Net1 UEPS Technologies (UEPS) Q3 2020 Earnings Call Transcript

Net1 UEPS Technologies (UEPS -0.96%)
Q3 2020 Earnings Call
May 27, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Dhruv Chopra

Thank you, Irene. Welcome to our third-quarter 2020 earnings call. With me on the call today is our CEO, Herman Kotze; and our CFO, Alex Smith. Our press release and a supplementary investor presentation are available on our investor relations website, ir.net1.com.

As a reminder, during this call, we will be making forward-looking statements and I ask you to look at the cautionary language contained in our press release regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our press release in rand to assist investors understanding the underlying trends of our business.

As you know, the company's results can be significantly affected by currency fluctuations between the U.S. dollar and the South African rand. We will have a question-and-answer session following our prepared remarks. And with that, let me turn the call over to Herman.

Herman Kotze -- Chief Executive Officer

Thank you, Dhruv, and good day to everyone. I hope everyone is healthy and safe during these unprecedented times. Just like many of you, most of us have been working from home for the last several weeks as South Africa remains on a national lockdown. Similar to every business around the world, the COVID-19 pandemic has impacted our operations.

During this time, though, I'm proud of our ability to ensure we are doing the right things for our employees, our customers, and the communities that we serve. Today, I would like to focus on four key things. First, a brief overview of our Q3 results, as well as, a discussion around the impact of the COVID-19 pandemic on our business, the actions we have taken, and the strength of our current liquidity position. Next, I'll review our plan for South Africa.

Then third, followed by our plans for international markets subsequent to the cancellation of our Bank Frick option. And fourth, an update on our corporate actions, shareholder value, and uses of capital. First, a brief recap of our third-quarter results. Revenue from continuing operations for the quarter was $36.5 million, which was flat year over year in U.S.

dollars, but grew 8% in constant currency. In line with the South African banking industry's united response to the COVID-19 pandemic, we did not charge certain cash withdrawal fees to customers due to the lockdown during the last few days of March 2020. I would like to note that KSNET's contributions are excluded from continuing operations for the third quarter. We reported an adjusted EBITDA loss from continuing operations of $6.4 million, primarily due to the lack of top-line growth in South Africa and higher losses in Ceevo, which is the new brand for IPG.

And including KSNET for two months, adjusted EBITDA would have been a loss of $2.9 million in Q3. Transaction processing volumes in South Africa increased 24% year over year in constant currency. Number of bank accounts remained relatively stable at 1.03 million and debt-related financial services. We sold KSNET for $237 million in March 2020 and DNI for $48 million in April 2020.

And at March 31, 2020, we had unrestricted cash of $209 million and debt of $3 million. On March 27th, our key market of South Africa went into a nationwide lockdown, only allowing people out of the house for essentials or for emergencies, giving our team limited access to facilities and branch offices. Many of our services were deemed essential, and therefore, continued to operate either remotely or with the limited number of staff on site. There were also certain services such as ATM withdrawals for which we and others were not permitted to charge during the lockdown, while other services like selling new financial services products, such as loans and insurance policies through our branch infrastructure, were also prohibited during the lockdown.

South Africa extended its initial 21-day lockdown and introduced a grading system from Level 5 to Level 1 with effect from May 1st when it went to Level 4, which still is highly restrictive. Level 3 will become effective on June the 1st, when we believe many of our activities will be restored, though some limitations on certain fees may continue for now. Despite the disruptions and restrictions, I'm proud of our employees who continue to serve our customers during this unprecedented time and would like to thank them for their tireless efforts. We experienced a reduction in revenue the last few days of March due to the industrywide waiving of certain ATM fees during this period and this is expected to continue at least until the lockdown grading reaches Level 1.

However, we observed record daily transaction volumes across our mobile ATMs and digital channels during April, and so far in May, demonstrating the relevance and importance of our network. Some of the highlights during the last 60 days of lockdown in South Africa include, increasing daily volumes processed in our mobile ATMS; record volumes processed through our EasyPay value-added services switch; record bill payment volumes and new billers wanting to join the platform; no interruption in the availability of our core processing systems, in other words, 100% uptime; and completion and launch of new product development in record time, such as our mobile based -- mobile phone-based loan origination platform, which works on any type of feature phone or smartphone. Similar to other businesses around the world, we faced a number of challenges over the past few months but we believe that the steps we've taken over the past two years to focus on execution rather than be tied up with legacy and nonproductive issues have positioned us well to not only survive these challenging times but to also emerge with a solid foundation comprising of a sound capital base and relevant technologies. Our immediate focus has been to ensure the safety and well-being of our employees, partners, customers, and communities during the COVID-19 pandemic.

In March, we closed a number of our offices and operating locations in order to comply with government regulations and for the general well-being of our employees following the outbreak of the pandemic. We have provided the necessary facilities for our employees to operate remotely and have provided comprehensive protective equipment and sanitization facilities for those employees that continue to operate within our offices and operating locations. In April, we developed a system to grant loans to repeat customers using mobile phone-based USSD strings, which was launched in early May 2020. In April, we also announced that all of Net1's non-executive directors and its South African-based executives have taken salary benefit and fee reductions of 30% for the three months to June 30th.

These amounts will be donated to the Solidarity Fund and other related initiatives to assisting the fight against the COVID-19 pandemic in South Africa and its impact on various critical functions such as healthcare, social assistance, and education. Over the past six months, we have completed a number of corporate disposals, which leaves the group in a very strong and liquid position. Let me now outline the second topic, which is our plan for South Africa. Having taken dramatic steps to reduce costs in our South African operations in fiscal 2019, our focus in fiscal 2020 has been to transition our South African financial inclusion activities toward a business to customer or B2C model.

We have developed new banking products in cooperation with Finbond, stabilized our financial services offerings, and continued to increase efficiency in our distribution and infrastructure. Our ability to expand our account base and financial services offerings had, until Q3 2020, been constrained by the availability of sufficient liquidity, but following the asset disposals during the fiscal year, we are now in a position to inject adequate liquidity to support such growth over the next 12 months. However, with South Africa going into a lockdown period as a result of COVID-19, we will only be able to commence with these activities once the government-imposed restrictions have been lifted, as our target customers typically require face-to-face interactions. Under the government-imposed restrictions due to COVID-19, we have been unable to grow our loan book during the lockdown period as the face-to-face marketing and sales of new loan and other financial products is prohibited.

Additionally, we've had to waive fees on certain types of essential services, such as ATM withdrawals by grant recipients during the lockdown period. And in January 2020, we launched new loan products in collaboration with Finbond, utilizing their balance sheet. These loans are to the higher LSA customers, and therefore, the first of our efforts to move up to a higher-income customer segment. This initiative showed promising early signs, but it's also currently affected by the lockdown regulations.

And finally, we continue to work with Grindrod Bank on our ATM and other acquiring initiatives. Our processing and bill payment platform, EasyPay, has sustained its momentum even through the lockdown, as customers and consumers embraced digital payment channels that do not require them to leave their homes or interact with other people. As the largest bill payment platform in the country, we signed 41 new billers to the platform during Q3 2020, of which some have already been integrated and others are expected to be integrated by the end of June. EasyPay revenue increased 9% year on year during Q3 2020 despite a very challenging retail spending environment.

To conclude on our activities in South Africa, we have been unable to settle all of the claims and counterclaims between our subsidiary Cash Paymaster Services, or CPS, and SASSA through dialogue, and we accordingly decided that the most appropriate course of action would be to place CPS into bankruptcy protection or business rescue as it is referred to in South Africa. As a result, business rescue practitioners have been appointed to independently assess the viability of CPS as a growing concern, considering the various claims and counterclaims, the likelihood of a settlement, and then, to propose a plan to all stakeholders. We are excited about the opportunity in South Africa. We have the right products, partners, and resources in place, and we'll be prepared to grow in the market as soon as it's safe to do so.

We know that the country faces significant hurdles on its way to economic recovery, and we are willing and able to provide the growing base of struggling consumers with financially inclusive products and services based on our technology stack. Now moving on to our international businesses. Given rapidly changing market conditions and a global reduction in bank valuations, we chose to alter our European strategy by canceling our option to take a controlling stake in Bank Frick. The bank still plays a critical role in our European strategy, and while Ceevo will still partner with Bank Frick on mutually agreed ventures, it will also collaborate with other bank partners in the region.

In spite of not controlling Bank Frick, we are still able to offer a fully vertically integrated solution, though it may delay time to market and result in lower profit margins. The near-term macro environment, however, plays the premium on conserving cash. Two weeks ago, Bank Frick received official approval from Visa and can now onboard payment facilitators, including Ceevo. We now intend to commence with the rollout strategy of our products in earnest and in accordance with the current safety restrictions imposed across the continent.

I will now summarize the specific activities that Ceevo is pursuing. It is currently in a position to offer or will very soon be able to offer the following: A, acquiring services in the EU, which is providing small merchants the ability to rapidly begin accepting debit and credit card payments; B, acceptance of alternate payment methods, or APMs, mainly providing small merchants in the EU the ability to accept over 30 alternate payment methods, such as Alipay, WeChat Pay, Skrill, and so forth; C, card issuing prepaid and virtual cards to EU-based corporates and merchants; D, bank account opening through the issuance of instant [Inaudible] and performing direct debits and credits through the SEPA system in Europe and ACH in the USA; and E, crypto and blockchain products, including a fee to crypto trading platform and vice versa, as well as, a crypto asset storage product. We will continue to collaborate with Bank Frick to introduce new payment and blockchain-related products. In Africa, we have seen meaningful business momentum at Carbon and V2, which supports our strategy to focus on using local talent, resources, and partnerships to establish a sizable pan-African business.

As for Carbon, prior to the outbreak of the pandemic and its resulting impact in Nigeria, that business had continued to report exponential sequential growth across all the key indicators of its business. It has reacted quickly to the changing circumstances, tightening lending criteria, and communicating regularly with its customers, particularly, as Nigeria faces the additional challenge of low oil prices. It has successfully raised local funding in recent months and was able to settle all of its U.S. dollar-denominated funding prior to the crisis, leaving it in a sound financial position.

Carbon's vision is to be the first pan-African digital bank with an end-to-end product set for the under-banked. Pre-COVID, Carbon had an unaudited $24 million annual revenue run rate with a 70% repeat rate of its lending customers. Based on revenue, Carbon's run rate is higher than many better known challenger banks in the U.K., such as Atom, Monese, Starling Bank, and Monzo. Carbon is further expanding its suite of services to include virtual cards, cryptocurrencies, and foreign exchange.

Retail credit penetration in Nigeria is still only around 2% and with 90 million adults, leaves a long runway for growth. And finally, on the international front, we've had a number of discussions with MobiKwik's management team recently as both India and Africa are facing a number of similarities in dealing with the outbreak. This is the time when key players with strong financials and relevant products can rapidly expand their business, while many others are reactionary and focused on survival. MobiKwik is one such company that does not have to contend with high monthly cash burn, like most of its peers.

There are a number of our technologies, products, and know-how we are looking at, jointly, that have the potential to positively impact both of our businesses in India and across the world. We have talked about our virtual card and expect MobiKwik to launch that before calendar year end to its 15 million qualified customer base. We will discuss other offerings as and when they materialize. MobiKwik itself continues to perform ahead of expectations, primarily due to its successful transition to being a digital financial services provider.

For the quarter ended March 31, 2020, MobiKwik recorded unaudited annualized gross revenue of $74 million, up from $38 million for the quarter ended March 31, 2019. It has been contribution margin positive since October 2018 and has been around cash EBITDA breakeven since the month of August 2019. COVID-19 is expected to have a positive impact on its payments business but a nationwide 180-day moratorium on all term loan repayments is likely to reduce top-line growth in the June and September 2020 quarters. However, they still expect to generate healthy top-line growth for the full year.

During the March 2020 quarter, MobiKwik disbursed approximately 150,000 new loans per month. They were also the first to introduce the coronavirus insurance product, which offers a cover of $700 to $4,000 a for a premium as low as $6 to $18. They sold over 2,000 such policies within the first week. So similar to our South African business, our international portfolio is well-positioned to grow off a small base once the restrictions ease in the markets in which we operate.

Finally, as I touched on earlier, we have concluded a number of corporate actions over the past six months, including the sales of first, KSNET and DNI, which have positioned us well for the near and long term. Now that I have outlined the sources of liquidity, I would like to focus on capital allocation. Following the recent disposals, our board has initiated a comprehensive strategic review of the entire company. In light of the continued uncertainty around the current pandemic, the need to ensure that the company maintains a strong balance sheet and pending completion of the strategic review process, the board has decided to delay any share repurchases.

Any return of capital will also be subject to clarification of the company's status under the Investment Company Act. Due to the sale of several large businesses and the decision last month, not to take control of Bank Frick, coupled with the depreciation of the rand and the shrinking of our South African operation base, we do not currently qualify for clear exemption from the Investment Company Act. An investment company classification has numerous and significant implications for the operation of the company and its use of capital. However, we consider ourselves to be an operating company and not an investment company.

Nevertheless, it is important for us to develop a plan to provide us with an exemption that we can confidently rely upon, and therefore, we have engaged in a further strategic review by the board in cooperation with Value Capital Partners to prepare such a plan. Depending on the outcome of the plan, we may decide to seek an exemptive order from the SEC. We still very much intend to return some capital to shareholders but we will need a resolution on the above-mentioned items before we can commence any such activities. Over the last few months, we have announced five new non-executive appointments to the board of directors, including the appointment of Jabu Mabuza as our chairman designate when Chris Seabrooke retires at the end of June.

We believe that each of these directors bring significant and specific skills and decades of business experience to the Net1 board, and we look forward to their future contributions. We also look forward to a productive relationship with Value Capital Partners, who recently became our largest shareholder. And finally, I would like to express our heartfelt appreciation to Chris Seabrooke for his tireless leadership and guidance during some very challenging times as director and chairman over the years, and we wish him all the best. Let me now hand it over to Alex to go over the financials.

Alex Smith -- Chief Financial Officer

Thank you, Herman, and good day to everybody. Given the structural changes in the business over the past 12 months, the comparison of our third-quarter results to Q1 and Q2 is more relevant than the year-over-year comparisons. Adding to that, the effects of COVID-19 -- the effects of COVID-19 have direct bearing on the operations, and therefore, I will spend more time than normal discussing quarter-to-date trends for Q4. Though the pandemic is global in nature, given the current mix of our operations, the most relevant and material impacts for Net1 are experienced in South Africa, and therefore, limited parallels can be drawn between trends in the U.S., Europe, and many other markets, and those that we see in South Africa.

Unsurprisingly, our near-term financial results will depend on the severity of the situation in South Africa, the length of the lockdown, and curtailed economic activities, and finally, the trajectory of the recovery once restrictions begin to be lifted. Given our business is largely focused on the unbanked and under-banked, our customer behavior is more dependent on necessities and less so on discretionary spend and habits. We therefore, do not believe that there will be any systemic shift in the behavior of our target markets, that we recognize that actions like social distancing, safety, etc., will likely be more pronounced. Following the disposals of the last two months, we have a very strong balance sheet, a good handle on our costs, having gone through a substantial cost reduction exercise over the past year, and therefore, have reasonable visibility on our expected cash burn over the next two quarters.

Despite the pandemic, we've not laid off any employees nor reduced salaries, with the exception of the management team and directors, as discussed by Herman, and our employees are all productive and eager to execute on our strategy as soon as regulatory and safety conditions permit us to do so. South Africa was in Level 5 lockdown from March 27th to April 30th. This is the most severe form of lockdown, with only very limited parts of the economy operating. The country then moved Level 4 on May 1st, Level 4 allowed some increased economic activity, but still maintains most restrictions as before.

It has now been announced that South Africa will move to Level 3 from June 1st and the operating guidelines for this phase are expected to be released by government over the next few days. Outside of designated hotspots, this will see many areas of the economy reopen, but there remains significant restrictions on any activity involving social interaction and travel. At this point, it is not definitively clear whether our micro-lending operations will be able to resume in earnest and whether the other direct impacts we have seen will fall away. South Africa is expecting the incidence of the virus to continue rising over the coming winter months, which, as a reminder, is summer in the Northern Hemisphere, and should the situation deteriorate from the expected path, there is a risk that the lockdown level will be increased again, particularly, in the country's economic hubs.

Moving on to our third quarter of 2020 results. Our average rand-dollar exchange rate was ZAR 15.37 to the dollar compared to ZAR 14.17 a year ago and ZAR 14.60 in the second quarter. However, the rand appreciated sharply during March to almost ZAR 19 to the dollar in reaction to ratings downgrades, weak commodity prices, and the pandemic, before partially recovering to its current level around ZAR 17.50 to the dollar over the past 10 days or so. Third-quarter 2020 fundamental loss per share was $0.11, compared to the $0.62 fundamental loss per share a year ago.

This compares to a fundamental loss per share in the second quarter of $0.10. By segment, South African transaction processing reported revenue of $19.9 million in the third quarter of 2020, up 24% compared with the third quarter of 2019 and up 2% from the second quarter of 2020 on a constant currency basis and would have been even higher if not for the foregone transaction fees in the last week of March. The increase in segment revenue was primarily due to an increase in transactions performed through our ATM network and EasyPay, but partially offset by lower fees as a result of fewer EPE and SASSA accounts in the prior period. Our revenue for third-quarter 2020 was adversely impacted by $0.5 million as a result of the COVID-19 pandemic as we were unable to charge certain cash withdrawal fees to customers as a result of the lockdown during the last few days of March 2020.

We expect the monthly impact of foregone fees to be approximately ZAR 20 million or $1.1 million at current exchange rates until the current dispensation is ended. Excluding the impact of the $5.6 million EasyPay goodwill impairment loss, our South African transaction processing operating segment revenue and operating loss have been adversely impacted by the loss of SASSA customers compared to a year ago. Our operating margin for Q3 of 2020 and 2019 was negative 44% and negative 75%, and negative 14.6% in Q2 of 2020. Our operating loss margin for Q3 2020, excluding the goodwill impairment, was negative 15.5%.

While we've made progress in returning this segment to profitability, we remain subscale at this level of accounts and the key focus is on lifting revenue. International transaction processing generated revenue from continuing operations of $1.6 million in the third quarter of 2020, which was down 26%, compared to the third quarter of 2019, but up sequentially on a constant current base -- constant currency basis. The year-over-year decrease in revenue in this segment was primarily due to an ongoing contraction in international transaction volumes. As Herman noted, the conclusion of Bank Frick's Visa audit will allow us to launch various new services over the next few months.

However, we expect initial sales activity may be tempered by the effects of the pandemic in Europe and will be influenced by the extent to which restrictions ease and economic activity returns. Once new product sales commence, we expect to see transaction volumes return to a positive trajectory. Given its largely fixed cost nature, we anticipate losses will start to decline with growing volume and that we are able to reach monthly EBITDA breakeven in early calendar 2021. Segment operating loss from continuing operations during Q3 2020 increased, compared to fiscal 2019 due to higher operating losses, reflecting the high fixed cost component of the business.

Our operating loss margin for Q3 2020 and 2019 was negative 202.6% and negative 84.2%, respectively. As you know, we sold our Korean operations in early March and they contributed revenue of $19 million and EBITDA of $3.5 million for this quarter. Key features of the disposal were total proceeds of $237 million were reduced by the $23.5 million of cash disposed of, as well as, the $21.1 million of taxes paid in Korea. This latter amount includes withholding taxes of approximately $19.9 million on closing the transaction and we have commenced a process to have this amount refunded in the next 12 months.

Estimated U.S. taxes of approximately $15 million, which we expect to pay in July 2020 and we incurred transaction-related costs of around $8.6 million and recognized an after-tax gain on sale of $12.7 million. Financial inclusion and applied technology segment revenue from continuing operations increased modestly, primarily due to higher ad hoc terminal sales and insurance revenue. Lending and prepaid sales were broadly consistent with the third quarter of fiscal 2019.

Our operating income margin from continuing operations for the segment was negative 5.3% against a negative 26.1% during the third quarter of 2019. This compares with negative 4% that we saw in the second quarter of 2020. Active EPE accounts continue to remain fairly steady, with the new Finbond accounts offsetting some of the natural attrition in account numbers. Our plans were to start ramping up account numbers on the back of the loan product following the release of capital from the disposals but we have not yet been able to action this due to the current pandemic lockdown.

For Q3 2020, we experienced gross loan originations of between ZAR 80 million to ZAR 110 million per month. We would expect a step reduction in our lending revenue as the book unwinds. And even there were no lending activities during the next two quarters, we would expect to record approximately 70% of the revenue related to the March 2020 book in the fourth quarter of fiscal 2020 and 30% in the first quarter of fiscal 2021. To clarify further, without new originations, the revenue on the existing book will decline each month, but conversely, cash flow will improve as the book unwinds.

In April 2020, there were almost no new loan originations as in-store activities have been curtailed. In the interim, our technical teams developed a new mobile-based origination product to fulfill demand during these times and commenced with the origination of loans through this channel in May. Month-to-date, the response for this product has been positive and we believe doing the restrictions, we can originate about 25% of our normal monthly origination volumes through this distribution channel. It is also important to note that we have not observed any deterioration in the repayment characteristics of our customers through the duration of the pandemic thus far and believe we are adequately provisioned.

We expect that our lending book and associated revenue will meaningfully increase only once we are able to commence in-store lending activities again. However, in the current environment, we are unable to predict the level of origination through the new mobile-based product, or when we will be able to commence face-to-face lending in branches again, or the expected growth rate in the lending book. We believe that there will be significant demand for these products once the operating restrictions are lifted, but that the credit criteria will need to be closely monitored. Similar to lending, our insurance business has also been unable to grow its policy base and continues to receive premiums based on its existing level of policies.

Given the low level of infections in South Africa, to date there has not been any related increase in claims, but our insurance business is well capitalized to deal with any adverse claims experience, should it arise. From recent press articles and speculation, it's clear that Cell C is making progress on its recapitalization but this remains an ongoing process. The progress made in recent weeks is encouraging but until such time as a recapitalization is finalized, the impact on Cell C's operating viability is assessed and we understand the extent of any dilution we will suffer. We will continue to assess the fair value of our investment at a zero value.

Cell C has seen some benefits from an increasing focus on its core operations over the last nine months but needs to complete its recapitalization to create a sustainable business. We recognized income from equity-accounted investments of $0.6 million during the third quarter of 2020, compared to a loss of $0.5 million in the same period last year, primarily, due to the contribution from DNI in the current quarter. However, we recognized three non-cash charges to our investments, two of which, namely Bank Frick and V2 related to market conditions and DNI, primarily due to changes in foreign exchange rates between December 2019 and March 2020. On April 1st, 2020, we sold our remaining 27% interest in DNI for $48 million, of which $43 million was received in cash and the remaining $5 million will be recovered over the next 24 months.

We recorded an impairment loss of $11.5 million related to the difference between the fair value of consideration received on April 1st, 2020, and the carrying value of DNI, including the $11.3 million included in the accumulated foreign currency translation reserve as of 31st of March 2020. In April, we paid a termination fee of $17.5 million to cancel the exercise of our option to acquire a further 35% of Bank Frick. In the third quarter of 2020, we recorded an impairment loss of $18.3 million, which was calculated as the difference between the determined fair value of our interest in Bank Frick and our carrying value before the impairment. In April 2020, we received a cash dividend of approximately $1.3 million.

We remain committed to the Bank Frick investment and working closely with them to exploit opportunities. At March 31, 2020, our cash and cash equivalents were $209.3 million and comprised primarily of U.S. dollar-denominated balances of $192 million. We received a further ZAR 760 million of cash, $43 million at current exchange rates, related to the portion of DNI sold on April 1st and settled our remaining outstanding debt of $3 million using the proceeds.

Our cash used in operating activities during the third quarter of 2020 was impacted by the cash losses incurred by the majority of our continuing operations. We were unable to commence origination of loans toward the end of March 2020 due to the COVID-19 restrictions imposed on our lending activities in March 2020 and this had a positive result on net cash during the third quarter of 2020, compared with 2019, where we originated loans and which resulted in a net outflow of cash. Going forward, we expect our interest income to increase due to the higher cash balances, partially offset by lower interest rates. We also expect to continue to incur some interest expense related primarily to our ATM funding facilities.

Our third-quarter 2020 tax expense was $0.6 million, compared to a tax benefit of $3.6 million in the third quarter of 2019. And our weighted average share count has remained relatively constant at 56.8 million shares during the third quarter of 2020. Based on the results of the third -- for the third quarter, our continuing operations incurred an EBITDA loss of around $6.4 million. EBITDA is a reasonable proxy for cash in our business, and so, we are currently incurring cash losses of around $2.1 million a month.

The loss of our cash withdrawal fees will increase this cash burn by about $1.1 million a month. In respect to the loan book, the monthly reduction in income due to the unwind of the loan book will be more than compensated for by the capital repayments, though this will clearly reverse once the loan book starts to grow again. The duration and severity of the COVID-19 pandemic is still unknown, and therefore, we believe it's prudent to withdraw our financial outlook for the remainder of fiscal 2020. While many of our South African processing businesses have recently observed strong transaction volumes, our inability to charge for certain essential services during the lockdown period has had an adverse impact on our financial statements.

If we are able to commence the marketing of our new financial and banking products prior to the end of fiscal 2020, we believe our adjusted EBITDA will be modestly positive for the full fiscal 2021. We can now open up the call for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from Scott Buck of B. Riley.

Scott Buck -- B. Riley FBR Inc. -- Analyst

Hey, good morning, guys. I'm curious if you could tell us when you became aware of the Investment Company Act issue and what are the options to remedy that?

Herman Kotze -- Chief Executive Officer

Sure. Hi, Scott. The company has been aware of the investment company issue for a while and it's been part of our planning over the last year or so. We had specific plans in place to deal with this issue.

But unfortunately, the change in circumstances over the last three months has resulted in the current position that we find ourselves in. It is a fairly complicated piece of legislation that one needs to analyze and we don't have enough time, I think, on this call to go through all of it. But from our perspective, the key matters that had an influence on the current situation, obviously, revolves around the Bank Frick option, which we did not exercise. That was clearly part of the plan to remedy the situation, as well as, the significant decline in the South African rand, which had a resultant effect on the relative valuation of our South African assets.

So, this is an issue that we are aware of and that we plan to deal with. We still intend to deal with it as efficiently and as swiftly as we can. There is a strategic review currently under way to determine the best course of action, which is not going to take a very long amount of time. And if depending on the outcome of this investigation, we need to ask for an exemption from the SEC, then that is what we will do, but we hope to certainly deal with this as expeditiously as possible.

Scott Buck -- B. Riley FBR Inc. -- Analyst

What are the ramifications if you're declared an investment company and you can't get any kind of forbearance from the SEC?

Herman Kotze -- Chief Executive Officer

So, it's -- as I said, it's a fairly complicated area of the law. But I think, the best description of the various impacts or implications that this may have is actually contained in our Q. So, you'll see that there's a risk factor that we've included over there and I'll refer you to that for a concise description of what it means.

Scott Buck -- B. Riley FBR Inc. -- Analyst

All right. And in terms of time line to gain clarity, I mean, are we talking about three months or longer?

Herman Kotze -- Chief Executive Officer

Yeah. So obviously, some of it may not be entirely under our control when -- as far as the regulators are concerned. But from our perspective, we certainly intend to complete everything that we need to do within the next three months.

Scott Buck -- B. Riley FBR Inc. -- Analyst

Great. Next question for me. In terms of the strategic review, it feels like we went through this exercise about a year ago and that's what kind of drove the decisions to sell KSNET and DNI. What's different this time and why are we doing this again?

Herman Kotze -- Chief Executive Officer

I think a couple of things. Obviously, there have been quite a few changes recently in terms of the corporate structure. We have a new No. 1 shareholder in the form of Value Capital that came on board a month ago or so or during the last few weeks.

And as part of the cooperation agreement that we've signed with them, we agreed to embark on a strategic review of the company. We also have five new non-executive directors on the board and we believe that it's important and also fair to them to embark on a further review. Obviously, during these times, Scott, with the world changed as it has and various business activities impacted in different ways, we think that now is a prudent time to actually just -- it's not a brand-new review, I would say. This is a continuation of a plan that we've been propagating and that we started communicating about a year ago.

So for those very specific reasons, we think it's opportune for us to complete it now.

Scott Buck -- B. Riley FBR Inc. -- Analyst

All right, guys. I appreciate the answer still. Thank you.

Operator

Thank you, gentlemen. [Operator instructions] We have a question from Bill Gordon of Gordon Capital.

Unknown speaker

I was going to go down the same route as Scott just did, but he did it. And everything's figured out so I don't really want to reopen that story. But now that we have cash there, can we get some sort of direction where we're going to go with the cash when we don't get a dividend, when you don't pay a quarterly dividend, or anything of that nature? In other words, we got some high-growth areas in this company, whether it's India, MobilePay, doesn't seem to need it. What can use our money that can be the best investment for us at this particular point?

Herman Kotze -- Chief Executive Officer

We -- so, obviously, this will support the level of our review that we're currently busy with. I -- just generally speaking, about the various uses of capital, as I said during my remarks, it is still our intention to return some capital to shareholders as soon as we are in a position to do so. So that hasn't changed. And it's -- the form of -- in terms of what it will take is what we're currently analyzing.

But from our perspective, we still intend to return an amount of capital to our shareholders in the not too long term. But as far as other uses of cash is concerned, when we look at M&A activities, etc., we have not identified any and we -- at this stage, don't intend to do any large-scale M&A activities over the foreseeable future. You know, those that we are considering or may be considering are very specific smaller bolt-on kind of deals that will add to our strategic intention and focus. And the other part of the capital that we've earmarked for the distribution over the next three months or so, again, as soon as we can start, which we think is as early as next week, is to significantly grow the South African loan book.

Unknown speaker

OK. Thank you.

Operator

We have no further questions. Do you have any closing comments?

Herman Kotze -- Chief Executive Officer

No, no further comments from our side. Thank you.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Dhruv Chopra

Herman Kotze -- Chief Executive Officer

Alex Smith -- Chief Financial Officer

Scott Buck -- B. Riley FBR Inc. -- Analyst

Unknown speaker

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