Wrap Text
Unaudited Condensed Consolidated Interim Results for the six months ended 31 August 2017
HUGE GROUP LTD
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
("Huge" or "the Company")
UNAUDITED CONDENSED CONSOLIDATED INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 AUGUST 2017
HIGHLIGHTS
- Total revenue and gross profit increased by 70.6% and 104.3% respectively
- Gross profit margins improved from 45.1% to 54%
- Operating profit up 149%
- Headline earnings of 19.1 cents up 90%
- Adjusted headline earnings per share of 29.5 cents after taking into account certain once-off
charges against operating profit
The board of directors ("the Board" or "the Directors") of Huge is pleased to present the
unaudited consolidated interim results of the Company and its subsidiary companies and joint
venture ("the Group") for the six months ended 31 August 2017.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited Audited Unaudited
31 August 2017 28 February 2017 31 August 2016
(6 months) (12 months) (6 months)
R'000 R'000 R'000
Total revenue 197 901 245 993 116 010
Gross profit 106 778 118 612 52 270
Other income 1 588 1 247 569
Operating expenses (70 173) (77 620) (37 499)
Operating profit 38 193 42 239 15 340
Investment income 1 831 233 88
Share of (losses) / earnings
from equity accounted
investments 9 (22) 7
Impairment (2 763) - -
Finance costs (4 956) (5 336) (2 696)
Profit before taxation 32 314 37 114 12 739
Income tax credit / (expense) (8 859) (10 307) (2 505)
Net profit for the period 23 455 26 807 10 234
Non-controlling interest 24 (184) (57)
Net profit attributable to owners
of the company 23 479 26 623 10 177
Basic earnings per share
(cents)* 17.10 26.27 10.05
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited Audited Unaudited
31 August 2017 28 February 2017 31 August 2016
(6 months) (12 months) (6 months)
R'000 R'000 R'000
ASSETS
Non-current assets
Property, plant and
equipment 115 794 73 222 65 672
Goodwill 540 701 215 153 215 153
Intangible assets 2 848 3 927 1 464
Investment in joint venture 679 688 716
Other financial assets 1717 - -
Deferred tax 12 533 7 550 4 385
Deferred expenditure 21 043 16 951 16 632
695 314 317 491 304 022
Current assets
Inventories 24 664 647 1 211
Trade and other receivables 58 487 42 606 30 753
Deferred expenditure 8 501 7 694 3 826
Cash and cash equivalents 19 585 70 976 397
111 237 121 923 36 187
Total assets 806 550 439 414 340 209
EQUITY AND LIABILITIES
Share capital 619 348 319 421 229 323
Retained earnings 28 580 60 361 43 915
Equity attributable to equity
holders of parent 647 928 379 782 273 238
Non-controlling interest (3 025) (3 001) (3 128)
644 903 376 781 270 110
Non-current liabilities
Finance lease obligations 1 802 1 331 1 802
Deferred tax 21 703 9 942 585
23 505 11 273 2 387
Current liabilities
Interest bearing liability 75 000 - 20 000
Loans from shareholders - - 177
Other financial liabilities 1 908 753 716
Current tax payable 3 888 4 256 2 562
Finance lease obligations 3 027 1 166 1 357
Trade and other payables 49 703 35 744 35 311
Bank overdraft 4 616 9 441 7 589
138 142 51 360 67 712
Total liabilities 161 647 62 633 70 099
Total equity and liabilities 806 550 439 414 340 209
Number of shares in issue
('000) 175 602 125 551 110 901
Net asset value per share
(cents) 513.66 339.74 266.76
Net tangible asset value per
share (cents) 80.73 142.20 52.83
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited Audited Unaudited
31 August 2017 28 February 2017 31 August 2016
(6 months) (12 months) (6 months)
R'000 R'000 R'000
Balance at 1 March 376 781 259 876 259 876
Total comprehensive income
for the period 23 455 26 807 10 234
Issue of Shares 244 667 90 098 -
Balance at 28 February/
31 August 644 903 376 781 270 110
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited Audited Unaudited
31 August 2017 28 February 2017 31 August 2016
(6 months) (12 months) (6 months)
R'000 R'000 R'000
Cash flows from operating activities 11 802 24 433 8 620
Cash flows from investing activities (435 588) (24 795) (10 385)
Cash flows from financing activities 377 220 67 215 (109)
Net cash movement for the period (46 566) 66 853 (1 874)
Cash at the beginning of the period 61 535 (5 318) (5 318)
Total cash at the end of the period 14 969 61 535 (7 192)
SEGMENTAL REPORTING
The directors have considered the implications of IFRS 8 Operating Segments and are of the opinion,
based on the information provided to the chief operating decision maker, that the current operations
of the Group can be split into three main operating segments, namely a Corporate Office Grouping,
Telecom Grouping and Financial Technology ("Fintech") Grouping. The summarised information
included below is in line with the requirements of IAS 34. The revenue generated from the products
and services supplied by the respective Group companies to all clients is done so on a countrywide
basis, with no geographical differentiation.
Corporate
Unaudited 31 Telecom Fintech Office
August 2017 Elimination Grouping Grouping Grouping
R'000 R'000 R'000 R'000 R'000
Total revenue 197 901 (2 180) 134 661 62 492 2 928
Gross profit 106 778 (2 180) 60 801 45 420 2 737
Other income 1 588 - 874 714 -
Operating expenses (70 173) 2 180 (50 452) (14 969) (6 932)
Operating profit/(loss) 38 193 11 223 31 165 (4 195)
Investment income 1 831 - 154 1 179 498
Loss from equity accounted
investments 9 9 - -
Impairment (2 763) - (2 763) - -
Finance costs (4 956) - (502) (179) (4 275)
Profit/(loss) before
income tax 32 314 8 121 32 165 (7 972)
Income tax -
credit/(expense) (8 859) (996) (7 945) 82
Profit after income -
tax 23 455 7 125 24 220 (7 890)
Corporate
Unaudited 31 Telecom Fintech Office
August 2016 Elimination Grouping Grouping Grouping
R'000 R'000 R'000 R'000 R'000
Total revenue 116 010 - 116 010 - -
Gross profit 52 271 - 49 571 - 2 700
Other income 569 569 - -
Operating expenses (37 499) (35 063) - (2 436)
Operating -
profit/(loss) 15 341 15 077 - 264
Investment income 88 - 33 - 56
Loss from equity
accounted
investments 7 7 - -
Finance costs (2 696) (2 670) - (25)
Profit/(loss) before -
income tax 12 740 12 447 - 294
Income tax
credit/(expense) (2 507) (2 424) - (82)
Profit after income -
tax 10 233 10 023 - 213
COMMENTARY
BASIS OF PREPARATION
The unaudited consolidated interim results have been prepared in accordance with the recognition
and measurement principles of International Financial Reporting Standards ("IFRS") and the SAICA
Financial Reporting Guides as issued by the Accounting Practices Committee and Financial
Pronouncements as issued by the Financial Reporting Standards Council and presented in compliance
with IAS 34: Interim Financial Reporting, the Companies Act of South Africa, and the
JSE Limited's ("the JSE") Listings Requirements ("Listings Requirements").
This announcement has not been reviewed or reported on by the Company's auditors. Any references to
post year-end performance are based on management accounts.
ACCOUNTING POLICIES
The accounting policies applied in the preparation of these unaudited consolidated interim results
are in terms of IFRS and are consistent with those applied in the preparation of the annual financial
results of the Company for the year ended 28 February 2017.
BASIC EARNINGS AND HEADLINE EARNINGS PER SHARE
Unaudited Audited Unaudited
31 August 2017 28 February 2017 31 August 2016
(6 months) (12 months) (6 months)
R'000 R'000 R'000
Basic earnings per share
(cents)* 17.10 26.27 10.05
Adjusted for:
Profit on disposal of property,
plant and equipment (0.01) (0.05) -
Impairment of property, plant
and equipment 2.01 - -
Headline earnings per share
(cents)* 19.10 26.22 10.05
Total number of shares in issue
('000) 175 602 125 551 110 901
Weighted number of shares in
issue ('000) 137 281 101 360 101 255
*The Group does not have any dilutionary instruments in issue.
STANDARDS ISSUED NOT YET EFFECTIVE
IFRS 15 Revenue from contracts with customers
The standard is effective for years commencing on or after 1 January 2018. The standard will be
adopted by the Group for the financial reporting period commencing 1 March 2018. IFRS 15 requires
an entity to recognise revenue in such a manner as to depict the transfer of the goods or services to
customers, at an amount representing the consideration to which the entity expects to be entitled in
exchange for those goods or services. The standard has a 5-step process to be applied to all
contracts with customers. The standard provides guidance for identifying the contract with the
customer, identification of the deliverables (performance obligations), determination of the
transaction price (including the treatment of variability in the transaction price, and significant
financing components), how to allocate the transaction price, and when to recognise revenue.
Huge has assessed its significant contracts with customers in line with the new standard. The outcomes
of the preliminary assessment indicate the pattern of revenue recognition for certain device sales and
fees charged will differ to current accounting treatment under IAS 18. Further the new standard
requires commissions paid to acquire a contract, some of which are expensed currently, to be
capitalized and amortised over the contract duration. The Group is still in the process of quantifying
the impacts of these changes and will take a decision on the transition method to be applied.
IFRS 16 Leases
The standard is effective for years commencing on or after 1 January 2019. The standard is likely to be
adopted by the Group for the financial reporting period commencing 1 March 2018, but must be
implemented by 1 March 2019. IFRS 16 requires a lessee to recognize a right of use asset and lease
obligations for all leases except for short term leases, or leases of low value assets which leases may
be treated similarly to operating leases under the current standard IAS 17, if the exceptions are
applied. A lessee measures its lease obligation at the present value of future lease payments, and
recognises a right of use asset initially measured at the same amount as the lease obligation,
including costs directly related to entering into the lease. Right of use assets are subsequently treated
in a similar way to other assets such as property, plant and equipment, or intangible assets,
dependent on the nature of the underlying item.
The Group has a number of property rental agreements in place. In accordance with the above,
right of use assets and lease obligations associated to these rentals would be recognised in the
statement of financial position, the extent of which is yet to be determined. The Group will take a
decision on the transition method to be applied, or the application of exceptions related to short
term and low value asset leases.
IFRS 9 Financial instruments
The standard is effective for years commencing on or after 1 January 2018. The standard is likely to be
adopted by the Group for the financial reporting period commencing 1 March 2018, but must be
implemented by 1 March 2019. IFRS 9 provides guidance on the classification, measurement and
recognition of financial assets and financial liabilities and replaces IAS 39. The standard establishes
three measurement categories for financial assets: amortised cost, fair value through other
comprehensive income and fair value through profit and loss. Classification of financial assets into
these categories is dependent on the entity's business model (which depicts its objectives with
respect to the management of financial assets as a whole) and the characteristics of the contractual
cash flows of the specific financial asset. There were no significant changes to the classification
guidance for financial liabilities.
IFRS 9 introduces a new expected credit loss impairment model that replaces the incurred loss
impairment model used in IAS 39. The Group will have to adjust its impairment models to incorporate
forward looking information and time value of money to comply with expected credit loss
impairments under IFRS 9. The Group is still in the process of quantifying the impacts of this change.
The Group will take a decision on the transition method to be applied.
COMPANY PROFILE
Huge is an investment holding company listed on the Main Board of the JSE.
Huge Telecom Proprietary Limited ("Huge Telecom") was the principal operating entity of Huge prior
to the acquisition of Huge Connect Proprietary Limited ("Huge Connect"), formerly Connectnet
Broadband Wireless Proprietary Limited ("ConnectNet"), and its wholly owned subsidiary company,
Huge Networks Proprietary Limited, formerly Sainet Internet Proprietary Limited ("Sainet Internet").
Huge Connect and Huge Networks were acquired with effect from 30 March 2017.
Huge Telecom is a telephony services business that makes use of GSM to provide a wireless 'last mile'
connection from the customer's premises to the core of the network (the last mile is the final
connection from the core network to the customer's premises). Its principal service is substituting fixed-
line voice infrastructure, like that provided by a public switched telephone network (PSTN) such as
Telkom, with wireless GSM solutions. The customers of Huge Telecom exceed 14 500 in number (and
circa 40 000 telephone lines) and comprise corporate organisations of any size and residential
consumers, who require a fixed location voice service. Huge Telecom does not own any core network
infrastructure; rather, it leverages off the existing mobile operator networks in South Africa.
Huge Telecom has an extensive and growing distribution network, selling its telephony services
through more than 650 resellers (referred to as Business Partners).
The sum-of-the-parts valuation of Huge (prior to Huge Connect), is comprised of: firstly, the
demonstrable fixed landline telephony services substitution blueprint and secondly, the cash flow
generative profile of its customer base coupled with the scalability of this base (via a large
distribution channel). The economies of scale enjoyed by the mobile network operators (MNOs) means
that the existing customer base would generate much higher cash flow returns to the networks, thereby
imputing a far higher valuation in their hands.
Huge Connect is a telecommunications solutions company with a focus on growing its voice, network
connectivity and payment offering. It was established in 2004 and provides connectivity to the card
payment terminals of the commercial banks in South Africa by making use of secure, managed, dual
SIM connectivity over GSM data networks. The company has also expanded into other markets,
including ATMs, integrated points of sale, medical/script verifications, telemetry applications, micro-
lending applications and cash vaults.
Huge Networks is a network service provider and data communications company that markets and
sells a variety of products and services including Internet data services, managed network solutions,
branch connectivity, hosting services and website and system development.
The combination of Huge Telecom, Huge Connect and Huge Networks is compelling. Firstly, the bulk
of Huge Connect's 31 000 customers fit squarely into Huge Telecom's target customer market, with
little overlap. It is therefore expected that Huge Connect will assist Huge Telecom in expanding its
base of customers. Secondly, Huge Networks creates a critical entry for Huge Telecom to participate
in the data market.
Huge, enlarged by Huge Connect and Huge Networks, is building an investment theme focused on
connectivity, mobile payments and Financial Technology (Fintech). People live in a connected world
- everyone and everything needs to be connected - Huge Telecom, Huge Connect and Huge
Networks make connections possible. Huge Connect and Huge Networks provide Huge with an entry
into the data telecommunications and mobile payments markets, and an opportunity to participate
in the expected explosive growth of the Internet, as it transforms from being a source of information to
one focused on value and its movement. Huge Connect's participation as a trusted service provider
in the payments industry makes it invaluable real estate for expansion into Fintech-type opportunities.
REVIEW OF OPERATIONS
Reporting segments
Huge acquired ConnectNet and its wholly owned subsidiary company Sainet on 30 March 2017.
ConnectNet has been renamed and rebranded as Huge Connect and Sainet has been renamed
and rebranded as Huge Networks.
In terms of Huge's segmental reporting, the Telecom Grouping comprises the following companies:
- 100% held Huge Telecom, the holding company of which is Huge
- 100% held Huge Soho Proprietary Limited, the holding company of which is Huge
- 100% held Huge Software and Technologies Proprietary Limited, the holding company of which is Huge
- 100% held Huge Cellular Proprietary Limited, the holding company of which is Huge Telecom
- 100% held Huge Networks, the holding company of which is Huge Telecom
- 50.2% held Ambient Mobile Proprietary Limited, the shareholding of which is held by Huge Telecom
- 49.66% held Le Gacy Telecom (FRA) Proprietary Limited, the shareholding of which is held by Huge Telecom
In terms of Huge's segmental reporting, the Fintech Grouping comprises the following companies:
- Huge Connect, the holding company of which is Huge
In terms of Huge's segmental reporting, the Corporate Office Grouping comprises the following companies:
- Huge itself
- 75% held Accknowledge Systems Proprietary Limited
- 96% held Eyeballs Mobile Advertising Proprietary Limited
Revenue
The revenue of the Telecom Grouping is up 16.1% for the first six months of the current financial year
("HY18") when compared to the comparative six month period ("the Comparative"). This is largely as
a result of the inclusion of 5 months of revenue attributable to the acquisition by Huge Telecom of
Huge Networks. If the impact of the acquisition of Huge Networks on the Telecom Grouping's revenue
is excluded, like for like revenue growth was 2.5%. Huge Telecom is the principal contributor to the
Telecom Grouping's revenue and profit.
Huge Telecom's installed base of telephone lines increased by 1 490 telephone lines, from 36 793
installed telephone lines at the end of February 2017 to 38 283 installed telephone lines at the end of
August 2017, implying a net growth of 250 telephone lines per month.
Average revenue per user ("ARPU"), where a user is defined as an installed telephone lines,
amounted to just over R475 for HY18 (HY17: R550). ARPUs are expected to increase with the launch by
Huge Telecom of its new full suite telephony service referred to below.
The general economic downturn and low rate of economic growth in South Africa during HY18 has
had a significant impact on Huge Telecom's ability to sell telephone lines. Net growth for the
Comparative was 3 132 installed telephone lines, implying a net growth of 520 telephone lines per
month. This is more than double the monthly net growth for HY18.
Huge Telecom has been working with the mobile network operators in South Africa to increase the
functionality of telephone services using mobile network infrastructure. A development project was
launched on 1 March 2017 with a view to developing this additional functionality, which has become
known in Huge Telecom as full suite telephony.
Prior to the development of full suite telephony, Huge Telecom did not have access to (1) the ability
to queue incoming telephone calls made simultaneously to the same telephone number for distribution to
multiple mobile telephone lines for further distribution to the extensions to the PABX and (2) the
ability to distribute multiple outgoing telephone calls made simultaneously from the extensions to the
PABX to multiple mobile telephone lines while displaying the same telephone number. These two functions
have lowered the barrier to making the porting of geographic fixed line telephone numbers useful. There
was historically no point in porting a geographic fixed line telephone number to a mobile network
operator due to the lack of this functionality. The introduction of full suite telephony has now provided
Huge Telecom with access to these important telephony functions.
It was originally anticipated that full suite telephony would become available from 1 August 2017.
There were delays in finalising the development and accordingly, full suite telephony only became
available in November 2017. Huge Telecom expects significant growth in the sale of telephone lines
as a result of full suite telephony. It is anticipated that full suite telephony will not only increase
the monthly gross sales of telephone lines, which averaged 645 during HY18 (872 during the Comparative),
but will also reduce the monthly churn of telephone lines, which averaged 395 during HY18 (350 during
the Comparative). Net sales in November 2017 are already 8 times what they were on average during HY18.
The revenue of the Fintech Grouping includes 5 months of revenue from Huge Connect, which was
acquired with effect from 30 March 2017. Accordingly, there is no comparative.
The revenue of the Corporate Office Grouping includes revenue from the sale of accounting
software by Accknowledge of R748 088 and management fees of R2 179 708 charged by Huge to
Huge Telecom.
Gross profit
On 15 February 2017, Huge published a voluntary announcement on the JSE Limited's Stock
Exchange News Service ("SENS") in which it sought to explain the possible impact of, amongst other
things, the negotiation of substantially lower wholesale pricing ("New Pricing") from certain existing
suppliers of Huge Telecom on the future cost of sales of Huge Telecom ("the Guidance").
In order for Huge Telecom to benefit from the New Pricing it has to rotate the SIM cards in each router
underlying each telephone line ("the Rotation"). The Rotation started on 1 March 2017. At the end of
October 2017, 64% of billed minutes benefited from the New Pricing.
The gross profit of the Telecom Grouping is up 16.6% for HY18 when compared to the Comparative.
This is largely as a result of the inclusion of 5 months of gross profit attributable to the acquisition by
Huge Telecom of Huge Networks. If the impact of the acquisition of Huge Networks on the Telecom
Grouping's gross profit is excluded, like for like gross profit would be 4% higher than its Comparative.
For the six months from March to August 2017, 41% of the total minutes billed by Huge Telecom
benefited from the New Pricing. Historically, 51% of Huge Telecom's minutes are billed in the first half
of the financial year and 49% are billed in the second half of the financial year. If Huge Telecom had
completed the Rotation on 1 March 2017, Huge's cost of sales for HY18 would have been R9.5 million
lower, gross profit and operating profit would have been R9.5 million higher ("the Rotation Effect"),
after tax profit would have been R6.8 million higher and headline earnings per share would have
been higher by 5 cents per share.
The gross profit of the Fintech Grouping includes 5 months of gross profit from Huge Connect, which
was acquired with effect from 30 March 2017. Accordingly, there is no comparative.
If the gross profit of Huge Networks for the 5 months to 31 August 2017 is aggregated with the gross
profit of Huge Connect for the same 5 months for comparative purposes, the gross profit for Huge
Connect and Huge Networks for the last 5 months of HY18 amounted to R52.4 million. This implies
average monthly gross profit of R10.5 million. The gross profit of Huge Connect and Huge Networks for
the 6 months to August 2016, which was disclosed in Huge's circular to shareholders, dated 17
January 2017, amounted to R46.3 million, implying average monthly gross profit of R7.7 million.
Accordingly, gross profit growth for Huge Connect and Huge Networks has been substantially higher.
Operating expenses
The operating expenses of the Telecom Grouping are up 38.6% for HY18 when compared to the
Comparative. If the impact of the acquisition of Huge Networks on the Telecom Grouping's operating
expenses is excluded, like for like operating expenses would have been 30% higher than the
Comparative. The two main reasons for the increase in operating expenses is a 15.3% increase in
human capital costs and an increase in provisions. The increase in human capital costs is mainly
attributable to R1.7 million in once-off severance charges ("the Severances"). Excluding the
Severances, human capital costs would have increased by 7.7%, which is in line with the inflationary
increases proposed and approved on 1 March 2017. Included in operating expenses is a provision for
disputes amounting to R5.6 million ("the Disputes") and an increase in the provision for doubtful debts
of R2.7 million. Given the current economic climate in South Africa, management are of the view that
a more conservative approach in providing for doubtful debts is warranted. While Huge Telecom is
optimistic about its prospects relating to the Disputes, it has once again preferred a more
conservative approach. Excluding the effects of the Disputes and the Severances, headline earnings
per share would have been 3.8 cents higher.
The operating expenses of the Fintech Grouping include 5 months of operating expenses of Huge
Connect, which was acquired with effect from 30 March 2017. Accordingly, there is no comparative.
If the operating expenses of Huge Networks for the 5 months to 31 August 2017 are aggregated with
the operating expenses of Huge Connect for the same 5 months for comparative purposes, the
operating expenses for Huge Connect and Huge Networks for the last 5 months of HY18 amounted to
R14.4 million. This implies average monthly operating costs of R2.9 million. The operating expenses of
Huge Connect and Huge Networks for the 6 months to August 2016, which was disclosed in Huge's
circular to shareholders dated 17 January 2017, amounted to R17.6 million, implying average monthly
operating expenses of R2.9 million.
The operating expenses of the Corporate Office Grouping include once-off charges relating to the
acquisition of ConnectNet and the issue of shares for cash, all of which were required to be
expensed. These are corporate finance charges amounting to R3.1 million ("the Once-off Charges")
and are unrelated to the organic performance of Huge. They are related to acquisitions, the benefits
of which will only accrue in later years. Huge expects to continue to incur such once-off charges as it
pursues future acquisitions. Excluding the effects of the Once-off Charges, headline earnings per
share would have been 1.7 cents higher.
Operating profit
Operating profit for HY18 amounted to R38.2 million, which is 149% higher than the Comparative.
Excluding the Rotation Effect, the effects of the Severances, the Disputes and the Once-off Charges,
operating profit for HY18 would have amounted to R58.1 million, which would have been 280% higher
than the Comparative. Adding back the aforementioned items, headline earnings per share would
have been 10.4 cents per share higher than the 19.1 cents per share for HY18.
Shareholders are reminded that it in terms of the Subscription and Repurchase Agreement ("the SRA")
concluded by Huge, ConnectNet and the vendors of ConnectNet, the initial repurchase
consideration (as that term is defined in the SRA) is subject to an upward or downward adjustment in
the event that sum of the cumulative aggregate operating profit of ConnectNet and Sainet for the
financial years ended 28 February 2018, 28 February 2019 and 29 February 2020 is greater than, or less
than, an upper and lower threshold either side of a cumulative aggregate operating profit target of
R240 million.
The cumulative aggregate operating profit of ConnectNet and Sainet for the six months to 31 August
2017 amounted to R35 million.
FUTURE PROSPECTS
There is a profitable vacuum in the telecommunications market for services. Service companies have
been emerging and building propositions that cater to specific market segment needs while the big
network operators continue to roll out a commodity - technology infrastructure. This has allowed
innovative service organisations to steal a march on their bigger rivals by owning the customer
relationship and experience. This has been effective particularly in the Small, Medium Enterprise
("SME") and Small Office, Home Office ("SOHO") and Residential markets. Huge has over 45 000 SME
customers and it is the intention of the Group to expand this customer base and leverage the cross-
selling and cross-over opportunities that exist. The large networks struggle to compete in these
markets because their core processes are engineered and geared towards supporting either the
large corporates (through large sales forces on the ground), or consumers (through mainstream
media advertising and mass distribution through large retail chains and owned stores). The SME,
SOHO and Residential market segments are also largely price insensitive and are prepared to pay
relatively more for effective and efficient services tailored to their needs.
Full suite telephony is a very exciting development and recent data points talk to enormity of the
opportunity. Huge Telecom is able to port geographic telephone numbers for use with wireless GSM
networks. This has never been done before and is a world first. This presents Huge Telecom with a
new and significantly expanded market - a vast market that previously was the exclusive domain of
the Telkom monopoly.
Huge Telecom's wireless GSM telephony service is a fast, simple and easy to install solution - one that
is plug, play and walk away. It does not come with a charge for hardware - there are no device
costs. It is a solution that offers a simple ecosystem with few variables and few points of failure, which
is devoid of complexity and the high costs of maintenance that come with complexity. It is a solution
built on first tier mobile network infrastructure and it does not require a data connection. There is no
risk of cable theft. It is a low maintenance, if not free of maintenance, solution - so much so that
Huge Telecom doesn't charge for after sales service and maintenance. It is a solution that is
inherently mobile and capable of quick and easy relocation. It is compatible with all makes of PBX
and a solution that offers significant savings on call costs.
While the future looks promising for Huge Telecom, the management team realizes that they need to
do a massive roll out of this service to what is effectively an untapped market. This is going to require
the building of capacity. The appointment of Gunter Engling as Managing Director of Huge Telecom
is evidence of Huge's commitment to building this capacity. A key differentiator of the Huge
Telecom business model is its reach - Huge Telecom has approximately 650 resellers - which Huge
Telecom calls Business Partners - located nationwide.
TREASURY SHARES
As at 31 August 2017, the Company has 175 602 077 ordinary shares in issue, of which 9 646 926
ordinary shares are held by Huge Telecom in treasury, resulting in a net 165 955 151 listed ordinary
shares.
LITIGATION AND REGULATORY REQUIREMENTS
Huge is currently party to the following litigation:
Pro-active Monitoring of Financial Statements
On 11 August 2017, shareholders of Huge were advised that the Company's application ("the
Application") to the High Court: Gauteng Local Division Johannesburg ("the Court") to set aside the
decision of the JSE Limited ("the JSE") of 27 October 2014 ("the Decision") directing the Company to
restate its annual financial statements ("AFS") for the years 2010, 2011 and 2012 ("the Restatement"),
was dismissed. In terms of the Decision, the Company was required to announce the Restatement on
the JSE's Stock Exchange News Service ("SENS") and include the full details of the Restatement in
Huge's next annual financial statements, being the annual financial statements for the year ended 28
February 2018 ("the Next AFS").
The Restatement is related to the accounting treatment in Huge's 2010 (and by implication the 2009
comparative), 2011 and 2012 annual financial statements ("the Relevant AFS") of 80 455 single stock
futures ("SSF") contracts that Huge acquired in October 2008.
Huge, on the advice of its statutorily appointed auditors, reflected the SSF contracts in the Relevant
AFS as derivative financial instruments and accounted for the movement in the fair value of the SSF
contracts through profit and loss and ultimately retained income in equity. In terms of the Decision,
Huge should have reflected the SSF contracts in the Relevant AFS as equity instruments and
accounted for the movement in the fair value of the SSF contracts through share capital in equity.
Fair value losses relating to the SSF contracts of R17 881 163 and R7 059 948 were recorded in the 2009
and 2010 AFS respectively, a fair value gain relating to the SSF contracts of R3 252 619 was recorded
in the 2011 AFS and fair value losses relating to the SSF contracts of R1 783 148 and R4 202 350 were
recorded in the 2012 and 2013 AFS respectively. The aggregate fair value losses relating to the SSF
contracts and recorded from 2009 to 2013 amounted to R27 673 990. The Company accounted for
these losses through profit and loss and ultimately retained income in equity, instead of through share
capital in equity, as is required by the Decision.
Huge has considered the impact of the Restatement on the Next AFS and in this regard Accounting
Standard ("IAS") 8: Accounting Policies, Changes in Accounting Estimates and Errors is applicable.
Because the cumulative impact of the Restatement is both a debit and a credit to equity in the same
amount (being a debit to share capital in equity and a credit to retained income in equity of the
same amount) and the Company closed out the SSF contracts on 18 December 2013, there will be no
impact on assets, equity or liabilities of the current or comparative period of the Next AFS.
Arbitration
Dispute between Huge and TeleMasters Holdings Limited (TeleMasters)
During February 2013 Telemasters cancelled an agreement with Huge for the supply of MTN airtime
and suspended the SIM cards held by the Company. In its Statement of Claim issued on 31 May 2013,
Telemasters alleges that the Company is indebted to it in the amount of R4.176 million plus interest
thereon.
In its Plea and Counterclaim issued on 11 June 2014, the Company:
1. admitted that TeleMasters was entitled to raise R1.7 million for monthly subscriptions for the period
15 January 2013 to 14 February 2013 in respect of 2 820 SIM cards;
2. admitted that TeleMasters was entitled to raise R8 084 for monthly subscriptions for the period 15
February 2013 to 18 February 2013 in respect of 100 SIM cards;
3. claimed that Telemasters is indebted to it in the amount of R4.392 million plus interest thereon in
respect of amounts overcharged by Telemasters and which is made up as follows:
a) R1.215 million in respect of "Itemised Billing" for which it was not entitled to charge;
b) R1.034 million in respect of "Administration Fees" for which it was not entitled to charge;
c) R2.143 million in respect of "Gross Out of Bundle Charges" (being a claim of R4.053 million in
respect of Gross Out of Bundle Charges, less a credit note passed by TeleMasters in respect
thereof of R1.910 million) in respect of for which it was not entitled to charge.
The matter is subject to arbitration by the Arbitration Foundation of Southern Africa. The assets and
liabilities relating to this dispute have been recognised at levels appropriate to the Company's
assessment of the outcome of the arbitration hearing.
During February 2017, Huge and TeleMasters decided to separate out for decision ("the Separation"),
before deciding on the claim and counterclaim, the following matters:
i. Was TeleMasters entitled to charge Huge a fee in respect of itemised billing?
ii. Was TeleMasters entitled to charge huge the Administration Fees?
iii. Was TeleMasters entitled to charge Huge for calls made on SIM cards, where those calls
had been zero rated by the network operator in the depleting any accumulated value?"
The hearing was set down for five days, commencing on 2 October 2017. The parties argued the
separated issues before the arbitrator on 4 October 2017.
No definitive relief was claimed on account of the Separation but the arbitrator's decision on the
separated issues was anticipated would contribute to a convenient resolution of some issues
between the parties.
In terms of an award of the arbitrator, dated 6 October 2017, the arbitrator made the following
award in respect of the separate issues:
A. In respect of issue number i above, the arbitrator decided in favour of Huge;
B. In respect of issue number ii above, the arbitrator decided in favour of TeleMasters;
C. In respect of issue number iii above, the arbitrator decided in favour of TeleMasters.
The remaining issues arising out of the Statement of Claim and the Plea and Counterclaim were
postponed sine die and no order was made thereon.
Other litigation
The Company and Group engage in a certain level of litigation in the ordinary course of business. The
Directors have considered all pending and current litigation and are of the opinion that, unless
specifically provided, none of these will result in a loss to the Group. All significant litigation
which the Directors believe may result in a possible loss has been disclosed.
SUBSEQUENT EVENTS
There have been no events subsequent to 31 August 2017 and to the date of this announcement
which have had or may have a material impact on the Company.
GOING CONCERN
The Board has undertaken a detailed review of the going concern capability of the Company (and
all subsidiary companies of the Company that form the Group) with reference to certain assumptions
and plans underlying various cash flow forecasts.
The Board has not identified any events or conditions that individually or collectively cast significant
doubt on the ability of the Company and the Group to continue as a going concern.
CHANGES TO THE BOARD
During the six months ended 31 August 2017, the following changes were made to the Board:
D Deetlefs 31 May 2017 Resignation
A Potgieter 30 June 2017 Resignation
C Lyons 30 June 2017 Appointment
B Armstrong 1 September 2017 Appointment
DIVIDENDS
No dividends were declared or paid during the period under review.
GOVERNANCE
The Group recognises the need to conduct its business with integrity, transparency and equal
opportunity, and subscribes to good corporate governance as set out in the King IV Report on
Corporate Governance.
Johannesburg
30 November 2017
Sponsor
Questco Corporate Advisory (Pty) Ltd
1st Floor, Ballywoods Office Park, 33 Ballyclare Drive, Bryanston, 2021
Registered office
1st Floor, East Wing, 146a Kelvin Drive, Woodmead, Johannesburg, 2191 (PO Box 16376, Dowerglen,
1610)
Transfer Secretaries
Computershare Investor Services (Pty) Ltd
2nd Floor, Rosebank Towers, 15 Bierman Avenue, Rosebank, 2196
Directors
Non-Executive: Dr DF Da Silva (Chairman), SP Tredoux* (Lead Independent Director), DR Gammie*,
BC Armstrong*, C Lyons*, VMM Mokholo
Executive: JC Herbst (Chief Executive Officer), Z Bulbulia (Chief Financial Director)
*Independent
Date: 30/11/2017 05:25:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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