ITEM 1A. RISK FACTORS
Important factors that could cause actual financial, business or operating results to differ materially from expectations are disclosed in this annual report, including without limitation, the following risk factors. In addition to the risks listed below, we may be subject to other material risks that, as of the date of this report, are not currently known to us or that we deem immaterial at this time.
SUMMARY OF RISK FACTORS
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flow, and future prospects. The following is a summary of the principal risks that should be considered before investing in our securities. The list below is not exhaustive, and investors should read this “Risk Factors” section in full. These and other risk are described in more detail in this Item 1A. Risk Factors.
Risks related to Our Business
• We may be unable to maintain our relationships with our existing customers, which could result in a loss of subscription revenue.
• Any inability to adapt to rapid technological change in our industry could impair our ability to remain competitive and result in a decline in market acceptance of our products.
• Inaccurate output from artificial intelligence could result in brand and reputation damage.
• Industry consolidation may result in increased competition, which could result in a loss of customers and/or a reduction in revenue.
• The loss of one or more of our key personnel, or our failure to attract, train and retain other highly qualified personnel, could prevent us from executing our growth plan.
• COVID-19 or any other global pandemic outbreak and measures taken in response thereto may continue to have an adverse impact our business, results of operations and financial condition.
• We may expand by acquiring or investing in other companies, which may divert our management’s attention, result in dilution to our shareholders and consume resources that are necessary to sustain our business.
• We may not be able to increase sales of our solutions, which could materially and adversely affect our ability to grow our business and increase revenue.
• We depend on certain key suppliers and vendors to manufacture our hardware, and an interruption in the supply of our hardware could impair our production capacity, which would impact our ability to supply hardware to customers.
• We depend on our network of dealers and distributors to sell our solutions and adverse changes in our relationships with significant dealers and distributors could cause a decline in sales.
• We depend on our cellular network providers for the transmission of data from installed in-vehicle devices to our data centers and we would incur significant costs if the services of these network providers became unavailable to us.
• Our business and our customers may be materially and adversely affected by global economic and market conditions.
• Increasing focus on evolving environmental, social and governance matters by shareholders, customers, regulators and other stakeholders may result in additional risk and compliance costs.
• Climate change may have adverse impact on our business.
• Failure of businesses to adopt fleet management solutions could reduce the demand for our solutions.
• Changes in practices of insurance companies in the markets in which we provide our solutions could materially and adversely affect demand for products and services.
• Security or privacy breaches in our electronic transactions, data and asset tracking sensors may expose us to additional liability or result in a loss of customers, either of which events could harm our business.
• We are subject to U.S. and other anti-corruption laws, trade controls, economic sanctions and similar laws and regulations, including those in the jurisdictions where we operate. Our failure to comply with these laws and regulations could subject us to civil, criminal and administrative penalties and harm our reputation.
• Laws and regulations relating to the Internet and data privacy in the markets in which we operate are complex and continuously evolving, and compliance costs are high. As these laws and regulations continue to evolve, we may be required to increase our compliance-related expenditures or limit the manner in which we collect information, the types of information that we collect, or the solutions that we offer, which may impede our ability to provide our solutions or may reduce our profit margins in specific geographic regions.
• Failure to correctly and efficiently implement a new Enterprise Resource Planning (“ERP”), Customer Relationship Management System (“CRM”) and billing system could have a material and adverse effect on our operations.
• We may be exposed to risks related to litigation and administrative proceedings that could materially and adversely affect our business, results of operations and financial condition.
Risks related to Intellectual Property
• We have not traditionally relied on patents to protect our intellectual property, and we rely on trade secrecy laws, confidentiality agreements, confidentiality procedures and contractual restrictions to establish and protect our intellectual property rights, which provide only limited protection and may subject us to litigation.
• An assertion by a third party that we are infringing on its intellectual property rights could subject us to costly and time-consuming litigation or expensive licenses.
Risks related to South Africa
• Fluctuations in the value of the South African Rand have had, and will continue to have, a significant impact on our reported revenue and results of operations, which may make it difficult to evaluate our business performance between reporting periods and may also adversely affect the price of our ADSs.
• If we do not achieve applicable B-BBEE (“Broad-Based Black Economic Empowerment”) black economic empowerment objectives in our South African businesses, we risk not being able to renew certain of our existing contracts which service South African government and quasi-governmental customers, as well as not being awarded future corporate and governmental contracts, each of which would result in the loss of revenue.
• A lack of growth, high inflation or increased interest rates in the South African economy could reduce our anticipated revenue and increase our operating costs.
Risks related to an Investment in our Ordinary Shares and ADSs
• Certain provisions of South African law may limit our ability to issue securities and access the capital markets in the future, which could hinder our ability to raise capital in the future.
Risks Related to Our Business
We may be unable to maintain our relationships with our existing customers, which could result in a loss of subscription revenue.
We provide our solutions principally on a subscription basis, typically with an initial subscription term of three to five years and renewal terms varying from one to five years, or, for certain customers, on a month-to-month basis. However, our fleet customers have no obligation to renew their subscriptions after the initial term or after any renewal term expires. Consumer contracts, unless the contract is a prepaid contract, will continue indefinitely unless cancelled by the customer based on one calendar months’ notice. We may be unable to retain existing customers and, as a result, our revenue would be adversely affected. Customers may choose to cancel or not to renew their subscriptions for many reasons, including:
• the belief that our solutions are not required for their needs or are not cost-effective;
• a desire to reduce discretionary spending;
• a belief that our competitors’ solutions provide a better value;
• changes in our customers’ businesses, and regulations impacting our customers’ businesses that may decrease the need for our fleet and mobile asset management solutions;
• economic downturn in our customers’ industries;
• economic downturn in the geography in which our customers operate;
• a reduction in discounts offered by insurers to vehicle owners who have installed our products; or
• a belief that a return on investment cannot be demonstrated.
Our enterprise fleet management customers, whose contracts are due for renewal, may also not renew for reasons entirely out of their control, such as the dissolution of their businesses. Enterprise customers may also decrease the number of vehicles covered by subscription contracts if their fleet sizes decrease.
Our subscription contracts generally do not provide our customers with an early termination option without penalty. However, if customers do not honor subscriptions for the full term, our remedies may be limited to re-negotiation of contract terms or legal recourse through the courts, which may not be successful or cost-effective, and we may not be able to recoup all of our costs.
A significant loss of or failure to renew our subscription-based contracts, or significantly different contract terms could materially and adversely affect our business, results of operations and financial condition.
Any inability to adapt to rapid technological change in our industry could impair our ability to remain competitive and result in a decline in market acceptance of our products.
The industry in which we compete is characterized by rapid technological change, frequent introductions of new products and evolving industry standards. In addition to the mobile asset management industry, we are subject to changes in the automotive, mobile handset, Global Positioning System (“GPS”) navigation device, information technology, telecommunications and enterprise software industries. As the technology used in each of these industries evolves, we will face new integration and competition challenges. For example, as truck and automobile manufacturers continue to develop in-vehicle technology, GPS-based tracking solutions may become standard equipment and result in new sources of competition. If we are unable to adapt to rapid technological change, i t could impair our ability to remain competitive and result in a decline in market acceptance of our products.
The development of new or improved products, systems or technologies that compete with our products may render our products less competitive and we may not be able to enhance our technology in a timely manner. In addition to the competition resulting from new products, systems or technologies, our future product enhancements may not adequately meet the requirements of the developing marketplace, and may not achieve the broad market acceptance necessary to generate significant revenue.
The development of new and improved products can be costly and time-consuming and is associated with inherent risks and uncertainties such as market acceptance, pricing, value proposition and continuous changes and developments in laws and regulations. If we are unable to successfully develop and timely introduce new and enhanced products which are accepted by the market it could materially and adversely affect our business, results of operations and financial condition.
Inaccurate output from artificial intelligence could result in brand and reputation damage.
Artificial intelligence (“AI”) is being integrated into a number of our solutions and/or products and could be a significant factor in future service offerings. While AI can present significant benefits, it also presents risks and challenges to our business. Data sourcing, technology, integration and process issues, program bias into decision-making algorithms, security challenges and the protection of personal privacy could impair the adoption and acceptance of AI solutions. If the output from AI solutions are deemed to be inaccurate or questionable, our brand and reputation may be harmed and we may potentially be subject to legal liability claims.
Industry consolidation may result in increased competition, which could result in a loss of customers and/or a reduction in revenue.
Some of our competitors have made, or may make, acquisitions or enter into partnerships or other strategic relationships to offer more comprehensive services or achieve greater economies of scale. In addition, new entrants not currently considered competitors may enter our market through acquisitions, partnerships or strategic relationships. We expect these trends to continue as companies attempt to strengthen or maintain their market positions. Many potential entrants may have competitive advantages over us, such as greater name recognition, longer operating histories, more varied services and larger marketing budgets, as well as greater financial, technical and other resources. Industry consolidation may result in competitors with more compelling service offerings or greater pricing flexibility than we have, or business practices that make it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or service functionality. These pressures could result in a loss of subscribers and/or a reduction in revenue.
The loss of one or more of our key personnel, or our failure to attract, train and retain other highly qualified personnel, could prevent us from executing our growth plan.
We depend on the continued service and performance of our key personnel. The loss of one or more key members of our leadership team and, or professionally qualified and experienced specialists who know our products and business processes could materially and adversely affect our operations. In addition, the loss of staff focused on customer retention in the international regions such as customer success, project management (implementation and field services) technical product and support personnel could disrupt our ability to deliver to our existing customer base and could have a material adverse effect on our ability to attract new business.
Recruiting and retaining skilled staff in the technology industry is highly competitive and staff with extensive telematics knowledge are scarce. We may experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Our failure to attract and train new personnel, or our failure to retain, focus and motivate our current personnel, could materially and adversely affect our business, results of operations and financial condition.
COVID-19 or any other global pandemic outbreak and measures taken in response thereto may continue to have an adverse impact our business, results of operations and financial condition.
The global impact of the COVID-19 pandemic and measures taken to reduce the spread of the virus have had an adverse effect on the global macroeconomic environment and have significantly increased economic uncertainty and reduced economic activity. Although governments around the globe have taken steps to mitigate some of the more severe economic effects of the virus and the impact of the pandemic on the economic activity globally is unfolding, there can be no assurance that such steps will be effective or achieve their desired results in a timely and sustainable manner or at all.
The COVID-19 pandemic has disrupted and may continue to disrupt our operations and the operations of our customers for an indefinite period of time. COVID-19 has resulted in, and may continue to result in, significant economic volatility and uncertainty in U.S. and international financial markets, which could adversely affect our access to capital markets and investment activity, negatively impacting the availability of capital, the terms and conditions of financing arrangements and the related costs of such financing. This could result in situations where financing may not be available to us at all, or at terms formerly available to us. The effects of the pandemic also manifested in supply chain disruptions, increased the unpredictability of global markets and future economic performance, negatively impacted customer demand, changes workforce behaviors and increased reliance of remote access due to remote working arrangements.
We may expand by acquiring or investing in other companies, which may divert our management’s attention, result in dilution to our shareholders and consume resources that are necessary to sustain our business.
We may acquire complementary products, services, technologies or businesses. We also may enter into relationships with other businesses to expand our portfolio of solutions or to expand our ability to provide our solutions in foreign jurisdictions. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to complete these transactions may be subject to conditions or approvals that are beyond our control, including anti-takeover and antitrust laws in various jurisdictions. We may seek to acquire other companies or businesses using our shares as consideration. Under the South African Companies Act, No. 71 of 2008, as amended (the “Companies Act”), we are prohibited from issuing shares representing 30% or more of our outstanding equity in connection with an acquisition without shareholder approval by way of special resolution. In terms of Johannesburg Stock Exchange (“JSE”) Listings Requirements, an acquisition or disposal constituting 30% or more of our market capitalization, will require shareholder
approval. In addition, we are subject to New York Stock Exchange Listing Rules which, subject to limited exceptions, require shareholder approval of a transaction involving the sale, issuance, or potential issuance by a company of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock, or 20% or more of the voting power outstanding before the issuance, and in certain other circumstances. Consequently, these transactions, even if undertaken and announced, may not close.
An acquisition, investment or new business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of acquired companies, particularly if the key personnel of the acquired company choose not to work for us, the acquired company’s technology is not easily compatible with ours or we have difficulty retaining the customers of any acquired business due to changes in management or otherwise. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for the development of our business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or any such acquisition, investment or business relationship may expose us to unknown liabilities, including litigation against the companies we may acquire, invest in or otherwise consummate a business relationship with. For one or more of those transactions, we may:
• issue additional equity securities that would dilute our shareholders;
• use cash that we may need in the future to operate our business;
• incur debt on terms unfavorable to us or that we are unable to repay or that may place burdensome restrictions on our operations;
• incur large charges or substantial liabilities; or
• become subject to adverse tax consequences, or substantial depreciation or amortization, deferred compensation or other acquisition-related accounting charges.
Any of these risks could materially and adversely affect our business, results of operations and financial condition.
We may not be able to increase sales of our solutions, which could materially and adversely affect our ability to grow our business and increase revenue.
We intend to increase sales of our solutions by increasing penetration in our existing markets and by entering new markets that represent a large potential source of demand for these solutions. Our success in increasing sales may be tied to a wide variety of factors, including demand for our services, price and service competition, customer experience, our relationships with third-party distributors and dealers, supply chain disruptions, the rate of new vehicle sales, the oil price, global economic conditions and, in the case of our safety and security solutions, the perceived threat of vehicle theft and discounts offered by insurers.
Some car and truck manufacturers have begun installing factory fitted substitute products and services, such as certain GPS-based products, in new vehicles prior to their initial sale, which may preclude us from increasing sales to subscribers purchasing such vehicles. Our inability to market and sell our solutions to new customers, at or prior to the initial sale by the manufacturer, could materially and adversely affect our ability to grow our business and increase revenue.
In the Middle East and Australasia segment and the Americas segment, we generate significant revenue from the oil and gas sector, and we may not be able to diversify and/or successfully enter into new verticals, which could materially and adversely affect our ability to grow our business and increase revenue.
We depend on certain key suppliers and vendors to manufacture our hardware, and an interruption in the supply of components or of our hardware could impair our production capacity, which would impact our ability to supply hardware to customers.
We currently purchase electronic components used in the manufacturing of our hardware from a number of suppliers, globally. These electronic components often have extended lead times on orders. An interruption in the supply of components from these suppliers or a failure to identify the need to react to shortages in a timely manner would significantly impact our operations and could require us to identify and integrate our manufacturing and supply logistics
with an alternate supplier, or use a substitute component, which could materially and adversely affect our business, results of operations and financial condition.
The components we use to manufacture hardware are predominately supplied by manufacturers and suppliers in China. The COVID-19 pandemic, amongst other contributing factors, has adversely affected manufacturing capacity of electronic components. The component supply shortage and extended lead times may impact our business in terms of increased pricing and additional engineering projects to implement alternative components, however, we have so far been able to supply our customer demand and maintain commitments to customers. Where possible, we have also taken steps to mitigate our risk to some extent by buying additional safety stock of scarce items or items with extended lead times and continue to carefully monitor the situation which seems to be improving in certain classes.
We contract two vendors in South Africa to manufacture and assemble hardware. We have no financial control over, and limited operational influence on these vendors and the conduct of their businesses. These vendors could negatively impact our business by, among other things, extending delivery times, raising prices and limiting supply due to their own shortages and business requirements. Our two contract manufacturers produce different products for us and if the facilities at one of these contract manufacturers suffer a mass casualty event, it could take as much as four to five months, or longer, to replace production capacity.
An extended interruption in the supply of hardware from our contract manufacturers could materially and adversely affect our production capacity and hence our ability to fulfil sales orders which could have a material adverse effect on our operations. The hardware products and accessories underpinning our MiX Vision AI solution come from a supplier in China. We do not expect a hardware supply interruption would have a significant impact on our subscription revenue other than an inability to replace hardware as part of our maintenance programs, however, a hardware interruption will have a direct impact on new business growth in terms of hardware sales and the contracting of new subscribers.
We depend on our network of dealers and distributors to sell our solutions and adverse changes in our relationships with significant dealers and distributors could cause a decline in sales and customer retention.
We currently distribute our products to small fleet operators and consumers both directly and through various distribution channels, including automobile dealers, aftermarket automotive parts and service suppliers, and automobile insurers and retailers, which we collectively refer to as “distributors”.
We currently distribute our products to enterprise fleet customers, including large enterprise fleets and small fleet operators, both directly and through third parties, who are assigned specific geographic territories in which they can sell, which we refer to as “dealers”.
We are dependent on our dealers and distributors, who account for a substantial percentage of our total sales, and sales generated by certain dealers and distributors individually represent a meaningful percentage of our revenue. The terms of our agreements with our dealers do not usually include minimum purchase obligations, are specific to a geographic territory and are primarily non-exclusive. It is possible that our dealers and/or distributors also have relationships with our competitors and we have limited, if any, controls over their business activities.
Our dealer agreements generally have a fixed initial term, after which they may be renewed or continue indefinitely if not terminated. This is subject to the right of either party to terminate on specified notice, generally ranging from 90 days to one year, or for breach. Similarly, our distributor agreements do not generally include minimum purchase obligations and are either structured as resellers without commission on sales generated or are based on a commission agreement applicable to sales generated by the distributor. If our relationships with our dealers and distributors deteriorate, or if a dealer or distributor, or group of related dealers and distributors, accounting for a material portion of our sales elects not to do business with us in the future, our sales could decline materially, which could materially and adversely affect our business, results of operations and financial condition.
We depend on our cellular network providers for the transmission of data from installed in-vehicle devices to our data centers and we would incur significant costs if the services of these network providers became unavailable to us.
We contract with cellular network providers in each of our markets to provide cellular network services. These cellular networks transmit data from our customers’ in-vehicle devices to our data centers, where it is managed for the benefit of our customers. All of our installed in-vehicle devices contain a SIM card that is compatible with a specific cellular network provider. If a cellular network provider in one of our markets were to experience extended service
outages or refuse to continue contracting with us for any reason or were to go out of business, it may adversely affect the ability to collect data from our in-vehicle devices.
In South Africa we are reliant on Eskom (the South African Power Utility), which has had challenges in meeting the country’s power demand, resulting in load shedding, load reduction and intermittent power outages. Although it has not resulted in our business operations being impacted directly, not having power at some of our contracted Cellular Network Service provider signal towers may impact our ability to locate and track vehicles in that area during load shedding.
We could incur significant costs related to the replacement of SIM cards for our customers and could suffer damage to our reputation and customer relationships. Any of the foregoing could materially and adversely affect our business, results of operations and financial condition.
The markets in which we participate are highly fragmented and competitive, with relatively low barriers to entry, and increased competition could result in reduced operating margins, increased sales and marketing expenses, and the loss of market share.
The market for our solutions is highly fragmented, consisting of a significant number of vendors, with relatively low barriers to entry. Competition in our market is based primarily on:
• functionality and reliability;
• total cost of ownership;
• breadth and depth of application functionality for fleet deployments;
• product performance;
• new technology adoption including AI;
• interoperability;
• brand and reputation;
• customer service;
• distribution channels, including a global footprint and ability to service multinationals;
• regional geographic expertise, including localized language support, support for applicable government regulations and the ability to comply with local Internet and data privacy regulations;
• size of customer base and reference accounts within key industry segments;
• ability to deliver ongoing value and return on investment;
• ease of deployment and use;
• relevant industry domain expertise and functionality; and
• the financial resources of the vendor.
We compete with a number of companies in each of the geographic markets in which we operate. Such competition could result in reduced operating margins, increased sales and marketing expenses and the loss of market share, any of which would harm our operating results. We expect competition to intensify in the future with the introduction of new technologies, the use of mobile devices and new market entrants from outside the telematics industry, such as enterprise software vendors.
The market for safety and security solutions is highly competitive. We compete in the safety and security solutions market primarily on the basis of the technological innovation, value-added services offered, brand recognition, rate of successful recoveries of mobile assets, and quality and price of our products and services. Our most competitive market is the vehicle and mobile asset tracking and recovery solutions market, due to the existence of a wide variety of competing products and services, and alternative technologies that offer various levels of protection and tracking capabilities. Some of these competing products and services, such as certain GPS-based products, are installed in new cars by vehicle manufacturers prior to their initial sale, which may make it more difficult to compete for such subscribers. Furthermore, providers of competing services or products may extend their offerings to the locations in which we operate, or new competitors may enter the safety and security solutions market.
Our business and our customers may be materially and adversely affected by global economic and market conditions.
We generate revenue through subscription and hardware sales across various industries, all of which are exposed to general market and economic conditions. Global market and economic conditions have been, and continue to be, disrupted and unstable. Factors that could affect us and our customers include increased global inflation and inflation control policies, investor and consumer confidence, fluctuations in economic growth, availability of capital in capital and equity markets, liquidity of global financial markets, interest rates and exchange control policies, the stability of governments in countries we operate and the strength of these economies and unemployment rates.
Adverse global economic conditions, or a general global economic slowdown, could result in a contraction of existing customers, a reduction in sales revenue, extended cash collection periods from our customers due to their deteriorating financial conditions and increased impairments. This could also result in reduced new opportunities due to delayed or cancelled capital investment impacting current or anticipated customer engagement.
Increasing focus on evolving environmental, social and governance matters by shareholders, customers, regulators and other stakeholders may result in additional risk and compliance costs.
Environmental, social, and governance (“ESG”) matters are becoming more of a focus area in the United States, Europe and in other countries where we operate. Companies are facing evolving laws, regulations and expectations with respect to their operating practices, disclosure and performance in relation to corporate responsibility, diversity, equity, human capital management, climate change, data privacy and security, supply chains and human rights.
This resulted in, and is likely to continue to result in, increased management time, additional human and capital resources, and administrative expenses to comply with regulations and requirements. For example, developing an ESG strategy, implementing such strategy and collecting, measuring and reporting ESG information based on various reporting requirements can be time consuming, difficult and costly. If we fail to respond towards achieving the required ESG commitments and compliance, our business reputation and financial performance and result of operations may be negatively impacted.
Climate change may have adverse impact on our business
Extreme weather conditions at an increasing frequency including drought, floods, heat waves, intense hurricanes, thunderstorms, tornadoes, snow and ice storms may have an impact on critical infrastructure used by MiX or our suppliers or at our customer, potentially disrupting our business, the business of our suppliers and customers, which may result in extended downtime and /or additional costs to maintain or resume operations.
We could be exposed to product liability claims, which could result in significant damage to our reputation and material economic loss.
Our products, and the batteries that many of them contain, could malfunction and cause damage to our customers’ property. In particular, the rechargeable batteries in our in-vehicle devices may be prone to leakage due to environmental factors, such as extreme weather conditions or overuse. Leaks in these batteries could damage our customers’ in-vehicle devices and vehicles. Our safety and security solutions may be disabled or prove to be ineffective as a result of techniques employed by car thieves, or the discovery of technological weaknesses by such persons. If there were a systematic failure of any of our products, we could suffer significant damage to our reputation, and any insurance we maintain might not be sufficient to prevent us from suffering a material economic loss.
Failure of businesses to adopt fleet management solutions could reduce the demand for our solutions.
We derive, and expect to continue to derive, substantial revenue from the sale of subscriptions for fleet management solutions to commercial customers. Widespread acceptance and use of fleet management solutions is critical to our future revenue growth and success. If the market for fleet management solutions fails to grow, or grows more slowly than we currently anticipate, demand for our solutions would be negatively affected.
The market for fleet management solutions is subject to changing customer demand and trends in preferences. Some of the potential factors that could affect interest in and demand for fleet management solutions include:
• the effectiveness and reliability of solutions;
• fluctuations in fuel and vehicle maintenance costs, which are significant drivers of customer demand for fleet
management solutions;
• assumptions regarding general mobile workforce inefficiency and the extent to which efficiency can be improved through fleet management solutions;
• the level of governmental and regulatory burden on the fields of transportation and occupational health and safety;
• the price, performance, features and availability of products and services that compete with ours;
• our ability to maintain high levels of customer satisfaction; and
• the rate of acceptance of web-based solutions generally.
Failure of businesses to adopt fleet management solutions could materially and adversely affect our business, results of operations and financial condition.
A decline in vehicle sales and/or an increase in the sales of factory-fitted GPS solutions in new vehicles in our markets could result in reduced demand for our solutions, which could materially and adversely affect our revenue.
A reduction in sales of new vehicles and/or an increase in factory-fitted GPS solutions in new vehicles could reduce our addressable market for solutions. New vehicle sales may decline for various reasons, including adverse changes in the general economic environment, a reduction in our customers’ discretionary spending, or an increase in new vehicle tariffs, taxes or gas prices. A decline in vehicle production levels or labor disputes affecting the automobile industry in the markets where we operate, may also impact the volume of new vehicle sales. A decline in sales of new vehicles in the markets in which we provide our solutions would result in reduced demand for such products and services, which could materially and adversely affect our business, results of operations and financial condition.
Demand for our fleet management solutions decreases when prices for crude oil and natural gas decrease, which could materially and adversely affect our revenue.
Demand for our fleet management solutions can fluctuate with the prices for crude oil and natural gas, which impact the attractiveness of our services and also directly affects our customers in the oil and gas industry, from whom we derive a significant portion of our revenue. Subscription revenue from oil and gas customers in fiscal year 2023 represented 14.4% of our total subscription revenue. Generally, lower oil and gas prices reduce the return on investment for many of our customers. Gains in fuel efficiency may lead to a relative decrease in the return on investment of our solutions perceived by our customers. The oil and gas industry is complex, and numerous geopolitical, economic, environmental and other factors affect pricing. Expectations for future crude oil and natural gas prices may affect our customers’ spending habits. Prolonged or substantial declines in crude oil and/or natural gas prices, or the perception that such prices will remain low, could materially and adversely affect our business, results of operations and financial condition.
Changes in practices of insurance companies in the markets in which we provide our solutions could materially and adversely affect demand for products and services.
We depend in part on the practices of insurance companies in some of our markets to support demand for certain of our products and services. For example, in South Africa, which is currently the largest market for our products and services, insurance companies either mandate the installation of tracking devices as a prerequisite for providing insurance coverage to owners of certain vehicles, or provide discounts on insurance premiums to encourage vehicle owners to subscribe to vehicle tracking and mobile asset recovery solutions such as ours. We benefit from insurance companies’ continued practice in the South African and certain other markets:
• accepting mobile asset location technologies such as ours as a preferred security product;
• providing premium discounts for using location and recovery products and services such as ours; and
• mandating the use of our products and services, or similar products and services, for certain vehicles.
If any of these policies or practices change, revenue from the sale of our products and services could decline, which would materially and adversely affect our business, results of operations and financial condition.
We face many risks associated with our existing and potential new international operations, which could prevent us from successfully expanding into new geographic markets, or operating successfully in existing geographic markets.
We are a global company with substantial assets located in a number of countries. We provide our services in more than 120 countries with 12 offices in 9 countries. In some international markets, customer preferences and buying behavior may be different, and we may use business or pricing models that are different from our traditional subscription model to provide fleet management solutions to customers in those markets, or we may be unsuccessful in implementing the appropriate business model. Our revenue from new foreign markets may not exceed the costs of establishing, marketing, and maintaining our international offerings.
In addition, expanding international operations into new territories may subject us to risks with which we have limited experience. These risks include:
• lack of familiarity with local markets, including legal and regulatory requirements;
• difficulties in finding and maintaining, or potentially replacing, local dealers and distributors;
• competing with established local competitors;
• laws favoring local competitors;
• the cost and burden of monitoring and complying with legal and regulatory requirements in new territories, and/or changes to existing legal and regulatory requirements, including those relating to the Internet and data privacy and security;
• fluctuations in currency exchange rates or restrictions on currency exchange;
• availability of U.S. Dollars in countries highly dependent on resource exports;
• potentially adverse tax consequences, including the complexities of transfer pricing, value added or other tax systems, double taxation, tariffs and restrictions and/or taxes on the repatriation of earnings;
• dependence on third parties, including some commercial partners with whom we may not have extensive experience;
• increased financial accounting and reporting burdens and complexities;
• increased travel, real estate, infrastructure, insurance, legal and compliance costs associated with international operations;
• political, social, and economic instability, terrorist attacks, and security concerns in general;
• reduced or varied protection for intellectual property rights in some countries;
• increased exposure and vulnerability to claims that we have infringed on the intellectual property of third parties;
• exposure to liabilities under anti-corruption and anti-money laundering laws and regulations; and
• complexities of complying with U.S. and non-U.S. export controls laws and regulations, including Export Administration Regulations (“EAR”).
Operating in international markets requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in additional territories may not produce desired levels of revenue or profitability.
Our business and results of operations may be negatively impacted by the United Kingdom’s withdrawal from the European Union.
Exposure to United Kingdom political developments, including the impact of the United Kingdom exiting from the European Union (also known as “Brexit”), could have a material adverse effect on our operations, specifically in Europe. The United Kingdom’s withdrawal from the European Union on January 31, 2020 created an uncertain political and economic environment in the United Kingdom and potentially across other EU member states. The United Kingdom and European Union has agreed to participate in a transition period, which expired on December 31, 2020, to negotiate a trade agreement and other aspects of their relationship after the transition period. During the transition period, free trade continued between the United Kingdom and European Union without checks and extra charges. Prior to the expiration of the transition period, it was announced that the United Kingdom and the European Union have entered into a post-Brexit
deal on certain aspects of trade and other strategic and political issues, thereby avoiding some of the anticipated disruptions.
Changes resulting from Brexit or any subsequent transition agreements, including changes to existing trade agreements between Europe and the United Kingdom could lead to increased customs duties, tariffs and withholding taxes for the sale of our hardware and services from the United Kingdom into Europe, and may result in us being less profitable.
Security or privacy breaches in our electronic transactions, data and asset tracking sensors may expose us to additional liability or result in a loss of customers, either of which events could harm our business.
Any inability on our part to protect the information security of our networks, data processing systems, software products and platforms could have a material adverse effect on our reputation and profitability by exposing us to additional liability, increasing our expenses relating to resolution of these breaches and deterring users from using our products and services. Our systems and operations are vulnerable to damage or interruption from human error, a breach in cybersecurity, computer viruses, ransomware, other malware, distributed denial of service attacks, spurious spam attacks, intentional acts of vandalism and similar events. We cannot assure you that our current security methods and measures will effectively counter evolving security risks, prevent future slowdowns or disruptions, protect against extraordinary attacks while addressing the security and privacy requirements of existing and future users. Any breaches, system failures, slowdowns or disruptions as a result of malicious insiders or third-party action, including malevolent conduct by hackers, phishing and other means of social engineering could likely result in the loss, corruption or unavailability of data or unanticipated disruptions in service to our users, decreased levels of user satisfaction and significant negative effects on our reputation, which could materially and adversely affect our business.
We utilize third-party encryption and authentication technology providers to secure and review transmission of confidential information over the Internet, including private customer data such as bank account numbers and asset tracking data. Advances in technological capabilities, new discoveries in the field of cryptography, and a continually changing landscape of cybersecurity threats as well as other events or developments, could result in a compromise or breach of the technology we use to protect sensitive transaction data, including the technology provided by third parties. If any such compromise of our data security, or the data security of our customers, were to occur, it could result in misappropriation of proprietary information or interruptions in operations, and have an adverse impact on our reputation or the reputation of our customers. If we are unable to detect and prevent unauthorized access to or use of confidential information including bank account numbers and asset tracking data, our business, results of operations and financial condition could be materially and adversely affected. Any such interruption or breach of our systems could also result in legal and reputational damage to our business, including legal claims and proceedings, liability under laws that protect the privacy of personal information, government enforcement actions and regulatory penalties, as well as remediation costs. We maintain cyber liability insurance; however, this insurance may not be sufficient to cover legal, reputational and financial losses that may occur as a result of an interruption or a breach of our systems.
Our operating results may be harmed if we are required to collect sales, use, services or other related taxes for our solutions in jurisdictions where we have not historically done so, or if there are significant changes in the effective tax rates exposing us to greater than anticipated tax liabilities.
We do not believe that we are ordinarily required to collect sales, use, services or other similar taxes from our customers in certain jurisdictions. However, one or more countries or states may seek to impose sales, use, services, or other tax collection obligations on us, including for past sales. For example, the European Commission introduced a proposal of a Directive addressing taxation of digital businesses operating within the European Union, but has not yet reached an agreement on a sales tax with a scope limited to digital advertising services. As a result, certain countries, including the United Kingdom, Italy, France and Spain moved to introduce their own digital service tax (“DSTs”). DSTs would be imposed on gross revenue derived from a variety of digital services, for example, the provision of digital intermediary services. Based on our current activities, we do not believe that we would fall within the scope of the DSTs as designed today. However, the current definition of DSTs proposed by the OECD (from which the local initiatives stem) will probably be adjusted, and the locally proposed and implemented DSTs differ significantly in their scope and structure. A successful assertion by one or more jurisdictions that we should collect sales, DST or other taxes on the sale of our solutions, could result in substantial tax liabilities, including interest and penalty charges for past sales and decrease our ability to compete for future sales. We review applicable rules and regulations periodically and, when we believe sales and use taxes apply in a particular jurisdiction, we voluntarily engage tax authorities in order to determine how to comply with their rules and regulations. We cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in jurisdictions where we presently believe sales and use taxes are not due. Furthermore, we cannot be certain that we have recorded sufficient provisions on our consolidated financial statements to cover taxes.
Although our client contracts ordinarily provide that our clients must pay all applicable sales and similar taxes, they may be reluctant to pay back taxes, and may refuse responsibility for interest or penalties associated with those taxes. If we are unable to collect and pay back taxes and the associated interest and penalties, we will incur unplanned expenses that may be substantial.
Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the laws are published. Changes in tax legislation could increase our tax obligations in countries where we do business.
Due to the nature of our business, our services are provided within multiple jurisdictions, including certain jurisdictions in which we may not have anticipated our services being provided or within which we may not have had prior dealings. Accordingly, there may be unforeseen obligations related to certain jurisdictions that were not identified, where the tax legislation may have been amended or not adequately provided for in our contracts. These obligations could materially and adversely affect our financial position.
An actual or perceived reduction in vehicle theft and crime rates, may adversely impact demand for certain of our solutions, which could result in a loss of customers and a decline in growth.
Demand for our vehicle tracking and asset recovery solutions is influenced by prevailing or expected vehicle theft rates. Vehicle theft rates may decline as a result of various factors, such as the availability of improved security systems, implementation of improved or more effective law enforcement measures, and improved economic or political conditions in markets that have high theft rates. If vehicle theft rates in our markets decline significantly, or if vehicle owners or insurance companies believe that vehicle theft rates have declined or are expected to decline, demand for some of our products and services may decline, which could result in a loss of customers and a decline in growth.
We are subject to U.S. and other anti-corruption laws, trade controls, economic sanctions and similar laws and regulations, including those in the jurisdictions where we operate. Our failure to comply with these laws and regulations could subject us to civil, criminal and administrative penalties and harm our reputation.
Doing business on a worldwide basis requires us to comply with the laws and regulations of various foreign jurisdictions. These laws and regulations place restrictions on our exports, reexports, operations, technologies, trade practices, partners and investment decisions. In particular, our operations are subject to U.S. and foreign anti-corruption and trade control laws and regulations, such as the Foreign Corrupt Practices Act (the “FCPA”), various export controls and economic sanctions programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), as well as Australian and European sanctions. Certain of our products, technologies and services are, or may be subject to the EAR . U.S. export controls, regulations and economic sanctions include various restrictions and license requirements, including prohibit the shipment of certain products, technologies, software and services to U.S. embargoed or sanctioned countries, governments and persons. Complying with economic sanctions, export regulation, import laws and regulations may be time-consuming and may results in delays or loss of sales opportunities.
In 2022, the United States, the European Union, and the United Kingdom have imposed a number of new sanctions and export control restrictions on Russia following Russia’s invasion of Ukraine. While we have maintained business relationships with a limited number of oil and gas customers in Russia, we continue to closely monitor those relationships in consultation with outside advisors to maintain compliance with applicable U.S. sanctions and export control and regulations. Certain debt and equity restrictions that have been imposed on dealings with certain Russian entities that are not otherwise blocked parties continue to impact our ability to collect payment on the provision of services in Russia. Additionally, some of our products, technologies and services subject to the EAR may not be exported to Russia without a license. We are also mindful that more comprehensive trade restrictions may be imposed on Russia in the future, and that may impact our ability to engage in any business in Russia or with Russian entities.
While we take precautions to ensure compliance, if we fail to comply with export laws, customs and import regulations, economic sanctions and EAR, we could be subject to substantial civil and criminal penalties, including fines for the company and incarceration of responsible employees and managers, and the possible loss of export privileges. If our dealers and distributors fail to obtain any appropriate import, export, re-export licenses or permits, we may also be subject to government investigations or penalties and suffer reputational harm.
We also monitor compliance in accordance with the ten principles as set out in the United Nations Global Compact Principles, the Organization for Economic Co-operation and Development recommendations relating to corruption, and the International Labor Organization Protocol in terms of certain of the items to be monitored. As a result
of doing business in foreign countries and with foreign partners, we are exposed to a heightened risk of violating anti-corruption and trade control laws as well as sanctions regulations.
The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining business, or securing any improper business advantage. It also requires us to keep books and records that accurately and fairly reflect our transactions. As part of our business, we may deal with state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA. In addition, the United Kingdom Bribery Act (the “Bribery Act”) which came into effect on July 1, 2011, extends beyond bribery of foreign public officials and also applies to transactions with individuals not employed by a government. The Bribery Act further punishes both the giving and receiving of bribes, whereas the FCPA only prohibits payment of a bribe. The provisions of the Bribery Act are also more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Some of the international locations in which we operate, lack a developed legal system and have higher than normal levels of corruption.
Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. Economic sanctions programs restrict our business dealings with certain sanctioned countries, persons and entities. In addition, because we act through dealers and distributors, we face the risk that our dealers, distributors and customers might further distribute our products to a sanctioned person or entity, or an ultimate end-user in a sanctioned country, which might subject us to an investigation concerning compliance with OFAC or other sanctions regulations. Moreover, we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities.
Violations of anti-corruption laws, trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment.
We have developed policies and procedures as part of a company-wide compliance program that is designed to assist our compliance with applicable U.S. and international anti-corruption and trade control laws and regulations, including the FCPA, the Bribery Act and trade controls and sanctions programs administered by OFAC, and provide regular training to our employees to comply with these laws and regulations. However, there can be no assurance that all of our employees, consultants, partners, agents or other associated persons will not take actions in violation of our policies and these laws and regulations, or that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, or provide a defense to any alleged violation.
In particular, we may be held liable for the actions that our local, strategic or joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could materially and adversely affect our reputation, business, results of operations and financial condition. Any violation of the FCPA, other applicable anti-corruption laws, or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, severe criminal or civil sanctions and suspension or debarment from government contracts, which could have an adverse effect on our reputation, business, financial condition, results of operations, and prospects. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees. Our continued international expansion, including in developing countries, and our development of new partnerships and joint venture relationships worldwide, could increase the risk of FCPA, OFAC or Bribery Act violations in the future.
Operating in emerging markets subjects us to greater risks than those we would face if we only operated in more developed markets, which could increase our operating costs and inhibit our growth plan.
Emerging markets, including Africa, Eastern Europe, Mexico, the Middle East, Asia and South America, are subject to greater risks than more developed markets. The Middle East region is experiencing ongoing instability, which has affected and may continue to affect our growth in the region. The Brazilian market continues to experience political and economic issues such as high unemployment rates, high inflation rates and corruption allegations, which affect our growth in the region and our ability to introduce new services to the region. South Africa is experiencing political and economic issues, as well as high unemployment rates, which could affect our ability to maintain our existing customer base as well as our ability to grow our existing customer base. The political, economic and market conditions in many emerging markets present risks that could make it more difficult to operate our business successfully. These risks include:
• political and economic instability, including higher rates of inflation and currency fluctuations;
• higher levels of corruption, including bribery of public officials;
• loss due to civil strife, acts of war or terrorism, guerrilla activities and insurrection;
• a lack of well-developed legal systems which could make it difficult for us to enforce our intellectual property and contractual rights;
• logistical and communications challenges;
• potential adverse changes in laws and regulatory practices, including import and export license requirements and restrictions, tariffs, legal structures and tax laws;
• difficulties in staffing and managing operations and ensuring the safety of our employees;
• restrictions on the right to convert or repatriate currency or export assets;
• greater risk of uncollectible accounts and longer collection cycles; and
• introduction or changes to indigenization and empowerment programs.
Laws and regulations relating to the Internet and data privacy in the markets in which we operate are complex and continuously evolving, and compliance costs are high. As these laws and regulations continue to evolve, we may be required to increase our compliance-related expenditures or limit the manner in which we collect information, the types of information that we collect, or the solutions that we offer, which may impede our ability to provide our solutions or may reduce our profit margins in specific geographic regions.
Various laws and regulations associated with the Internet and data privacy are complex and increase our cost of doing business. Furthermore, these laws and regulations may expose us to fines and penalties if we fail to comply with them. Although we have implemented procedures designed to comply with international practices and have established additional group policies, charters and procedures to assist in maintaining data privacy and data security, we have not undertaken a formal legal review to determine our compliance with data privacy and data security laws in jurisdictions outside of the UK, the European Union and South Africa.
Furthermore, our employees, contractors and agents may not always comply with the policies and procedures we establish regarding data privacy and data security, particularly as we expand our operations through organic growth and acquisitions. While our employees may violate our policies and procedures, the Company remains responsible for, and obligated to implement, policies and procedures and enter into contracts with service providers that require appropriate protection. Any violations could subject us to civil or criminal penalties, including substantial fines or prohibitions on our ability to offer our products in one or more countries, and could also materially damage our reputation, our brand, our international expansion efforts, our business, results of operations and financial condition.
The transmission of data over the Internet and cellular networks is a critical component of our SaaS business model. Additionally, as cloud computing continues to evolve, increased regulation by federal, state or foreign agencies becomes more likely, particularly in the areas of data privacy and data security. In addition, taxation of services provided over the Internet or other charges imposed by government agencies, or by private organizations for accessing the Internet, may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet, could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.
Our solutions and products enable us to collect, manage, store, and otherwise process a wide range of data related to fleet management such as mobile asset location and fuel usage, speed and mileage. We obtain our data from a variety of sources, including our customers and third-party providers. The United States and various state governments have adopted or proposed limitations on the collection, distribution and use of personal data, as well as requirements that must be followed if a breach of such personal data occurs. The California Consumer Privacy Act, effective January 1, 2020, was the first consumer privacy law in the United States. This law created new privacy rights for California consumers which were expanded by the newly passed California Privacy Rights Act of 2020, effective January 1, 2023. The employee and business-to-business (“B2B”)data exemption expired on January 1, 2023, which means that employees and B2B contracts also have enhanced rights (e.g., right to access, deletion, correction, and opt-out). There are also certain requirements that may apply to sensitive personal information, such as precise geolocation and biometric data.
Following California, other U.S. sate consumer privacy laws have been passed:
• Virginia Consumer Data Protection Act (“VCDPA”) (effective January 1, 2023);
• Colorado Privacy Act (“CPA”) (effective July 1, 2023);
• Connecticut Data Privacy Act (effective July 1, 2023); and
• Utah Consumer Privacy Act (effective January 1, 2024).
Unlike the CCPA, these other state privacy laws do not apply to employee or commercial data. However, failure to comply with any state privacy laws, could result in penalties, fines, and/or regulatory enforcement actions.
Companies must have reasonable policies, procedures and safeguards in place to protect personal information. The FTC, which is the primary enforcement authority against “unfair” or “deceptive” practices in the U.S., has found it to be an unfair business practice when a company does not provide adequate safeguards to protect consumers’ personal information, because the lack of safeguards harms consumers and consumers cannot avoid the harm.
In addition, several U.S. state laws require data owners to implement reasonable security measures to protect the personal information collected from residents. These laws generally require a data owner to implement reasonable security procedures and practices appropriate to the nature of the information, and to protect the personal information from unauthorized access, destruction, use, modification, or disclosure. Although most of these state laws generally require an entity to maintain appropriate security, at least one state (Massachusetts) has adopted comprehensive data privacy requirements to protect personal information. However, these regulations only apply to more sensitive data, such as driver’s license number, Social Security number, and other government identifiers, as well as financial account and credit card number. California was the first state to enact an Internet of Things (IoT) cybersecurity law, which took effect on January 1, 2020. If applicable, the IoT law requires manufacturers of any internet-connected devices to equip devices with reasonable security features that are: appropriate for the nature and function of the device; appropriate for the information it may collect, contain, or transmit; and designed to protect the device and any information contained within the device from unauthorized access, destruction, use, modification or disclosure.
Some U.S. state privacy laws have also adopted data minimization principles. For instance, under the CCPA, collection, use, retention, and sharing of a consumer’s personal information must be “reasonably necessary and proportionate to achieve the purposes for which the personal information was collected or processed.” Further, personal data and sensitive personal data may not be retained “for longer than is reasonably necessary”.
In the European Union, the EU GDPR governs data collection, use, storage and disclosure of personal data in the European Union. The EU GDPR requires companies to maintain a robust, documentation heavy, data privacy compliance framework. At the same time, electronic privacy law in the EU (which is due to be updated by the upcoming e-Privacy Regulation), requires a high standard of informed consent for the use of cookies and direct electronic marketing. Failure to comply with the EU GDPR can result in penalties and fines for noncompliance, and such fines are now routinely imposed by data protection authorities. When the e-Privacy Regulation is introduced, the same high level of fines will apply in that domain. Further, since the Schrems II decision of the Court of Justice of the European Union in July 2020, there have been material restrictions on the transfer of personal data outside of the European Union, including to ‘third countries’ such as the United States and South Africa. Finally, the EU is in the process of adopting a range of other new laws governing data, digital products (including AI) and cybersecurity. We will need to monitor the applicability of these laws carefully and may need to make further investments to comply.
The United Kingdom has the UK GDPR (adopted when the UK left the EU), which for the time being imposes near-identical requirements on companies. As such, the UK benefits from an adequacy decision which allows personal data to flow freely between the UK and the EU. In March 2023, the UK published a bill to reform some aspects of UK data protection law. Whilst these reforms are relatively modest, it remains to be seen whether they will have any impact on the UK’s adequacy decision when that is reviewed in 2026. The aforementioned Schrems II decision is also applicable in the UK, meaning that there are also restrictive rules relating to the export of personal data outside of the UK. Whilst the UK is not currently contemplating the same range of new data, digital and cyber security laws as the EU, some developments in this space are planned, and these we will need to review these alongside the EU proposals.
The Australian Privacy Principles contained in the Privacy Act of 1988 (the “Privacy Act”) regulate the collection, use, retention, disclosure and security of personal information. Personal information is defined as “information or an opinion about an identified individual, or an individual who is reasonably identifiable, whether the information or opinion is true or not or is recorded in a material form or not”. Personal information includes location-based information where the information enables the location of an individual to be ascertained. Under the Privacy Act, before disclosing personal information outside of Australia, the transferor must take such steps as are reasonable in the circumstances to ensure that the overseas recipient does not breach the Australian Privacy Principles in relation to the information. What constitutes reasonable steps will depend on the circumstances of the transfer, but would generally include entering into a transfer agreement between the transferor and the transferee under which the transferee agrees to handle the information in accordance with the Australian Privacy Principles. The transferor may be held responsible for any breaches of the Australian Privacy Principles when personal information is transferred outside Australia, regardless of whether there is a data transfer agreement in place. There are exceptions to the requirement to take reasonable steps, such as where the individual to whom the information relates provides fully informed consent.The NDB scheme which was included in the Privacy Act in February 2018, requires companies to notify individuals whose personal information is involved in a data breach that is likely to result in serious harm and includes recommendations about steps individuals should take in response to the breach.
The POPI Act was promulgated into law in South Africa in November 2013 and came into full effect on July 1, 2021. Any failure to comply with the POPI Act may result in a fine not exceeding R10 million and/or imprisonment of up to 10 years, depending on the severity of such failure.
We continuously update and will continue to evaluate our group data protection and security policies, charters, and procedures to assist in maintaining data privacy and data security in line with international privacy practices.
Embracing digital transformation is a way to increase MiX’s value to customers globally. Organizations not embracing and capitalizing on new technologies are at risk of being behind the curve in terms of new technology. Adopting new technologies such as AI technologies create new opportunities, however, increases the risk regarding compliance to privacy obligations. For example, our MiX AI Vision solution is based in hardware from a Chinese manufacturer who also owns the IP. While the solution and video footage are hosted on our servers and not in China, customers might have concerns that their footage could potentially be accessed by the supplier if the Chinese Government forces them to do so.
We may also be subject to costly notification and remediation requirements if we, or a third party, determine that we have been the subject of a data breach involving personal data of individuals. Data breach notification regulations vary among the countries where we conduct business, and also vary among the states of the United States, and any such breach involving personal data could be subject to any number of these requirements.
As noted above, we have sought to implement internationally recognized practices regarding data privacy and data security. If our privacy or data security measures fail to comply, or are perceived to fail to comply, with current or future laws and regulations, we may be subject to litigation, regulatory investigations, fines or other liabilities. Moreover, if future laws and regulations limit our customers’ ability to use and share this data or our ability to store, process and share data with our customers over the Internet, demand for our solutions could decrease and our costs could increase. We might also have to limit the manner in which we collect data, the types of personal data that we collect, or the solutions we offer. Any of these risks would materially and adversely affect our business, results of operations and financial condition.
Our ability to repatriate cash from certain regions may be restricted due to foreign exchange controls and could have an adverse effect on our results of operations.
Governments in Africa frequently intervene in economies and make changes to policies and regulations. Regulations might include price controls, mandatory wage increases, changes to employee benefits, capital and exchange controls and limitations on imports.
For example, MiX Telematics and its’ customers in Nigeria are having difficulty in sourcing foreign exchange through the Central Bank of Nigeria, which established exchange controls that limit our ability to convert Nigerian Naira into U.S. Dollar. Such limitations could adversely affect our ability to access cash and could negatively impact our results of operations in the region.
A governmental challenge to our transfer pricing policies or practices could impose significant costs on us.
The group has intercompany transactions and consequently closely monitors the appropriateness of its transfer pricing policies and compliance therewith. The global transfer pricing environment, including with respect to operational and reporting requirements, is continuously evolving and subject to input from multiple sources and jurisdictions. These complexities require management to closely monitor new developments, which it does.
Many countries routinely examine transfer pricing policies of taxpayers subject to their jurisdiction, and authorities challenge transfer pricing policies aggressively where there is potential non-compliance and impose interest and penalties where non-compliance is determined. Although the documentation of and support for our transfer pricing policies has not been the subject of a governmental proceeding beyond examination to date, there can be no assurance that a governmental authority will not challenge these policies more aggressively in the future or, if challenged, that we will prevail. We could suffer costs related to one or more challenges to our transfer pricing.
Although South Africa signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country (“CbC”) Reports on January 27, 2016, and published its CbC Reporting Regulations on December 23, 2016 (“CbC Regulations”), the Company is not under any obligation to file a CbC Report as its turnover is below the required threshold. In terms of the CbC Regulations, the ultimate parent entity of Multinational Enterprise Groups (“MNE Group”) with total consolidated group revenue of at least R10 billion (or €750 million should the MNE Group be headquartered outside of South Africa), must submit a CbC Report to the South African Revenue Service (“SARS”).
In addition to the CbC Regulations, any entity which has entered into cross-border related party transactions, which exceed or are reasonably expected to exceed R100 million per year in the aggregate, must submit a “Master File” and “Local File” to SARS.
MiX Telematics International meets this threshold and therefore is required to submit Master File and Local File returns.
Reduction in regulation in certain markets may adversely impact demand for certain of our solutions by reducing the necessity for, or desirability of, our solutions.
Regulatory compliance and reporting is driven by legislation and requirements, which are often subject to change, from regulatory authorities in nearly every jurisdiction globally. For example, in the United States, fleet operators can face numerous complex regulatory requirements, including mandatory Compliance, Safety and Accountability driver safety scoring, hours of service, compliance and fuel tax reporting. The reduction in regulation in certain markets may adversely impact demand for certain of our solutions, which could materially and adversely affect our business, financial condition and results of operations.
Failure to correctly and efficiently implement a new Enterprise Resource Planning (“ERP”), Customer Relationship Management System (“CRM”) and billing system could have a material and adverse effect on our operations.
We have completed the implementation of a new fully integrated ERP, CRM and billing system in the African Fleet Subsidiaries as well as completed the implementation of the ERP system in the Middle East, North America, Europe, Australia and Brazil RSOs. We are still in the process of enhancing the system functionality in Brazil. Planning for the implementation of the ERP system in the Africa Consumer RSO is underway. The overall aim of these new systems is to enable management to achieve enhanced quality, reliability and timeliness of information; improve integration and visibility of information stemming from different management functions and countries; and optimize global management of corporate processes.
The adoption of a new ERP, CRM and billing system, which will replace the various accounting systems within our individual operations, poses several challenges relating to, among other things, project governance, migration of data, potential instability of the new system, communication of new rules and procedures, training of personnel and maintaining effective internal controls. We are aware of the potential risks associated with a global system implementation and intend to adopt mitigation plans and contingency plans, in order to ensure business continuity, this includes mitigating issues noted during the pilot implementation before embarking on the full roll-out. However, there can be no assurance that a new ERP, CRM and billing system will be successfully implemented and failure to do so could have a material adverse effect on our operations and ability to execute on our growth strategy.
If the accounting estimates we make, and the assumptions on which we rely, in preparing our consolidated financial statements prove inaccurate, our actual results may be adversely affected.
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions about, among other things, the assessment of expected cash flows used in evaluating goodwill and long-lived assets for impairment, the amortization period for deferred commissions, the determination of useful lives of the Company’s customer relationships, maintenance and warranty accruals, contingencies, expected credit losses, the classification of devices and other hardware as in-vehicle devices (equipment) versus inventory based on the future expectation of the different types of customer contracts, income and deferred taxes, unrecognized tax benefits, valuation allowances on deferred tax assets, stock-based compensation, fair values of assets acquired and liabilities assumed from the business acquired and fair value measurement of the contingent consideration. These estimates and assumptions affect the reported amounts of our assets, liabilities, revenue and expenses, the amounts of charges accrued by us, and related disclosure of contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances and at the time they are made. If our estimates or the assumptions underlying them are not correct, actual results may differ materially from our estimates and we may need to, among other things, accrue additional charges that could adversely affect our results of operations, which in turn could adversely affect our stock price. In addition, new accounting standards, amendments and interpretations of accounting standards have occurred and may occur in the future that could adversely affect our reported financial results.
We may be exposed to risks related to litigation and administrative proceedings that could materially and adversely affect our business, results of operations and financial condition.
Our business may expose us to litigation and administrative proceedings relating to labor, regulatory, tax proceedings, governmental investigations, tort claims, contractual disputes and criminal prosecution, among other matters, that could materially and adversely affect our business, results of operations, and financial condition. In the context of these proceedings, we may not only be required to pay fines or monetary damages but also be subject to sanctions or injunctions affecting our ability to continue our operations. While we may contest these matters vigorously and make insurance claims when appropriate, litigation and other proceedings are inherently costly and unpredictable, making it difficult to accurately estimate the outcome of actual or potential litigation or proceedings. Although we will establish provisions in accordance with the requirements of GAAP, the amounts that we reserve could vary significantly from any amounts we actually pay due to the inherent uncertainties in the estimation process. In addition, litigation and administrative proceedings can involve significant management time and attention and be expensive, regardless of outcome. During the course of any litigation and administrative proceedings, there may be announcements of the results of hearings and motions and other interim developments. If securities analysts or investors regard these announcements as negative, the trading price of our ordinary shares and ADSs may decline. For more information, see “Item 3. Legal Proceedings.”
Risks Related to Intellectual Property
We have not traditionally relied on patents to protect our intellectual property, and we rely on trade secrecy laws, confidentiality agreements, confidentiality procedures and contractual restrictions to establish and protect our intellectual property rights, which provide only limited protection and may subject us to litigation.
Our future success and competitive position depend in part on our ability to protect our intellectual property and proprietary technologies. We rely primarily on trade secrecy laws, confidentiality agreements, confidentiality procedures and contractual restrictions to establish and protect our intellectual property rights, all of which provide only limited protection and may not currently, or in the future, provide us with a competitive advantage. Our confidentiality agreements with our employees, licensees, independent contractors and other advisers may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets or develop similar technologies and processes, and, in either event we would not be able to assert trade secret rights.
We also rely, to a limited extent, on patent, trademark and copyright law. A patent covering certain aspects of our Beam-e product was issued in South Africa during fiscal year 2014 and a patent covering a method for driver verification was issued during fiscal year 2015. A further patent for an asset tracking system and method was issued in Brazil on May 4, 2021. We have traditionally not sought patent protection over our intellectual property. As a result, we may not be able to successfully defend our intellectual property from third-party infringement.
We cannot assure you that any future trademark registrations will be issued for pending or future applications, or that any registered trademarks will be enforceable, or provide adequate protection of our proprietary rights, or that any such trademarks will not be challenged, invalidated, or circumvented.
Effective patent, trademark, copyright, and trade secret protection may not be available in every country in which our solutions are available, or where we have employees or independent contractors. In addition, the legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in Internet-related industries are uncertain and continue to evolve. The steps we have taken, and will take, may not prevent unauthorized use, reverse engineering, or misappropriation of our technologies and we may not be able to detect any of the foregoing. Any of the foregoing events could materially and adversely affect our business, results of operations and financial condition.
An assertion by a third party that we are infringing on its intellectual property rights could subject us to costly and time-consuming litigation or expensive licenses.
The fleet management, mobile asset management and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Much of this litigation involves patent-holding companies or other adverse patent owners who have no relevant product revenue of their own, and against whom our own limited patent portfolio may provide little or no deterrence. We have been subject to such claims in the past and may face additional claims in the future.
We have not historically conducted comprehensive art searches to determine whether our solutions infringe the patent rights of third parties in our current markets, or those markets we may enter in the future. Third parties may assert that we are infringing on patents, of which we are currently unaware and that would have been disclosed by prior art searches if they had been conducted. Our status as a public company in the United States has raised our visibility and may invite holders of patents who have not previously sought to enforce them against us, to bring or threaten claims for infringement or seek to negotiate royalty or other payments from us. The fact that we have relatively few patents associated with our intellectual property means that we may not be able to successfully defend our intellectual property from third-party infringement. Any of the foregoing could materially and adversely affect our business, results of operations and financial condition.
We cannot assure you that we will prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in such litigation. Defending such claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause development delays, or require us to enter into royalty or licensing agreements. In addition, we are obligated to indemnify some of our customers and other contract counterparties against third parties’ claims of intellectual property infringement based on our solutions. If our solutions violate any third-party intellectual property rights, we could be required to withdraw those solutions from the market, re-develop those solutions or seek to obtain licenses from third parties, which might not be available on reasonable terms, or at all. Any efforts to redevelop our solutions, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and operating results. Withdrawal of any of our solutions from the market could harm our business, financial condition and operating results.
Our software may contain undetected defects or software errors, which could result in damage to our reputation or market rejection of our products.
We must update our solutions quickly to keep pace with the rapidly changing market, including the third-party software and devices with which our solutions integrate, and we have a history of frequently introducing new releases. Our solutions and/or updates to our solutions could contain errors or defects, which were not detected during our review processes, especially when first introduced or when new versions are released. Our software may not be free from errors or defects, which could result in damage to our reputation or harm to our operating results.
We warrant that our hardware will be free of defects for various periods of time. The operation of the hardware is controlled by the firmware loaded on the hardware. We generally provide firmware updates to our fleet customers by “over-the-air” wireless communication of the updated firmware directly to our customers’ in-vehicle devices. If the firmware does not function as expected and it prevents the uploading of updated firmware, then the problem cannot be corrected by an over-the-air update and will require direct servicing of the installed on-board computer by trained personnel, which imposes a very significant cost on us. Variations among communications protocols in the markets in which we operate increase the risk of error in the remote installation of firmware. Although we attempt to manage this risk
by introducing firmware updates in stages, so that the success of deployment can be assessed on a small number of in-vehicle devices before the deployment risk is expanded to a larger customer base, there can be no assurance that we will be successful in detecting firmware operation and integration problems or otherwise in managing our exposure to remediation expense related to the deployment of firmware updates.
Our “over-the-air” transmission of firmware updates could permit a third party to disable our customers’ in-vehicle devices or introduce malware into our customers’ in-vehicle devices, which could expose us to widespread loss of service and customer claims.
“Over-the-air” transmission of our firmware updates may provide the opportunity for a third party, who has deep inside knowledge of our systems, to modify or disable our customers’ in-vehicle systems or introduce malware into our customers’ in-vehicle systems. No such incidents have occurred to date, but there can be no assurance that they will not occur in the future. Damage to our customers’ in-vehicle devices as a result of such incidents could only be remedied through direct servicing of their installed in-vehicle devices by trained personnel, which would impose a very significant cost on us, particularly if the incidents are widespread. Moreover, such incidents could expose us to widespread loss of service and claims by our customers under various theories of liability, the outcome of which would be uncertain. Third-party interference with our over-the-air transmission of firmware, or with our customers’ in-vehicle devices during such process, could materially and adversely affect our business, financial condition and results of operations.
Any significant disruption in service on, or security breaches of, our SaaS platform or computer systems, could compromise our information, damage our reputation and result in a loss of customers.
Our brand, reputation, and ability to attract, retain, and serve our customers depend upon the reliable performance of our service and our customers’ ability to access our solutions at all times. Our customers rely on our solutions to make operating decisions related to their fleet, as well as to measure, store and analyze valuable data regarding their businesses. We collect and store sensitive data, including data transmitted from our customers’ in-vehicle devices concerning the location of their mobile assets, as well as personally identifiable information concerning our customers and employees. Our solutions are vulnerable to interruption and our data centers are vulnerable to damage or interruption from human error, intentional malicious acts, computer viruses or hackers, pandemics, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events, any of which could limit our customers’ ability to access our solutions. Prolonged delays or unforeseen difficulties in connection with adding capacity or upgrading our network architecture may cause our service quality to suffer. Any event that significantly disrupts our service or exposes our data to misuse could damage our reputation and harm our business and operating results, including causing us to issue credits to customers, subjecting us to potential liability, reducing our customer retention rates, or increasing our cost of acquiring new customers, any of which would have the effect of reducing our revenue and could materially and adversely affect our business, results of operations and financial condition.
Any breach of our data or system security could result in our customer data being accessed, publicly disclosed, lost or stolen, our business and operations being interrupted, a loss of confidence in our products and services and other negative consequences such as civil liability, including under laws that protect the privacy of personal information, and regulatory penalties, any or all of which could materially and adversely affect our business, financial condition and results of operations.
In addition, we store data, host our solutions and serve all of our customers from our servers, which are located at third-party data center facilities in Algiers in Algeria, Sydney in Australia, Muscat in Oman, Dublin in Ireland, Dubai in the United Arab Emirates (“UAE”) and Virginia in the United States. While we control and have access to the servers and some of the physical components that are located in these external data centers, we do not control the operation of these facilities or certain equipment. Problems faced by our third-party data center locations, with the telecommunications network providers with whom they or we contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Third-party operators of our data centers could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our secure third-party data center operators or any of the service providers with whom they or we contract may have negative effects on our business, the nature and extent of which are difficult to predict.
In addition to data hosted at third-party data centers, we have transitioned the vast majority of our data to cloud-based service platforms such as Amazon Web Services (“AWS”). The use of such service presents similar risks to the use of a conventional third-party hosted environment, although at a level that is viewed internally as considerably lower. The
use of cloud-based servicing may however present additional complexity which may be more easily managed using physical data centers, for example the jurisdiction of data and applicability of various laws and regulations denoting the transfer of data between jurisdictions is more complex in a cloud-based environment.
Certain of our customer agreements currently, and may in the future, provide minimum service level commitments regarding items such as uptime, functionality or performance. If we are unable to meet the stated service level commitments for these customers, or suffer extended periods of service unavailability, we are or may be contractually obligated to provide these customers with credits for future subscriptions, provide services at no cost or pay other penalties, which could adversely impact our profitability. Additionally, if our contracted or physical capacity is unable to keep up with our growing needs, this could have an adverse effect on our business. Our disaster recovery systems are located at our third-party hosting facilities. We use a redundant architecture and regularly review and increase capacity. However, our systems have not been tested under all disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage. In the event of a disaster in which our disaster recovery systems are irreparably damaged or destroyed, we would experience interruptions in access to our services. Any changes in third-party service levels at our data centers or any errors, defects, disruptions, or other performance problems with our solutions could harm our reputation and may damage our data. Interruptions in our services could materially and adversely affect our business, results of operations and financial condition, cause us to issue refunds to customers, subject us to potential liability, or adversely affect our subscriber retention rates.
In South Africa we are reliant on Eskom (the South African Power Utility), which has had challenges in meeting the country’s power demand, resulting in load shedding, load reduction and intermittent power outages. Although it has not resulted in our business operations being impacted directly, not having power at some of our contracted Cellular Network Service Provider signal towers may impact our ability to locate and track vehicles in that area.
Our solutions rely on third-party software and any inability to license such software from third parties could render our solutions ineffectual.
We rely on software and other intellectual property licensed from third parties, including mapping software and data from Google and Here, to develop and provide solutions to our customers. In addition, we may need to obtain future licenses from third parties to use software or other intellectual property associated with our solutions. We cannot assure you that these licenses will be available to us on acceptable terms, without significant price increases or at all. Any loss of the right or inability to obtain the right to use any such software or other intellectual property required for the development and maintenance of our solutions could result in interruptions in the provision of our solutions until equivalent technology is either developed by us, or, if available from others, is identified, obtained, and integrated, which could harm our business.
In addition, we incorporate some open-source software into our platform. The terms of many open-source licenses to which we are subject have not been interpreted by U.S. courts or courts of other jurisdictions, and there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that event, we could be required to seek licenses from third parties in order to continue offering our solutions, to re-develop our solutions, to discontinue sales of our solutions, or to release our proprietary software source code under the terms of an open-source license, any of which could adversely affect our business.
We depend on third-party technology, including cellular and GPS networks, and any disruption, failure or increase in costs could impede the functionality of our solutions.
Two critical links in our current solutions are between in-vehicle devices and GPS satellites, and between in-vehicle devices and cellular networks, which allow us to obtain location data and transmit it to our system. Increases in the fees charged by cellular carriers for data transmission or changes in the cellular networks, such as a cellular carrier discontinuing support of the network currently used by our in-vehicle devices, requiring retrofitting of our in-vehicle devices, could increase our costs and impact our profitability. We have initiated activities to migrate new installations to the next generation of cellular network compatibility, in order to maximize expected useful life of our in-vehicle devices. However, cellular carriers could in the future discontinue support for our currently utilized cellular technologies. Also, while we have included the ability to store GPS data in our in-vehicle devices in case of temporary cellular network connectivity failure, widespread disruptions or extended failures of the cellular networks would adversely affect our solutions’ functionality and utility and harm our financial results.
GPS is a satellite-based navigation and positioning system consisting of a network of orbiting satellites. These satellites and their ground support systems are complex electronic systems, subject to electronic and mechanical failures and possible sabotage and it is not certain that the U.S. government will remain committed to the operation and
maintenance of GPS satellites in the future. In addition, technologies that rely on GPS depend on the use of radio frequency bands and any modification of the permitted uses of these bands may adversely affect the functionality of GPS and, in turn, our solutions. The satellites and their ground control and monitoring stations are maintained and operated by the U.S. Department of Defense, which does not currently charge users for access to the satellite signals and does not impose on the ability to access location data. We cannot assure you that it will not do so in the future. Any disruption, failure, increase in costs or regulatory hurdles could impede the functionality and/or cost of our solutions, which could adversely affect our business. The communication systems that we use to host and transmit data may be subject to security incidents, which may also subject the Company to regulatory enforcement and client pressures.
Our solutions integrate with third-party technologies and if our solutions become incompatible with these technologies, our solutions would lose functionality and our customer acquisition and retention could be adversely affected.
Our solutions integrate with third-party software and devices to allow our solutions to perform key functions. We cannot guarantee that this ease of integration will continue or that we will be able to integrate with other products at all or without additional cost. Additionally, previously unidentified errors, viruses or bugs may also be present in third-party software that our customers use in conjunction with our solutions. Changes to third-party software that our customers use in conjunction with our solutions could also render our solutions ineffective. Customers may conclude that our software is the cause of these errors, bugs or viruses and terminate their subscriptions. The inability to easily integrate with, or the presence of any defects in, any third-party software could result in increased costs, or in delays in software releases or updates to our products until such issues have been resolved, which could damage our reputation and materially and adversely affect our business, results of operations and financial condition.
Risks Related to South Africa
Fluctuations in the value of the South African Rand have had, and will continue to have, a significant impact on our reported revenue and results of operations, which may make it difficult to evaluate our business performance between reporting periods and may also adversely affect the price of our ADSs.
The majority of our subscription agreements and operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the South African Rand. Currency fluctuations, particularly those in respect of the South African Rand, may positively or negatively impact our reported income and expenses due to the effects of translating the functional currency of our foreign subsidiaries into our reporting currency of U.S. Dollars.
The majority of our revenue are derived from currencies other than the U.S. Dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. Dollar, will negatively impact our revenue and income as reported in U.S. Dollars. The depreciation of the South African Rand may also negatively impact the prices at which our ADR’s trade.
Due to the significant fluctuation in the value of the South African Rand and its impact on our results, you may find it difficult to compare our results of operations between financial reporting periods. This difficulty may have a negative impact on the price of our ADSs and/or increase their volatility. During fiscal year 2023, the South African Rand devalued by 14.3% against the U.S. Dollar (South African Rand/U.S. Dollar exchange rate averaged R16.99 and fluctuated between a high of R18.72 and a low of R14.44). This compared to an average exchange rate of R14.86 during fiscal year 2022 (which fluctuated between a high of R16.30 and a low of R13.43). The South African Rand exchange rate is affected by various international and South African political factors, global commodity prices, inflation rates, interest rates and slow economic growth. The economy is also negatively impacted by South Africa’s continuing energy shortage.
As stated above we operate internationally and are exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the South African Rand, the Euro, the Australian Dollar, Brazilian Real and the British Pound. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flows. Fluctuation in currency exchange rates impacts our operating results. We have implemented a foreign currency hedging policy to reduce our net exposure, on certain recognized assets and liabilities, to fluctuations in foreign currencies. Our policy is primarily based on economic hedging principles of managing certain of our on-balance-sheet risk, as opposed to using derivative financial instruments. We do not attempt to hedge currency translation risk. Our future attempts to hedge against foreign currency risk could be unsuccessful and expose us to losses.
If we do not achieve applicable black economic empowerment objectives in our South African businesses, we risk not being able to renew certain of our existing contracts which service South African government and quasi-governmental customers, as well as not being awarded future corporate and governmental contracts, each of which would result in the loss of revenue.
The South African government established a legislative framework for the promotion of B-BBEE. Achievement of B-BBEE objectives is measured by a scorecard which establishes a weighting for the various components of B-BBEE which relates to:
• Ownership - measuring the share of Black ownership and corresponding rights in the business, including voting rights among others.
• Management Control - reflecting the percentage of Black people in managerial positions ranging from junior management upwards.
• Skills Development - measuring the amount of money that was spent on the training and development of Black people including amongst others short courses, bursaries and learnerships.
• Enterprise and Supplier Development (including Preferential Procurement) - with enterprise development measuring contributions to, and the development of small Black-owned businesses with the objective of enabling them to supply goods and services to the company in the future; with supplier development measuring contributions to, and the development of Black-owned suppliers to help grow their businesses; and with preferential procurement measuring the extent to which goods and services are procured from suppliers that are empowered and have a good B-BBEE rating; and
• Socio-Economic Development - assessing the initiatives that the company supports often to the benefit of groups of individuals and communities with the objective of promoting income-generating activities and sustainable access to the economy for these beneficiaries.
The B-BBEE Codes have a continuous review process and updates. Various amendments and clarifications with more onerous compliance requirements have been made over the years.
It is important for us to make a meaningful contribution to the country, and we view the applicable B-BBEE objectives as an opportunity for us to ensure a brighter future for all, moreover in the context of the National Development Plan 2030. In addition, B-BBEE objectives are pursued, by and large, by requiring parties who contract with corporate, governmental and State-Owned Enterprises in South Africa to achieve B-BBEE compliance through satisfaction of the applicable scorecard. Parties improve their B-BBEE contributor level when contracting with businesses that have earned good B-BBEE contributor levels in relation to their scorecards.
MiX Telematics Enterprise SA Proprietary Limited engages with government and state-owned enterprises in tendering for business and is therefore required to maintain at least a certain B-BBEE contributor level to continue to provide the service. Currently some material end-customers requires MiX Telematics Enterprise SA Proprietary Limited to maintain at least a B-BBEE contributor between level 1 and 2 as measured under the new B-BBEE Codes. The value of these contracts represented 3.3% of our total revenue for fiscal year 2023. MiX Telematics Enterprise SA Proprietary Limited has attained the agreed compliance targets in fiscal year 2023.
The Employment Equity Act promotes equality in the workplace, and ensures that employees are treated fairly and have equal opportunities within the workplace. In April 2023, the Amendment Bill was assented. The main objectives of the Amendment Bill are to enable the Employment and Labour Minister to impose sector-specific EE targets and compliance criteria to issue EE Compliance Certificates in terms of Section 53 of the Employment Equity Act. This has bestowed the government with the right to set specific equity targets by sector and region. Companies that are wanting to do business with the government will be required to submit a certificate from the Department confirming that they are in compliance with the Employment Equity Act and its objectives. This means that MiX Telematics will not set its own EE targets but targets will be imposed.
Failing to achieve applicable B-BBEE and EE objectives could jeopardize our ability to maintain existing business or to secure future business from corporate, governmental or state-owned enterprises that could materially and adversely affect our business, financial condition and results of operations.
We face the risk of disruption from labor disputes and changes to South African labor laws, which could result in significant additional operating costs or alter our relationship with our employees.
Our operations may be materially affected by changes to labor laws. South African laws relating to labor that regulate work time, provide for mandatory compensation in the event of termination of employment for operational reasons, and impose monetary penalties for non-compliance with administrative and reporting requirements in respect of affirmative action policies, could result in significant costs. In addition, future changes to South African legislation and regulations relating to labor may increase our costs or alter our relationship with our employees. The resulting disruptions could materially and adversely affect our business, results of operations and financial condition.
Socio-economic inequality in South Africa or regionally may subject us to political and economic risks which may affect the ownership or operation of our business.
We are incorporated and own significant operations in South Africa. As a result, we are subject to political and economic risks relating to South Africa. South Africa was transformed from a racially based government into a democracy in 1994, with successful rounds of democratic elections held under a modern constitution during 1994, 1999, 2004, 2009, 2014 and most recently, in May 2019. The next national elections are scheduled to be held in 2024. We fully support government policies aimed at redressing the disadvantages suffered by the majority of citizens under the previous non-democratic dispensation and recognize that in order to implement these policies, our operations and profits may be impacted. However, South Africa faces many challenges in overcoming substantial racial differences in levels of economic and social development among its people. While South Africa features highly developed and sophisticated business sectors and financial and legal infrastructure at the core of its economy, large parts of the country’s black population, particularly in rural areas, do not have access to adequate education, health care, housing and other services, including water and electricity. In addition, South Africa also has a higher level of unemployment than the United States.
The ruling party which has controlled the South African government since democracy has committed itself to creating a stable, democratic, free market economy, which it has achieved to a great extent. It remains difficult however, to predict the future political, social and economic direction of South Africa or the manner in which any future government will attempt to address the country’s inequalities. It is also difficult to predict the impact that addressing these inequalities will have on our business. Furthermore, there has been regional, political and economic instability in countries neighboring South Africa, which could materially and adversely affect our business, results of operations and financial condition.
Although political conditions in South Africa are generally stable, changes may occur in the composition of its ruling party or in its political, fiscal and legal systems which might affect the ownership or operation of our business, which may, in turn, materially and adversely affect our business, financial condition and results of operations. These risks may include changes in legislation, arbitrary interference with private ownership of contract rights, and changes to exchange controls, taxation and other laws or policies affecting foreign trade or investment and could materially and adversely affect our business, financial condition and results of operations. Any changes in investment ratings, regulations and policies or a shift in political attitudes both within and towards South Africa are beyond our control and could materially and adversely affect our business, financial condition and results of operations.
A lack of growth, high inflation or increased interest rates in the South African economy could reduce our anticipated revenue and increase our operating costs.
The South African Reserve Bank (“SARB”) estimated and expects gross domestic product (“GDP”) to grow by 0.2% in 2023. The same report indicated that GDP is expected to grow by 1% in 2024 and 1.1% in 2025. The International Monetary Fund, in April 2023, projected that the South African economy is expected to grow by 0.1% in 2023.
Current economic projections remain uncertain as a result of no material easing of difficult global economic conditions. This can be attributed to Russia’s ongoing war in the Ukraine and the impact of that on European markets, financial conditions in the US, weak economic growth in developing countries, a surge in global inflation mainly as a result of global supply chain constraints, global politics, sanctions and impact thereof on global trade. Furthermore, the South African economy is also impacted by the high unemployment rate. In the first quarter of 2023, the official unemployment rate was 32.9%, with unemployment as per the expanded definition reported as 42.4%.
The South African economy has in the past and may in the future continue to be characterized by rates of inflation and interest rates that are substantially higher than those prevailing in the United States and other developed
economies. The SARB set the inflation target range as between 3% and 6%. SARB reported inflation in April 2023 remained elevated at 7.1% and is forecast to average 6.0% this year.
Economic conditions in South Africa may be further impacted by the South African credit ratings from the three major credit rating agencies. All three major rating agencies kept the South African credit ratings on Non-Investment Grade Speculative, however all three rating agencies have changed the outlook from negative to stable.
• Standard & Poor’s maintained South Africa’s long term foreign-currency credit rating to BB-, three notches below investment grade, kept the country’s local currency debt rating at BB, and maintained the outlook as positive on March 8, 2023;
• Fitch affirmed the rating on sub-investment grade BB- and maintained the outlook as stable on November 25, 2022; and
• Moody’s maintained its sub-investment grade Ba2 rating, with the outlook as stable. This was last updated on April 1, 2022.
Consequently, economic conditions in South Africa could impact our anticipated revenue growth, increase our South African-based costs, decrease our operating margins and adversely affect our ability to obtain cost-effective debt financing in South Africa.
Our business operations may be disrupted as a result of erratic and intermittent electricity supply in South Africa, which could adversely affect our business, results of operations and financial condition.
All businesses in South Africa are reliant on electricity generated and supplied by Eskom (the South African Power Utility). For an extended period, Eskom has been unable to generate and supply electricity to meet the demand of the South African economy and has resulted in erratic and intermittent electricity supply.
Eskom has implemented several short- and long-term mitigation plans to reduce and manage the demand and alleviate the pressure on the electricity grid. Despite their efforts and initiatives, supply continues to be intermittent and unpredictable.
As part of our operation mitigation plans, we have installed and upgraded back diesel generators to operate our control rooms, call centers and core business activities and are exploring further alternative power generation. We do regular maintenance and upgrades on these generators. We are managing and supporting diesel fuel replacement and battery backup through a third party specialist vendor.
Our business may be adversely affected, including our financial position, cash flows and future growth if Eskom is unable to increase their electricity generating capacity through commissioning new electricity-generating power stations.
Our financial flexibility could be constrained by South African currency restrictions, which, in turn, could hinder our normal corporate functioning.
South African companies are subject to exchange control limitations, which could hinder our normal corporate functioning, particularly given our significant expansion outside of South Africa in recent years. Exchange controls have been relaxed in recent years and may continue to be relaxed. However, South African companies remain subject to certain restrictions on their ability to raise and deploy capital outside of the Southern African Common Monetary Area, which includes South Africa, Namibia, Lesotho and Swaziland. These restrictions have affected the manner in which we have financed our acquisitions outside South Africa. These restrictions or any adverse changes to these restrictions could materially and adversely affect our business, results of operations and financial condition.
Risks Related to an Investment in our Ordinary Shares and ADSs
Sales of our ordinary shares may adversely affect the prices of our ordinary shares and ADSs.
Sales of substantial amounts of our ordinary shares in the public market, including sales by our officers, directors and principal shareholders, or the perception that such sales may occur, could adversely affect the prevailing market price of our ordinary shares or our ADSs as well as our ability to raise capital through an offering of our securities. In the future, we may also sponsor the sale of shares currently held by some of our shareholders, or issue new shares. We can make no prediction as to the timing of any such sales or the effect, if any, that future sales of our ordinary shares, or the availability of our ordinary shares for future sale, will have on the market price of our ordinary shares or ADSs prevailing from time to time.
The price of our ordinary shares or ADSs may be volatile and fluctuate significantly, which could result in substantial losses for investors.
Market prices for our securities may be volatile in response to various factors, some of which are beyond our control. Such volatility could negatively impact the perceived value and market prices of our ordinary shares or ADSs. In addition to the risks described in this ‘Risk Factors’ section of the annual report, some of the factors that may cause these market prices to fluctuate include:
• actual or anticipated fluctuations in our financial results or the financial results of our competitors;
• loss of existing customers or inability to attract new customers;
• actual or anticipated changes in our growth rate;
• our announcement of results for a financial reporting period that are lower than expected, whether caused by our results of operations or by currency fluctuations;
• changes in estimates of our financial results or recommendations by securities analysts;
• failure of any of our solutions to achieve or maintain market acceptance;
• changes in market valuations of similar companies;
• changes in our capital structure, including issuances or repurchases of securities or the incurrence of debt;
• announcements by us or our competitors of significant products, technologies, services, contracts, acquisitions, or strategic alliances;
• success of competitive products or services;
• regulatory developments in South Africa, the United States or other countries;
• actual or threatened litigation involving us or our industry;
• additions or departures of key personnel;
• breaches of security;
• general perception of the future of the fleet and mobile asset management market or our solutions;
• sales of ADSs or ordinary shares by our shareholders;
• ADS price and volume fluctuations attributable to inconsistent trading volume levels of our ADSs; and
• changes in general economic, industry, and market conditions.
We issue quarterly press releases and other disclosure of our financial results. Our quarterly operating results will fluctuate in the future as a result of a variety of factors, including, but not limited to, impact of adverse global economic conditions on our business and the businesses of our customers, our ability to accurately forecast revenue and appropriately plan our expenses, long sales cycles for our enterprise fleet management solutions, service outages or security breaches and any related occurrences which could impact our reputation as well as fluctuations in currency exchange rates. If our quarterly operating results or guidance fall below the expectations of research analysts or investors, the price of our ordinary shares and ADSs could decline substantially.
In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may materially harm the market price of our ordinary shares and ADSs. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.
Exchange rate volatility may adversely affect the market price of our ADSs and any dividends payable to ADS holders.
As discussed above and further discussed below, there have been significant fluctuations in the exchange rate between the South African Rand and the U.S. Dollar. Unforeseen events in international markets, fluctuations in interest rates, changes in capital flows, political developments or interest rates may cause further exchange rate instability that could, in turn, depress the value of the South African Rand, thereby decreasing the U.S. Dollar value of our ADSs and any dividends or distributions paid on the ordinary shares underlying the ADSs.
Our shares trade on more than one market and this may result in price variations.
Our ordinary shares have been traded on the JSE since 2007, and our ADSs have been traded on the New York Stock Exchange (the “NYSE”) since August 2013. Trading in our ordinary shares and ADSs on these markets takes place in U.S. Dollars on the NYSE and South African Rand on the JSE, and at different times, resulting from different time zones, trading days and public holidays in the United States and South Africa. The trading prices of our ordinary shares and ADSs on these two markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on the JSE could cause a corresponding decrease in the trading price of our ADSs on the NYSE.
We have reported a material weakness in our internal controls over financial reporting in the prior fiscal period. Although we have remediated the material weakness, we cannot assure you that other material weaknesses in financial reporting controls will not occur. An ineffective control environment might impair our ability to produce accurate and timely financial statements, which could adversely affect our operating results, our ability to operate our business and investors’ and customers’ view of us.
Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a management certification and auditor attestation regarding the effectiveness of our internal control over financial reporting. We are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal control that materially affect, or are reasonably likely to materially affect, internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In 2022, management identified several deficiencies in the design and operating effectiveness of business process level controls in the areas of management review of income tax, consignment stock and capitalization of internally generated software costs at the Company’s Africa segment. These deficiencies, aggregated with other business process level control deficiencies, were assessed and reported as a material weakness. For a discussion of the material weakness and our remediation efforts, see Item 9A, Controls and Procedures, in this Annual report on Form 10-K. The material weakness that was reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, was remediated as of March 31, 2023.
If we fail to maintain an effective internal control environment, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business, and investors’ and customers’ views of us. In addition, if we identify any additional material weaknesses in the future, the disclosure of that fact, even if quickly remediated could reduce the market’s confidence in our financial statements and negatively affect the trading price of our ADSs.
Inherent limitations on the effectiveness of the system of disclosure controls and procedures could result in misstatement due to error or fraud going undetected.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls or the procedures. Accordingly, even disclosure controls and procedures designed and operating effectively, can only provide reasonable assurance of achieving
their control objectives. Because of the inherent limitations in an effective system of internal controls, misstatement due to error or fraud may occur and not be detected.
Certain provisions of South African law may limit or otherwise discourage a takeover or business combination that could otherwise benefit our shareholders.
Various transactions including, without limitation, those which result in a person, or a group of persons acting in concert, holding shares entitled to exercise or cause to be exercised 35% or more of the voting rights at meetings of our shareholders will be subject to the Fundamental Transactions and Takeover Regulations (the “Takeover Regulations”), promulgated in terms of Section 196 of the Companies Act, which are regulated by the Takeover Regulation Panel. The Takeover Regulations impose various obligations in such circumstances including the requirement of an offer to minority shareholders.
A transaction will be subject to the approval of the competition authorities in terms of the Competition Act, No. 89 of 1998, as amended (the “Competition Act”), if it results in the acquisition of “control”, as defined in the Competition Act and otherwise falls within the scope of the Competition Act. The Competition Act prohibits a transaction within its scope from being implemented without the necessary approvals.
To the extent applicable, a transaction may be subject to the JSE Listings Requirements as well as the approval of the Exchange Control Department of the South African Reserve Bank, and other applicable regulatory bodies. In addition, certain fundamental transactions such as mergers, amalgamations, schemes of arrangements and sales of a majority of a company’s assets, require the approval of shareholders exercising 75% of the voting rights at a shareholders meeting, and if 15% or more of a company’s shareholders vote against the transaction, any dissenting shareholder may, within five days, require the company, at its expense, to obtain court approval before implementing the resolution. Even if less than 15% of the shareholders vote against the resolution, any dissenting shareholder may apply to court for a review of the transaction. Such regulations, including the Takeover Regulations and the Competition Act, may have the effect of delaying, deferring or preventing a change in control of us including an extraordinary transaction (such as a merger, tender offer, scheme of arrangement or sale of all or substantially all of our assets) that might provide a premium price for our shareholders.
We are a “smaller reporting company”, and the reduced disclosure requirements applicable to smaller reporting companies may make our ordinary shares or ADSs less attractive to investors.
We are a “smaller reporting company” as defined in the Exchange Act and have elected to take advantage of certain of the scaled disclosures available to smaller reporting companies, including simplified executive compensation disclosures in our filings. We cannot predict whether investors will find our ordinary shares or ADSs less attractive because of our reliance on any of these exemptions. If some investors find our ordinary shares or ADSs less attractive as a result, there may be a less active trading market for such securities. As a result, investors in our ordinary shares or ADSs may experience a decrease, which could be substantial, in the value of such securities, including decreases unrelated to our operating performance or prospects, or a complete loss of their investment.
The concentration of ownership of our capital stock limits your ability to influence corporate matters.
At May 26, 2023, our executive officers and directors beneficially owned 13.2% of our ordinary shares, and our current 5% or greater shareholders and entities affiliated with them, beneficially owned 40.6% of our ordinary shares (excluding any ordinary shares beneficially owned by an executive officer or director). This significant concentration of share ownership may adversely affect the trading price for our ordinary shares and ADSs because investors often perceive disadvantages in owning stock in companies with concentrated share ownership. In addition, these shareholders, acting together, may be able to control our management and affairs and matters requiring shareholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Shareholders owning greater than 25% of our outstanding ordinary shares will have the ability to block certain corporate actions, including the issuance of additional equity securities for cash. See “Certain provisions of South African law may limit our ability to issue securities and access the capital markets in the future, which could hinder our ability to raise capital in the future.” Consequently, this concentration of ownership may have the effect of exacerbating the delays and limitations on capital market transactions and could materially and adversely affect our business, results of operations and financial condition.
Certain provisions of South African law may limit our ability to issue securities and access the capital markets in the future, which could hinder our ability to raise capital in the future.
The authority of our Board of Directors to issue additional securities is limited by the JSE Listings Requirements and certain provisions of the Companies Act and our Memorandum of Incorporation, and as a result we may be unable to access the capital markets on a timely basis when it is opportune to do so. Under the JSE Listings Requirements, the issuance of equity securities, or securities convertible into equity securities, for cash by our Board of Directors requires shareholder approval, either by means of a specific authority for a specific transaction or by way of a general authority, for a limited time period. If a general authority is not in place, we may experience extended delays and uncertainty in seeking shareholder approval for financing transactions and as a result we may be unable to execute financing transactions with available investors, on advantageous terms or at all. Moreover, while a general authority could allow our Board of Directors to issue for cash additional ordinary shares representing up to 30% of the ordinary shares outstanding at the time of the general authorization, as a practical matter, shareholders in the South African market are often reluctant to grant general authorities up to the 30% threshold. The Company has previously sought a general authority to issue equity securities, or securities convertible into equity securities, for cash, limited to 5% of the ordinary shares outstanding at the time the general authorization is sought. A general authorization would not permit our Board of Directors to issue ordinary shares for cash with a greater than 10% discount to the 30-day volume-weighted average price, as of the issuance date, which, if we were to experience significant financial difficulties in the future, could prevent us from obtaining funds when needed. Shareholders owning greater than 25% of our outstanding ordinary shares have the ability to block an issuance of ordinary shares for cash. The Company has sought a further limited authority approving the placement of the authorized but unissued shares of the Company under the control of directors who may issue such shares in their discretion. This authority, if approved by a majority of shareholders, is only valid until the Company’s next annual general meeting or until renewed; is in line with the Memorandum of Incorporation and provides limited flexibility to execute financing transactions or any approval of a general authorization to our Board of Directors. While we will be able to issue non-convertible debt securities without shareholder approval, we will not be able to grant any voting rights to debt holders, which would be likely to increase the cost of any such debt issuance to the Company.
The relative volatility and illiquidity of the South African securities markets may substantially limit your ability to sell the ordinary shares underlying our ADSs at the price and time you desire.
Our ordinary shares are listed for trading on the JSE. Investing in securities that trade in emerging markets, such as South Africa, often involves greater risk than investing in the securities of issuers in the United States, and such investments are generally considered to be more speculative in nature. The South African securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States. There is also significantly greater concentration in the South African securities markets than in major securities markets in the United States. On April 28, 2023, the JSE total market capitalization amounted to R22,398.15 billion ($1,220.7 billion) and this market capitalization was represented by 349 companies. Accordingly, although you are entitled to withdraw the ordinary shares underlying our ADSs from the depositary at any time, your ability to sell such shares at a price and time you desire may be substantially limited. The Bank of New York Mellon (“BNYM”) serves as the depositary (the “depositary”) with respect to the ADSs.
Holders of our ADSs in the United States may have difficulty bringing actions and enforcing judgements, against us, our directors and our executive officers based on the civil liabilities provisions of the federal securities laws or other laws of the United States or any state thereof.
We are incorporated in South Africa; however, half of our directors and the majority of our senior management reside in the United States. The rest of the directors, senior management and certain experts names herein, either reside in South Africa or other jurisdictions. A portion of the assets of these persons and substantially all of the Company’s assets are therefore located outside of the United States. As a result, it may not be possible for investors to enforce against these persons or us a judgement obtained in a United States court predicated upon the civil liability provisions of the federal securities or other laws of the United States or any state thereof. South Africa is also not party to any international treaty or convention relating to the enforcement of foreign judgements.
A foreign judgement is not directly enforceable in South Africa, but constitutes a cause of action which will be enforced by South African courts provided that:
• the court that pronounced the judgement had jurisdiction (under its own laws) to entertain the case according to the principles recognized by South African law with reference to the jurisdiction of foreign courts;
• the defendant was a resident subject to the foreign court’s jurisdiction or was at least present in the foreign court’s jurisdiction at the commencement of the action, or must have submitted to that court’s jurisdiction either contractually or by conduct, in the latter instance, by defending the case on its merits;
• the judgement is final and conclusive (that is, it cannot be altered by the court which pronounced it);
• the judgement has not lapsed or been satisfied;
• the recognition and enforcement of the judgement by South African courts would not be contrary to public policy, including observance of the rules of natural justice which require that the documents initiating the United States proceeding were properly served on the defendant and that the defendant was given the right to be heard and represented by counsel in a free and fair trial before an impartial tribunal;
• the judgement was not obtained by fraudulent means;
• the judgement does not involve the enforcement of a penal or revenue law of the foreign state; and
• the enforcement of the judgement is not otherwise precluded by the provisions of the South African Protection of Businesses Act of 1978, as amended.
It is the policy of South African courts to award compensation for the loss or damage actually sustained by the person to whom the compensation is awarded. Although the award of punitive damages is generally unknown to the South African legal system that does not mean that such awards are necessarily contrary to public policy. Whether a judgement was contrary to public policy depends on the facts of each case. Exorbitant, unconscionable, or excessive awards will generally be contrary to public policy. South African courts cannot enter into the merits of a foreign judgement and cannot act as a court of appeal or review over the foreign court. South African courts will usually implement their own procedural laws and, where an action based on an international contract is brought before a South African court, the capacity of the parties to the contract will usually be determined in accordance with South African law.
It is doubtful whether an original action based on U.S. federal securities laws may be brought before South African courts. A plaintiff who is not a resident in South Africa may be required to provide security for costs in the event of proceedings being initiated in South Africa. Furthermore, the Rules of the High Court of South Africa require that documents executed outside South Africa must be notarially authenticated for the purpose of use in South Africa.
Holders of our ADSs may not receive dividend payments, which could cause you to lose some or all of the value of any dividend distribution.
Under the terms of our deposit agreement with the depositary for our ADSs, the depositary will convert any cash dividend or other cash distribution we pay on the ordinary shares underlying the ADSs into U.S. Dollars, if it can do so on a reasonable basis and can transfer the U.S. Dollars to the United States. If this conversion is not possible or if any government approval becomes necessary and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is permissible to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency or distribute a payment to you, you may lose some or all of the value of any dividend distribution. We consider the issuance of such dividends on a quarter-by-quarter basis.
Holders of our ADSs may be subject to additional risks related to holding ADSs rather than ordinary shares.
ADS holders do not hold ordinary shares directly and thus are subject to, among others, the following additional risks:
• as an ADS holder, we will not treat you as one of our shareholders and you will not be able to exercise shareholder rights, except through the depositary as permitted by the deposit agreement;
• distributions on the ordinary shares represented by your ADSs will be paid to the depositary, and before the depositary makes a distribution to you on behalf of your ADSs, any withholding taxes that must be paid will be deducted. Additionally, if the exchange rate fluctuates during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution; and
• we and the depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders.
You must act through the depositary to exercise your voting rights, as a result of which you may be unable to exercise your voting rights on a timely basis.
As a holder of ADSs, and not the ordinary shares underlying your ADSs, we will not treat you as one of our shareholders and you will not be able to exercise shareholder rights. The depositary will be the holder of the ordinary shares underlying your ADSs, and ADS holders will be able to exercise voting rights with respect to the ordinary shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our ordinary shares will receive notice of shareholders’ meetings by mail, the securities exchange news service of the JSE or by other means and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, by comparison, will not receive notice directly from us. Instead, in accordance with the deposit agreement, we will provide notice of any applicable meeting date to the depositary as soon as practicable. If we ask it to do so, as soon as practicable after receiving notice from us of any such meeting, the depositary will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which voting instructions may be given by holders. Subject to satisfaction of the foregoing standard, there is no specified number of days within which the depositary must mail ADS holders the notice of meeting and voting instructions. To exercise their voting rights, ADS holders must then instruct the depositary as to voting the ordinary shares represented by their ADSs. Due to these procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of ordinary shares. The ordinary shares represented by ADSs for which the depositary fails to receive timely voting instructions may not be voted at all.
Judgements of South African courts with respect to our ADSs will be payable only in South African Rand, which could expose any prevailing party to exchange rate risk until the judgement is collected.
If proceedings are brought in a South African court seeking to enforce the rights of holders of the ADSs, any judgement made in favor of such holders, even if the judgement is on an obligation deemed to be denominated in U.S. Dollars, could only be made or awarded in South African Rand based on the exchange rate in effect at the time the judgement is entered. The prevailing party in such proceeding would therefore bear exchange rate risk until the judgement could be collected and converted into another currency.
By purchasing ADSs, holders will irrevocably submit to the jurisdiction of state or federal courts in New York, New York in connection with any legal suit, action or proceeding relating to the deposit agreement or our ADSs.
By purchasing ADSs or an interest therein, holders of ADSs irrevocably agree that any legal suit, action or proceeding against or involving us or the depositary, arising out of or based upon the deposit agreement or the ADSs, may only be instituted in a state or federal court in New York, New York, and by purchasing ADSs or an interest therein holders irrevocably waive any objection to the laying of venue of any such proceeding. We have agreed to indemnify the depositary and its agents under certain circumstances. Neither the depositary nor any of its agents will be liable to holders or beneficial owners of ADSs or interests in ADSs for any indirect, special, punitive or consequential damages (including, without limitation, lost profits) of any form incurred by any person or entity, whether or not foreseeable and regardless of the type of action in which such a claim may be brought.
There is a risk that we will be classified as a passive foreign investment company (“PFIC”), which could result in adverse U.S. federal income tax consequences to U.S. holders of ordinary shares or our ADSs.
We may be classified as a PFIC for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequence to U.S. holders.
Based on the current price of our ADSs and the composition of our income and assets, we do not believe that we are a PFIC for U.S. federal income tax purposes for our current taxable year ended March 31, 2023. However, a separate determination must be made after the close of each taxable year as to whether we are a PFIC. We cannot assure you that we will not be a PFIC for any future taxable year. If we were treated as a PFIC for any taxable year during which a U.S. holder held an equity share or an ADS, certain adverse U.S. federal income tax consequences could apply to the U.S. holder.
