
31 July
2020
 
Stated capital
Opening balance 4 250 219   4 239 621  
Treasury shares allocated1 141   10 598  
4 250 360   4 250 219  
1 Average price paid for treasury shares is R5.45 per share (2020: R14.48).
Authorised

500 000 000 ordinary shares of no par value
40 000 000 EOH A shares of no par value

Figures in thousand Unaudited at 
31 January 
2021 
  Audited at 
31 July 
2020 
 
Issued
Reconciliation of the number of shares in issue
Opening balance 176 545    176 545   
Shares in issue at the end of the period 176 545    176 545   
Less:
Treasury shares held in the Group share incentive schemes (2 341)   (2 341)  
Treasury shares held by wholly owned subsidiaries of the Group that will not be cancelled (5 442)   (5 548)  
168 762    168 656   
EOH A shares of no par value
Reconciliation of the number of shares in issue
Opening balance 40 000    40 000   
Closing balance 40 000    40 000   
Unissued

323 455 039 (2020: 323 455 039) unissued ordinary shares are under the control of the directors in terms of the provisions of the Company's memorandum of incorporation (MoI).

16 OTHER FINANCIAL LIABILITIES

Figures in Rand thousand  Unaudited at 
31 January 
2021 
  Audited at 
31 July 
2020 
 
Interest-bearing liabilities  2 593 776    2 739 175   
Interest-bearing bank loans secured through security SPV  2 032 663    2 267 269   
Bank overdrafts  380 997    115 253   
Project finance loan*  109 994    135 080   
Unsecured interest-bearing bank loans  66 208    215 247   
Interest-bearing bank loans secured by fixed property  3 914    6 326   
Non-interest-bearing liabilities  4 138    44 043   
Vendors for acquisition  4 138    44 043   
Liabilities directly associated with assets held for sale (note 13) (8 538)   (29 516)  
2 589 376    2 753 702   
Non-current financial liabilities  110 430    5 674   
Current financial liabilities  2 478 946    2 748 028   
2 589 376    2 753 702   
Reconciliation of other financial liabilities 
Balance at the beginning of the period  2 783 218    3 333 205   
Bank overdrafts  265 744    115 253   
Proceeds from other financial liabilities  52 387    –   
Repayment of other financial liabilities  (457 828)   (321 128)  
Repayment of vendors for acquisitions  (14 494)   (75 286)  
Disposal of subsidiaries  (55 208)   (244 266)  
Net changes in fair value of vendors for acquisition  10 864    3 685   
Interest accrued on other financial liabilities  (7 568)   38 867   
Movement in capitalised debt restructuring fee  20 928    (51 028)  
Other non-cash items  (129)   (16 084)  
Closing balance before liabilities directly associated with assets held for sale  2 597 914    2 783 218   
Liabilities directly associated with assets held for sale (note 13) (8 538)   (29 516)  
2 589 376    2 753 702   
Financial instruments 
Measured at amortised cost  2 585 238    2 709 659   
Financial liabilities carried at fair value through profit or loss  4 138    44 043   
2 589 376    2 753 702   
Vendors for acquisition 
Current financial liabilities  4 138    44 043   
4 138    44 043   

* Ring-fenced debt. 

17 Financial instruments

Financial liabilities at fair value through profit or loss

Financial liabilities measured at fair value through profit or loss, in terms of the hierarchy, are classified as level 3 as the valuation techniques used are based on unobservable inputs for the liability.

Figures in Rand thousand Unaudited at
31 January
2021
Audited at
31 July
2020
Fair value through profit or loss:
Vendors for acquisition 4 138 44 043
4 138 44 043
Vendors for acquisition

The balance in respect of vendors for acquisition relates to the contingent consideration where business combinations are subject to profit warranties. The profit warranties allow for a defined adjusted value to the consideration payable in the event that the warranted profit after tax is not achieved, or in the event that it is exceeded, an agreed sharing in the surplus. The fair value of the contingent arrangement is initially estimated by applying the income approach assuming that the relevant profit warrant will be achieved. Subsequent measurement uses the income approach to calculate the present value of the expected settlement payment using the latest approved budgeted results and reasonable growth rates for the remainder of the relevant warranty periods, taking into account any specific circumstances.

Profit warrant periods normally extend over a 24-month period.

Upwardly revised performance expectations would result in an increase in the related liability, limited to the terms of the applicable purchase agreement.

Fair values have been determined using discounted cash flows. Unobservable inputs include budgeted results based on margins and revenue growth rates historically achieved by the various segments. The applicable discount rate is 7%, discounting cash flows over a two-year period. Changing such inputs to reflect reasonably possible alternative assumptions does not significantly change the fair value of the vendors for acquisition liability. The EOH Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that reports directly to the Group Chief Financial Officer, who oversees all significant fair value measurements.

Vendors for acquisition reconciliation of movement
Figures in Rand thousand Unaudited at 
31 January 
2021 
Audited at 
31 July 
2020 
Balance at the beginning of the period 44 043  303 313 
Disposals (36 275) (187 735)
Paid to vendors (14 494) (75 286)
Foreign exchange effects –  66 
Net changes in fair value 10 864  3 685 
Balance at the end of the period 4 138  44 043 

The Group does not have any financial instruments that are subject to offsetting.

All short-term receivables and payables carrying amounts approximate their fair values due to their short-term nature.

There have been no transfers between levels of the fair value hierarchy.

Non-recurring fair value measurements

Disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. The fair values were determined based on sales agreements that are in place for each of the disposal groups that are held for sale. The total of such fair values is R923 million (July 2020: R1 033 million). These fair values are categorised as level 3, based on inputs used.

18 Cash generated from operations

Figures in Rand thousand  Unaudited 
for the 
six months to 
31 January 
2021 
Unaudited 
for the 
six months to 
31 January 
2020 
(Loss)/profit before taxation from:  (95 153) (1 090 048)
   Continuing operations  (121 811) (938 192)
   Discontinued operations  26 658  (151 856)
Adjustments for: 
Depreciation and amortisation  155 226  250 094 
Impairment of assets  72 278  279 072 
Loss on disposal of subsidiaries, equity-accounted investments and property, plant and equipment  7 974  215 753 
Changes in fair value of vendors for acquisition  10 864  11 292 
Share of equity-accounted profits  (1 552) (3 308)
Share-based payments expense  23 930  18 104 
Net finance costs  155 369  180 124 
Net financial asset impairment losses  89 438  203 911 
Inventory write-off/impairment  2 120  21 351 
Provisions  (202 698) – 
Foreign exchange gains  (4 477) (3 231)
Other non-cash items  3 238  42 758 
Cash generated before changes in working capital  216 557  125 872 
Working capital changes net of effects of disposal of subsidiaries  (190 604) (94 901)
   (Increase)/decrease in inventories  (12 205) 44 975 
   Increase in trade and other receivables  (66 618) (136 785)
   Decrease in trade and other payables  (111 781) (3 091)
Cash generated from operations  25 953  30 971 

19 Related parties

Figures in Rand thousand  Unaudited at 
31 January 
2021 
Audited at 
31 July 
2020 
Transactions with associates and joint ventures 
Sales of products and services  29  3 899 
Purchases of products and services  2 729  3 272 
Balances arising from sales/purchases of goods and services with associates and joint ventures 
Trade receivable balances with related parties  3 412  3 773 
Trade payable balances with related parties  3 422  8 176 
Loans receivable from associates and joint ventures  10 442  21 322 
– Gross loans receivable from associates and joint ventures  46 892  57 772 
– Allowances for expected credit losses on loans to associates and joint ventures  (36 450) (36 450)
Transactions between Group companies (subsidiaries)
Sale of products and services  858 091  2 075 904 
Purchases of products and services  680 926  1 741 043 
Operating expenses  177 165  334 861 
Outstanding balances arising from sales/purchases of goods and services 
Loans from EOH Holdings Limited to subsidiaries  162 290  163 193 
Loans to EOH Holdings Limited from subsidiaries  51 633  59 149 
Vendor loans and receivables  –  287 

20 CONTINGENCIES AND COMMITMENTS

EOH issued parent company guarantees ('PCGs') during May 2019, as required by a client for a wholly owned subsidiary, PiA Solar SA Proprietary Limited ('PiA').The guarantees provided are for a period of years during both construction and after handover, including an operation warranty guarantee, which by the nature could (in the event of underperformance by PiA) compel EOH to either ensure physical performance or settle such underperformance in cash terms. While PiA had undergone some operational challenges as a result of several factors, including COVID-19, EOH has intervened in order to minimise the potential impact of these PCGs. The projects subject to these PCGs are now substantially complete, with the last project to achieve handover to the end client completed by end-March 2021. EOH thus believes that the risk presented by the PCGs, albeit still in existence, is now sufficiently mitigated such that no cash flow impact is expected in the future.

During the prior financial year, EOH also issued a PCG for another subsidiary, EOH Mthombo Proprietary Limited ('EOH Mthombo'), relating to the implementation of an ERP solution at the City of Johannesburg ('COJ') for a project which was signed during the 2017 financial year. The COJ guarantee compels EOH to ensure physical performance. EOH Mthombo has since terminated its agreement with COJ and is currently negotiating its exit from the project.

EOH became aware of certain fraudulent conduct that was perpetrated between executives of another subsidiary, Cornastone Enterprise Solutions Proprietary Limited ('Cornastone'), as well as senior employees of Cell C Limited ('Cell C'), as it related to the supply of certain equipment and software licences. EOH commissioned an investigation in collaboration with Cell C, which has culminated in criminal charges being levelled against the former executives of Cornastone and certain employees of Cell C.

Fine imposed by the JSE Limited

The JSE Limited imposed a fine on EOH on 29 July 2020 for prior period errors contained in EOH's previously published financial statements for the financial years ended 31 July 2017 and 31 July 2018. The fine was for R7.5 million of which R2.5 million is suspended for a period of five years on condition that EOH is not found to be in breach of material and important provisions of the JSE Listings Requirements. The R5 million was raised as liability at 31 July 2020, against which payments have been made, with the suspended amount being a contingent liability.

Litigation

EOH and its subsidiaries are involved in various litigation matters arising in the ordinary course of business, none of which are considered material on an individual basis or in aggregate. Management has no reason to believe that the disposition of these matters will have a materially adverse effect on the consolidated financial position, financial results or cash flows of EOH.

Uncertain tax exposure

The Group has an ongoing tax dispute dating back to 2012 related to a PAYE dispute in one of its staff outsourcing businesses. At 31 January 2021, the Group had provided for R257 million on the PAYE liability assessed and potential future assessments, and has submitted a notice of objection to the South African Revenue Service ('SARS'). Based on internal and external legal and technical advice obtained, the Group remains confident that it has a strong legal case to contest the remaining exposure. R28 million of the R257 million provision was repaid as at 31 January 2021.

There is further uncertainty regarding historical taxes that may be due as a result of the impact of the fraudulent transactions identified in the forensic investigation performed by ENSafrica during the 2019 financial year. Provisions based on best estimates were recognised at 31 July 2019. The Group has obtained further external legal guidance on the matter in the current year of assessment and has reversed a portion of the initial provision raised based on guidance, during the period ended 31 January 2021.

There is a further exposure and provision raised within the Group relating to incorrect VAT zero rating of intragroup invoicing. The Group is in the process of preparing a submission in terms of the SARS Voluntary Disclosure Programme to rectify this position taken. A provision of R44 million has been raised at 31 January 2021.

Uncertain exposure due to suspect transactions

An assessment was undertaken in relation to contracts flagged by ENSafrica as being associated with suspicious activities, for purposes of determining the likelihood of a claim/s being raised against EOH Mthombo in relation to the contracts in question. The total contingent exposure identified in consequence of the results of that assessment is R84.2 million.

The assessments which resulted in claims being regarded as possible and where a contingent liability was identified were in relation to the following contracts:

  • Department of Water and Sanitation – The contract is currently under negotiation with the SIU to finalise settlement of the fine.
  • Department of Home Affairs – ABIS (Biometric): At 31 March 2021 this contract has been ceded. An arbitration process is underway to finalise claims from both parties' sides and is expected to be concluded by 30 June 2021.

21 Events after reporting date

COVID-19

The Group considers information obtained subsequent to the reporting date, in relation to events it knows or should have known and expected eventualities identified as at 31 January 2021, as adjusting subsequent events. With regards to financial reporting impacts associated with COVID-19, the key principle is that COVID-19 is considered to be sufficiently prevalent in the Group's major markets at 31 January 2021. Therefore, COVID-19-related events that arise in the post-balance sheet period, that provide additional information in relation to assets and liabilities in existence at 31 January 2021, have been considered adjusting subsequent events. New events which occur after 31 January 2021, which do not relate to existing assets and liabilities related to COVID-19 at the reporting date (such as donations to relief initiatives), are considered to be non-adjusting subsequent events, and these, together with their relating financial effects, have been disclosed to the extent that they are considered to be material.

Deleveraging

The Group entered into an agreement with its lenders to deleverage R1 600 million by 28 February 2021. As at 31 January 2021, a total of R950 million had been repaid. The Group's disposal process, which is key to the deleveraging plan, has been impacted by COVID-19 in terms of the time to close a deal and investors taking a conservative view on investing capital into new assets. Lockdown level 5 and level 4 had a significant impact on delaying the process as well as an impact on operating performance of the IP B2B2C assets. As a result of these delays, the Group did not meet the full deleverage requirement of R1 600 million.

The Group has been engaging with lenders to create a more efficient debt structure for the longer term and has concluded long-form term sheets with its lenders to refinance the remaining debt due to lenders. This includes the refinancing of R650 million that was not settled in terms of the deleveraging agreement. As a result, the Group has received a waiver and extension for repayment of these amounts.