EDGAR 10-K Filing

Company CIK: 1041514
Filing Year: 2023
Filename: 1041514_10-K_2023_0001562762-23-000348.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
Overview
At Lesaka, our
core purpose is
to improve people’s lives by
bringing financial inclusion to
South Africa’s underserved consumers
and merchants.
We
achieve
this through
our ability
to efficiently
digitize the
last mile
of financial
inclusion,
providing
a full-service
fintech
platform serving both cash and digital, and facilitating the secular shift from
cash to digital that is currently taking place.
Lesaka uses its proprietary banking and payment technologies
to distribute low-cost financial and value-added
services to small
businesses, primarily
in the
informal sector,
and to
consumers, the
majority of
whom are
grant beneficiaries,
both largely
excluded
from financial services.
Our vision
is to
build and
operate the
leading full-service
fintech platform
in Southern
Africa, offering
cash management
and
digitization, card acquiring and payment processing, Value
Added Services (“VAS”),
and growth capital to micro, small and medium
enterprises
(“MSME”)
merchants
and
financial
services
to
underserved
consumers.
Our
dual-sided
financial
ecosystem
has
two
overlapping divisions: Merchants and Consumers.
Customers
-
In
our
B2C
Consumer
Division
we
focus
specifically
on
South
Africa’s
social
grant
beneficiaries,
who
have
historically been
excluded from
traditional financial
services. Our
products are
designed for
consumers at
the lower
socioeconomic
end of the
market within Living
Standards Measures (“LSMs”) 1
to 6, which
comprises approximately 26 million
people. We currently
have approximately 1.3 million active consumers.
In our B2B Merchant Division we
focus on MSME operating in
the informal and formal sectors of
the South African economy.
The informal
sector merchants are
generally smaller
and operate
in rural
areas or in
informal urban
areas and do
not have
access to
traditional banking
products. The
formal merchants
are generally
in urban
areas, have
larger turnovers
and have
access to
multiple
service providers. We operate separate brands in these two sectors of the economy. The informal market consists of approximately 1.4
million
merchants
and
the
formal
market
approximately
700,000
merchants.
Our
Merchant
Division
currently
has
over
82,000
customers using our solutions.
Products
-We offer
a comprehensive set of products and services to our consumer and merchant
customers.
In our Consumer Division, our products include transactional banking, short-term loans, a digital wallet as well as insurance and
various VAS to underserved consumers in South
Africa, aligning with
our purpose of
improving people’s lives and increasing
financial
inclusion. Our value proposition and products are designed to be simple,
relevant and cost effective for our target market.
In our
Merchant Division,
to informal
and formal
MSME customers,
we offer
cash management
and digitization
through our
proprietary vault technology, card acquiring, innovative growth capital, bill and supplier payment solutions, and a wide range of VAS
products for
our merchants
to sell.
To
the larger
enterprise level
merchants, we
offer bill
and supplier
payments and
VAS
products
through our proprietary financial switch, as well as Ingenico point of sale device and maintenance, bank and SIM card production and
other specialized technology products.
Market Opportunity
There
are
real
challenges
to
delivering
financial
inclusion
and
digitization
in
the
South
African
market.
One
of
these
major
challenges is
the deep
distrust and
a lack
of understanding
of cash
alternatives, which
is driven
by low
levels of
financial literacy.
Adding to this
challenge are the
relatively high connectivity
costs and the
low smartphone penetration
in South Africa,
where many
South
Africans
still use
older style
feature phones.
Together,
this means
that although
almost 90%
of South
Africans have
a bank
account, a significant majority treat them as post boxes and withdraw all their money in one
transaction. This has real implications for
both merchants and consumers.
For merchants
this means less
than 8% have
access to formal
credit and
less than 4%
of informal
merchants are able
to accept
digital payments. For consumers, only
an estimated 20% of the approximately
26 million South African consumers in
LSM 1-6 have
access to
credit and
savings,
and a
significant majority
of the
12 million
permanent social
grant recipients
require immediate
cash
withdrawals of their grant.
These sources
of friction
and challenges present
a significant market
opportunity for
Lesaka to provide
innovative solutions
to
both merchants
and consumers,
and more
importantly,
to facilitate
wider financial
inclusion and
digitization. Lesaka
has for
a long
time been at the forefront of providing financial inclusion and digitization
for consumers and merchants in this space.
Consumer financial
services for
the unbanked:
Our focus
is on
the LSM
1 to
6 population
in South
Africa, which
represents
approximately
million
adults
in
the
country.
Within
that,
we
estimate
there
to
be
approximately
million
people
reliant
on
permanent grants.
South Africa is
primarily a
cash-based economy,
with approximately
60% of transactions
still conducted
in cash.
In the Consumer Division, we currently have 1.3 million active account holders which represents approximately 4% share of our total
addressable market.
Our focus is
on South
African government
social grant
recipients the
majority of
whom are
being inadequately
served by the current system. Lesaka is well
placed to address the needs of these consumers with
its large informal market distribution
and affordable financial services.
Merchant payment
solutions and financial
services for MSMEs:
There are
approximately 2.1
million MSMEs in
South Africa,
of which
around 1.4
million operate
in the
informal market,
and it
is estimated
that only
4% of
these can
accept digital
payments.
Lesaka
has
a
comprehensive
product
suite
of
cash
and
digital
solutions
which
provide
a
significant
opportunity
to
assist
these
businesses to grow,
reduce cash related operating
risks and become more
efficient. This is an
underserved market and increasing
our
penetration is
more about
providing solutions
that encourage
the adoption
of more
formalized and
non-cash transacting
than about
taking market share from competitors.
While the informal market presents a major growth opportunity,
Lesaka also has a comprehensive offering to the formal MSME
and enterprise market.
Competition
With
our comprehensive
offering
to consumers
and merchants
we compete
with a
wide range
of service
providers. There
are
competitors for
individual products and
services, although
few with an
end-to-end offering,
particularly at
the lower
socioeconomic
end of the consumer market and the informal merchant market, where we
have a significant footprint and penetration.
In our
Consumer Division,
there are
a number
of traditional
and digital
providers of
low-cost transactional
bank accounts
and
micro financial services. These include South African banks such as
FNB, Standard Bank, Absa, Nedbank, African Bank and Capitec,
the South African
Post Bank, and digital
banks such as, Tyme
Bank and Bank
Zero. In the South
African ATM
network market, we
compete against the South African banks, ATM
Solutions and Spark ATM
Systems, which collectively have a market share in excess
of 90%.
In the informal merchant sector, there
are no competitors which offer a comprehensive product
set of cash, card, payment, VAS
and capital
solutions, such
as ours.
In the
formal merchant
sector there
is significantly
more competition,
with banks
and non-bank
fintech companies targeting these merchants.
In card acquiring, competitors include
Yoco,
iKhokha, Sureswipe and the South African
banks; in VAS
and bill payments, they
include Flash, Blue Label, Shop2Shop, Pay@ and Ukeshe; in lending, they
include Lulalend, Merchant Capital, Retail Capital and the
South African banks; and in cash management, they include Fidelity,
G4S, Cashnet and the South African banks.
At an enterprise level, our financial switch and VAS and bill payments business competes with BankservAfrica, Pay@, eCentric
and Transaction Junction.
Human Capital Resources
Over
the
last
two
years
we
have
built
a
diverse
team
of
high-caliber
individuals,
from
different
organizations,
to
form
our
leadership group. This
leadership group is
deeply committed to
building a high-performance
culture that is
based on our core
values
and a commitment to the care and development of our people.
Lesaka’s Core Values:
•
Entrepreneurial spirit;
•
Integrity;
•
Collective wisdom; and
•
A bias to action.
These are our
values that underpin
our mission
to enable
Merchants to compete
and grow,
and Grant
Beneficiaries to improve
their lives, by providing innovative financial technology and value
-creating solutions.
Employee training and skills development
We strongly believe that learning
is an ongoing process and that the majority of learning is in the doing. As such, while we offer
a range of formal
programs (as listed further
below), more importantly,
we continue to encourage
a culture of learning
in everything
that we do.
Sustainable
employee
training and
development
programs impact
employee
retention,
and
we believe
that our
willingness to
invest
in
employee
development
contributes
to
employee
satisfaction
and
belonging.
This
increases
loyalty,
which
will
in
turn
contribute
to employee retention. We
offer the following development programs to enhance employee
performance and skills:
•
unemployed and employed learnerships;
•
internships;
•
leadership development programs;
•
training programs;
•
other in-house and cross-functional training to aid with career advancement;
and
•
succession planning - training interventions.
Equal opportunity
Having an inclusive
and diverse workforce
which reflects our
economically active population
and society in
general, is crucial
for helping the organization attract and retain talent and is important for long-term organizational success. Our
human resources team
emphasizes recruiting
and retaining
a talented
and diverse
workforce with
special focus
on hiring
previously disadvantaged
groups
whenever possible. We
are committed to hiring qualified candidates without regard
to their personal status, while taking into account
the
unique
circumstances
affecting
our
operations
in
South
Africa
and
the
need
to
uplift
previously
disadvantaged
groups.
This
commitment extends to all levels of our organization,
including within senior management and our board of directors.
As of June 30, 2023, the composition of our workforce was:
•
55% female and 45% male;
•
35% between 18 and 34 years old, 60% between 35 and 54 years old, and 5% over
55 years old; and
•
67% Black, 11% two or more races, 7% Indian and 15%
White.
We have no
female named executive officers.
We
continue
to strive
to build
a more
inclusive workforce
and to
enhance our
pay structures
by taking
measures to
eliminate
potential remuneration discrimination
and to help close gender pay gaps
to progress towards gender equality
at work. We
have taken
positive strides towards a rewards philosophy that rewards
high performance,
is externally benchmarked and focuses on equal people
for equal work.
Employee compensation programs
We
are committed
to
ensuring
that
all
our
employees
are
paid
fair
and
competitive
remuneration. To
that
end,
we
offer the
following to our employees:
•
Access to a comprehensive medical, dental, and vision plan that our employees
have the option to join;
•
Access to a defined contribution retirement plan that our employees have
the option to join;
•
Paid sick, study, annual
and family responsibility leave;
•
Maternity benefits;
•
Life and disability insurance coverage;
•
Employee assistance programs; and
•
Product discounts.
Annual
increases
and
incentive
compensation
are
based
on
merit,
which
is
communicated
to
employees
at
onboarding
and
documented as part of our annual performance review process.
Our number
of employees
allocated
on a
segmental
and
group
basis as
of the
years ended
June 30,
2023,
2022 and
2021,
is
presented in the table below:
Number of employees
Consumer
(1)
1,306
1,826
2,920
Merchant
(1)
Total segments
2,296
2,650
3,075
Group
(1)
Total
2,303
2,657
3,079
(1) Consumer includes one executive officer for each of fiscal 2023,
2022 and 2021. Merchant includes one executive officer for
each of
fiscal 2023
and 2022
and none
for fiscal
2021.
Group includes
two executive
officers for
fiscal 2023
and three
for each
of
fiscal 2022 and 2021.
On a functional basis,
four of our employees
are our named executive
officers,
332 were employed in
sales and marketing, 253
were employed in finance and administration, 221 were employed in information technology and 1,493 were employed in operations.
Health and safety laws and regulations
We
are
subject
to various
South
African
laws and
regulations
that
regulate
the health
and
safety of
our
South
African-based
workforce, including
those laws monitored
by the
South African
Department of
Employment and
Labour which
stipulates the
legal
framework within
which we
need to
function. This
framework comprises
the Occupational
Health and
Safety Act,
Act 85
of 1993
(“OHSA”),
the
Compensation
for
Occupational
Injuries
and
Diseases
Act,
Act
of
(“COIDA”),
the
Basic
Conditions
of
Employment Act,
Act 75
of 1997
(“BCEA”) and
the Labour
Relations Act,
Act 66
of 1995
(“LRA”). Compliance
with COVID-19
regulations remains
regulated by the
National Institute of
Occupational Health (“NIOH”),
and the Occupational
Health Surveillance
System
(“OHSS”),
the
Centre
for
Scientific
Industrial
Research
(“CSIR”)
and
the
National
Institute
for
Communicable
Diseases
(“NICD”).
We
have
implemented
and regularly
update human
capital-related
policies that
are designed
to ensure compliance
with
applicable South African laws and regulations.
Our Executive Officers
The table below presents our executive officers, their
ages and their titles:
Name
Age
Title
Chris Meyer
Group Chief Executive Officer and Director
Naeem E. Kola
Group Chief Financial Officer, Treasurer,
Secretary, and Director
Lincoln C. Mali
Chief Executive Officer: Southern Africa, and Director
Steven J. Heilbron
Executive, and Director
Christopher
Meyer
has
been
our
Group
Chief Executive
Officer
since July
1, 2021.
Prior to
joining
Lesaka,
Mr.
Meyer
was
the Head of Corporate & Investment Banking and Joint Managing Director at Investec Bank Plc (“Investec”), an LSE-listed specialist
bank
and wealth
manager,
having
served
in many
different
roles
within
the Investec
Group
since 2001.
He was
also
an executive
director for various international and regional subsidiaries of Investec Bank Plc. Mr. Meyer is a member of the
South African Institute
of Chartered Accountants, holds an MSc Finance from the London
Business School and a Post Graduate Diploma in Accounting from
the University of Cape Town.
Naeem E.
Kol
a has
been our
Group Chief
Financial Officer,
Treasurer
and Secretary
since March
1, 2022.
Mr.
Kola has
held
progressively
senior
finance
roles
in
Dubai,
most
notably
as
Chief
Financial
Officer
of
the
Emerging
Markets
Payments
Group
(“EMP”), a high-growth
fintech business that grew
materially and successfully
concluded and integrated
five acquisitions during his
six-year
tenure
as
Chief
Financial
Officer.
Prior
to
becoming
Chief
Financial
Officer,
Mr.
Kola
was
Senior
Vice
President
for
Investments, Strategy and
Business Planning at
EMP.
Since the acquisition
of EMP by Network
International in 2017,
Mr. Kola
has
been an Operations Director
and Strategic Advisor to
the emerging market private equity
firm Actis, where he
again focused on fintech
businesses.
Lincoln
C.
Mali
has
been
our
Chief
Executive
Officer:
Southern
Africa
since
May
1,
2021.
Mr.
Mali
is
a
financial
services
executive with over 25 years in the
industry. Until April 2021, he was the Head of Group
Card and Payments at Standard Bank
Group,
and previously served
in many different
roles within that
organization since
2001. Mr.
Mali chaired the
board of directors
of Diners
Club South Africa until
April 2021, and was
a member of the Central
and Eastern Europe, Middle
East and Africa Business
Council
for Visa. Mr.
Mali holds Bachelor of Arts (BA) and Bachelor of Laws (LLB) degrees from Rhodes University,
an MBA from Henley
Management College, various diplomas and attended an Advanced
Management Program at Harvard Business School.
Steven J. Heilbron
has been the Chief
Executive Officer of the Connect Group since
2013 and joined us
following the acquisition
of Connect in April 2022
in the same capacity.
Mr. Heilbron has two
decades of financial services experience,
having spent 19 years
working
for
Investec in
South
Africa
and
the
UK,
where
he served
as Global
Head
of
Private Banking
and
Joint
Chief
Executive
Officer of Investec. He led a private consortium that acquired Cash Connect
Management Solutions (Pty) Ltd (“CCMS”) in 2013. Mr.
Heilbron has
presided over
significant organic
growth in
the rebranded Connect,
as well
as spearheading
the successful
acquisition
and
integration
of Kazang
and
EFTpos acquired
from
the Paycorp
Group in
February
2020.
He
is a
member
of
the South
African
Institute of Chartered Accountants.
Financial Information about Geographical Areas and Operating Segments
Refer
to
Note
to
our
audited
consolidated
financial
statements
included
in
this
annual
report
contains
detailed
financial
information about our operating segments for fiscal 2023, 2022 and 2021. Revenues based on the geographic location from which the
sale originated and geographic location where long-lived assets are held for the years ended June 30, are presented in the table below:
Revenue
(1)
Long lived assets
$'000
$'000
$'000
$'000
$'000
$'000
South Africa
505,558
215,046
127,468
300,104
359,725
50,754
India (MobiKwik)
-
-
-
76,297
76,297
76,297
Rest of the world
22,413
7,563
3,318
2,197
2,811
6,962
Total
527,971
222,609
130,786
378,598
438,833
134,013
(1)
Refer
to
Note
to
our
audited
consolidated
financial
statements
included
in
this
annual
report
which
contains
detailed
financial information about our revenue for fiscal 2023, 2022
and 2021.
Corporate history
Lesaka was incorporated
in Florida in
May 1997 as
Net 1
UEPS Technologies, Inc. and
changed its name
to Lesaka Technologies,
Inc. on May 12, 2022. In 2004, Lesaka acquired Net1 Applied Technology
Holdings Limited (“Aplitec”), a public company listed on
the Johannesburg
Stock Exchange
(“JSE”). In
2005, Lesaka
completed an
initial public
offering
and listed
on the
NASDAQ Stock
Market. In
2008, Lesaka
listed on
the JSE
in a
secondary listing,
which enabled
the former
Aplitec shareholders
(as well
as South
African residents generally) to hold Lesaka common stock directly.
Available information
We maintain a website at
www.lesakatech.com. Our annual report on Form
10-K, quarterly reports on
Form 10-Q, current
reports
on Form 8-K, and amendments to those
reports,
as well as our proxy statements,
are available free of charge through the
“SEC filings”
portion of our website, as soon
as reasonably practicable after they are filed
with the SEC. The information contained
on, or accessible
through, our website is not incorporated into this Annual Report on Form 10-K.
The SEC
maintains a
website at
www.sec.gov
that contains
reports, proxy
and information
statements, and
other information
regarding issuers that file electronically with the SEC.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
OUR OPERATIONS
AND FINANCIAL
RESULTS
ARE SUBJECT
TO VARIOUS
RISKS AND
UNCERTAINTIES,
INCLUDING
THOSE
DESCRIBED
BELOW,
THAT
COULD
ADVERSELY
AFFECT
OUR
BUSINESS,
FINANCIAL
CONDITION, RESULTS
OF OPERATIONS,
CASH FLOWS, AND THE TRADING PRICE OF OUR COMMON STOCK
Risks Relating to Our Business
To achieve our mission, our
strategy is to
build and operate
the leading South
African full service
fintech
platform offering cash management, payment
and financial services.
Our future success, and our ability
to
return
to
profitability
and
positive
cash
flow
is
substantially
dependent
on
our
ability
to
complete
the
implementation of this strategy successfully.
Our board conducted an extensive
review of our business strategy
and operations in July 2020,
and decided to focus on
our South
African
operations
and
other
business
opportunities
in
South
Africa
and,
to
a
lesser
extent,
the
rest
of
the
African
continent.
The
restructuring
of
the
consumer
business
and
acquisition
of
Connect
were
integral
parts
of
the
strategy
to
return
the
business
to
profitability and positive cash flow. We have made significant progress on both of these initiatives however we cannot assure you that
we will be able to complete our strategy successfully and return to profitability and
positive cash flow.
Even if we do return to profitability, achieving net income does not necessarily
ensure positive cash flows. Future periods of net
losses
from
operations
could
result
in
negative
cash
flow
and
may
hamper
ongoing
operations
or
prevent
us
from
sustaining
or
expanding our business. We cannot assure you that we will achieve, sustain or increase profitability in the future and if we do not, our
business will be materially and adversely affected.
In 2017
and 2018 we
suffered significant
reputational damage
as a result
of irregularities in
the awarding of
the South African
Social Security Agency (“SASSA”)
grant distribution contract in
2012 and allegations of abuse
of group companies’ access to social
grant recipients.
An entirely new
board and management
team were appointed
to develop and
execute the new
strategy however we
cannot provide assurance that issues related to those events will not resurface
and adversely affect the business.
We
have a
significant amount
of indebtedness that
requires us
to comply with
restrictive and financial
covenants. If we are unable to comply with these
covenants, we could default on this debt, which would have
a material adverse effect on our business and financial condition.
As
of
June
30,
2023,
we
had
aggregate
long-term
borrowing
outstanding
of
ZAR
2.5
billion
($133.1
million
translated
at
exchange rates
as of June
30, 2023). We
financed our acquisition
of Connect
in April 2022
through South
African bank borrowings
of ZAR 1.1 billion
($71.7 million, translated at
closing date exchange
rate (as defined in the
Sale Agreement) of $1:ZAR
14.65165).
The borrowings
are secured
by a
pledge of
certain of
our bank
accounts, and
the cession
of Lesaka’s
shareholding
in certain
of its
subsidiaries. These borrowings contain customary covenants that require Lesaka Technologies
(Pty) Ltd (“Lesaka SA”) to maintain a
specified total asset
cover ratio and restrict
the ability of
Lesaka, Lesaka SA,
and certain of its
subsidiaries to make
certain distributions
with respect
to their
capital stock,
prepay other
debt, encumber
their assets,
incur additional
indebtedness,
make investment
above
specified levels, engage in certain business combinations and engage in
other corporate activities.
The loan agreements also include a credit enhancement mechanism of ZAR
350 million ($23.9 million, translated at closing date
exchange rate), which has been provided by investment
funds managed by Lesaka’s
largest shareholder, Value
Capital Partners (Pty)
Ltd (“VCP”)
which includes
a contingent
subscription for
new shares.
There can
be no
assurance that
VCP will
perform under
the
commercially agreed
terms and failure
by it to
fulfil its obligation
under the credit
enhancement mechanism
may put our
funding or
future repayments at risk.
We also
have borrowings through
Connect. Connect’s
credit facilities include (i)
an overdraft facility (general
banking facility)
of ZAR 205.0
million (of which
ZAR 170.0 million
has been utilized);
(ii) Facility A
of ZAR 700.0
million; (iii) Facility
B of ZAR
550.0
million
(both fully
utilized);
and
(iv)
an asset-backed
facility of
ZAR
200.0
million
(of which
ZAR
149.1
million
has been
utilized).
These borrowings are
secured by a
pledge of,
among other things,
Cash Connect Management
Solutions’(“CCMS”) entire
equity interests
in its
subsidiaries and
investments and
any claims
outstanding. These
borrowings contain
customary covenants
that
require CCMS to maintain specified debt service, interest cover and leverage ratios.
Within our merchant lending
operations, we have
borrowing arrangements through
Cash Connect Capital
(Pty) Limited (“CCC”).
CCC has a
ZAR 300
million revolving
credit facility agreement.
We
have utilized
approximately ZAR
222.3 million
as of June
30,
2023.
This
facility
contains
customary
covenants
that
require
the
borrowing
parties
to
collectively
maintain
a
specified
capital
adequacy ratio, restrict the ability of the entities to make certain distributions with respect to their capital stock,
encumber their assets,
incur additional indebtedness, make investments, engage in certain
business combinations and engage in other corporate activities.
These security arrangements and covenants may
reduce our operating flexibility or
our ability to engage in
other transactions that
may
be
beneficial
to
us.
If
we
are
unable
to
comply
with
the
covenants,
we
could
be
in
default
and
the
indebtedness
could
be
accelerated. If this were to occur, we might not be able to obtain waivers of default or to refinance the debt with another lender and as
a result, our business, financial condition and stock price would suffer.
We
need to
significantly grow
our consumer
operations in
order to
ensure their
profitability and
long-
term sustainability.
Following the conclusion of our contract with SASSA, we
refocused our resources and technology on the
provision of financial
inclusion
services
to
our
target
market
and
currently
have
an
established
base
of
approximately
1.3
million
customers
of
which
approximately
1.1 million
are permanent
grant recipients.
Our strategy
involves significantly
expanding this
base over
the coming
years. While we believe that our financial services offerings are convenient and cost-effective, the success of our strategy will depend
on the extent to which we successfully market our offering to
grow the customer base.
Factors that may prevent us from successfully operating and expanding our
Consumer Division include, but are not limited to:
•
insufficient adoption and utilization of our products and
services;
•
inability to access sufficient funding for our ATM
infrastructure;
•
increased
competition
in
the
marketplace
and
restrictions
imposed
by
SASSA
or
the
South
African
government
on
the
manner in which grant recipients may transact;
•
political interference and changes in the regulatory environment;
•
failure to comply with laws and regulations related to our Consumer lending
business;
•
failure to comply with anti-money laundering and anti-corruption laws and
regulations;
•
cyber-attacks, data breaches and data leaks;
•
further civil unrest similar to that experienced in July 2021;
•
loss of key technical and operations staff;
•
expired property leases disrupting business operations; and
•
logistical and communications challenges, including scheduled and unscheduled
power supply disruptions.
We may undertake acquisitions
that could
increase our
costs or
liabilities or
be disruptive
to our
business.
Acquisitions are
an integral part
of our new
growth strategy
as we seek
to expand our
business and deploy
our technologies
in
new markets
in Southern
Africa. However,
we may
not be
able to
locate suitable
acquisition
candidates at
prices that
we consider
appropriate.
If
we
do
identify an
appropriate
acquisition
candidate,
we
may
not be
able to
successfully
negotiate
the
terms
of
the
transaction, finance it
or, if the
transaction occurs, integrate the
new business into
our existing business.
These transactions may
require
debt financing or additional equity financing, resulting in additional leverage
or dilution of ownership.
Acquisitions of businesses
or other material
operations and the
integration of these
acquisitions or their
businesses will require
significant attention
from members
of our senior
management team,
which may
divert their
attention from
our day-to-day
business.
The difficulties
of integration
may be
increased by
the necessity
of integrating
personnel with
disparate business
backgrounds
and
combining
different
corporate cultures.
We
also may
not be
able to
retain key
employees or
customers
of an
acquired business
or
realize
cost
efficiencies
or
synergies
or
other
benefits
that
we
anticipated
when
selecting
our
acquisition
candidates.
Acquisition
candidates may have liabilities or adverse operating issues that we fail to
discover through due diligence prior to the acquisition.
We
may
need
to record
write-downs
from future
impairments of
goodwill or
other intangible
assets, which
could reduce
our
future reported earnings.
Geopolitical
conflicts,
including
the
conflict
between
Russia
and
Ukraine,
may
adversely
affect
our
business and results of operations.
The
current
conflict
between
Russia
and
Ukraine
is
creating
substantial
uncertainty
about
the
future
of
the
global
economy.
Countries across the globe are instituting sanctions and other
penalties against Russia. The retaliatory measures that
have been taken,
and could
be taken
in the
future, by
the U.S.,
NATO,
and other
countries have
created global
security concerns
that could
result in
broader European military and political conflicts and otherwise have a substantial impact on regional and
global economies, any or all
of which could adversely affect our business.
While the broader consequences are
uncertain at this time,
the continuation and/or escalation of
the Russian and Ukraine
conflict,
along
with
any
expansion
of the
conflict
to
surrounding
areas, create
a
number
of risks
that
could
adversely
impact
our
business,
including:
•
increased inflation and significant volatility in the macroeconomic
environment;
•
disruptions to our technology infrastructure, including through cyberattacks,
ransom attacks or cyber-intrusion;
•
adverse changes in international trade policies and relations;
•
disruptions in global supply chains; and
•
constraints, volatility or disruption in the credit and capital markets.
All of these risks could
materially and adversely affect
our business and results of operations.
We are
continuing to monitor the
situation in Ukraine and globally and assessing the potential impact on our business.
A prolonged economic
slowdown or lengthy
or severe recession
in South Africa
or elsewhere could
harm
our operations.
A prolonged economic
downturn or recession
in South Africa
could materially
impact our results
from operations, particularly
in light of
on-going electricity disruptions
during calendar 2022
and 2023, a
significantly weak USD/
ZAR exchange rate
compared
with previous periods, and our strategic decision to focus on our South African operations. Economic confidence in South Africa, our
main operating
environment, is
currently low
and, as
a result, the
risk of
a prolonged
economic downturn
is increased, which
could
have a negative impact on merchants and retailers; mobile phone operators; our account holders; the
level of transactions we process;
the take-up of
the financial services
we offer and
the ability of our
customers to repay
our loans or to
pay their insurance
premiums.
If
financial
institutions
and
retailers experience
decreased
demand
for
their products
and services,
our
hardware,
software,
related
technology sales and processing revenue could decrease.
Our investment in MobiKwik
subjects us to certain
risks, including the possibility
of fluctuations in the
carrying value based on readily determinable fair values. In addition, our ability to dispose of our interest in
MobiKwik on acceptable terms, or at all, may be limited under certain circumstances.
We
have elected to
account for our
investment in MobiKwik
at cost minus impairment,
if any,
plus or minus changes
resulting
from observable
price changes
in orderly
transactions for
the identical
or similar
instrument of
the same
issuer because
it does
not
have a readily determinable fair value. The determination of the fair value of an investment requires us to make significant judgments
and estimates and we are required to
base our estimates on assumptions which
we believe to be reasonable, but
these assumptions may
be unpredictable and inherently uncertain. The value of our investment in MobiKwik as of
June 30, 2023 and 2022, was $76.3 million
and was determined
based on a
share issuance concluded
by MobiKwik in
June 2021, implying
a fair
value per equity
share of $12.275.
We
did not identify
any observable price
changes during either
of fiscal 2023
and 2022 and therefore
did not adjust
the value of
our
investment during the years ended June 30, 2023 and 2022. We recorded
a non-cash fair value adjustment of $49.3 million during the
year ended June 30, 2021, which increased the fair value to $76.3
million.
MobiKwik filed its draft
red herring prospectus in July
2021, with the original intention
of completing its initial public
offering
in November 2021. However, MobiKwik decided to delay its initial public offering given
prevailing market conditions at the time and
has indicated its intention to pursue an initial public listing in calendar 2024.
We
may
need to
record a
write-down of
the carrying
value of
our investment
in MobiKwik
in the
future (i)
if it
is unable
to
successfully complete its contemplated initial public offering, (ii) due to fluctuations in its market price upon listing, including during
the lock up
period after its
initial public
offering, or
(iii) if it
has not listed,
there is an
observable transaction
indicating a
fair value
per share
which is
lower than
our
June 30,
2023 price
per share.
Furthermore,
it may
be difficult
to dispose
of some
or all
of our
investment on acceptable terms, if at all, if MobiKwik fails to list.
Our
ability
to
fund
our
ATM
network
requires
that
we
continue
to
have
access
to
sufficient
lending
facilities, which requires compliance with restrictive and financial covenants.
The operational
maintenance
of our
ATM
network,
along with
an increase
in our
consumer
banking
client base,
necessitates
access to large
amounts of cash
to stock the
ATMs
and maintain uninterrupted
service levels. We
have credit facilities
from a South
African
bank
which
includes
security
arrangements
as
well
as
restrictive
and
financial
covenants.
The
security
arrangements
and
covenants included in our lending facilities may reduce our operating flexibility or our ability to engage in other transactions that may
be beneficial to us. If we are unable to comply
with the covenants in South Africa, we could be in default
and the indebtedness could
be accelerated. If this were to occur, we might not be able to obtain waivers of default or to refinance the debt with another lender and
as a result, our business and financial condition would suffer.
We may not be able to extend the terms
of these debt facilities or
refinance them, in each case, on
commercially reasonable terms
or at all. Our
ability to continue the
uninterrupted operation of
our ATM
network will be adversely
impacted by our failure
to renew
our debt facilities, any adverse change to the terms
of our credit facilities, or a
significant reduction in the amounts available under our
credit facilities,
or our
failure to
increase our
facilities if
required. We
may also
suffer reputational
damage if
our service
levels are
negatively impacted due to the unavailability of cash.
We
have
purchased
a
significant
amount
of
prepaid
airtime
voucher
inventory
which
exposes
us
to
market risk for this inventory as well as losses if the mobile network operators are unable to perform.
Historically,
we
have
purchased
a
significant
amount
of
prepaid
airtime
inventory
vouchers
in
order
to
take
advantage
of
discounted
pricing for
this inventory.
As of
June 30,
2023, the
carrying
value of
this inventory
is $4.0
million (ZAR
74.7
million
translated at exchange rates applicable as of
June 30, 2023). We expect to sell this inventory
over the next three months which
exposes
us to market risk for this inventory. The underlying service related to these
airtime vouchers is provided by South Africa’s four largest
mobile network
operators operating
in South
Africa and
therefore we
are also
exposed to
performance
risk by
these operators.
We
would be unable
to sell these prepaid
airtime vouchers if
the mobile network
operators were unable
to provide their
services and we
would need to
write this inventory
off. Failure
to recover the
carrying value of
this inventory
may have a
material adverse effect
on
our results of operations or financial condition.
We may be unable to recover the carrying value of certain Cell C
airtime that we own.
We
own a
substantial amount
of Cell
C airtime
inventory ($8.6
million translated
at exchange
rates applicable
as of
June 30,
2023). In support of
Cell C’s liquidity
position and pursuant to Cell
C’s recapitalization
process, we limited the resale
of this airtime
through
our
distribution
channels.
On
September
30,
2022,
Cell
C
concluded
its
recapitalization
process
and
we
entered
into
an
agreement with Cell C under which
Cell C agreed to repurchase, from
October 2023, up to ZAR 10 million
of Cell C inventory from
us per month. The amount to be
repurchased by Cell C will be calculated
as ZAR 10 million less the face
value of any sales made by
the Company during that month. The Company continued to sell a minimum amount of Cell C airtime through its internal channels in
late
fiscal
2022/
early
fiscal 2023
in support
of
Cell C’s
liquidity
position.
However,
our
ability
to
sell this
airtime
has
improved
significantly since
the acquisition
of Connect because
Connect is a
significant reseller
of Cell C
airtime. As
a result, we
sold higher
volumes of airtime through this channel than we did prior to the
Cell C recapitalization, however, continued
sales at these volumes is
dependent on
prevailing conditions continuing
in the airtime
market. If
we are able
to sell at
least ZAR 10
million a month
through
this channel
from October 1,
2023, then
Cell C would
not be required
to repurchase any
airtime from us
during any specific
month.
We
have agreed
to notify
Cell C
prior to
selling any
of this
airtime, however,
there is
no restriction
placed on
us on
the sale
of the
airtime.
Historical and current limitations
on our ability to freely dispose
of this Cell C airtime time
inventory exposes us to market
risk
for this inventory. Due to wholesale discounts in the distribution market for this airtime, it is not readily saleable in the current market
without realising a loss. In light of this, we recorded
a loss of $1.3 million during fiscal 2020, related
to this airtime inventory.
While
no further
losses were
recorded
in fiscal
2023,
2022 and
2021, we
may be
required to
record further
losses in
the future
if we
are
unable to recover the carrying
value of this airtime inventory
or if Cell C is unable
to repurchase the inventory
as per our agreement.
Failure to
recover the
carrying value
of this
inventory may
have a
material adverse
effect
on our
results of
operations or
financial
condition.
Our
consumer
microlending
loan
book
and
merchant
lending
book
expose
us
to
credit
risk
and
our
allowance for doubtful finance loans receivable may not be sufficient to absorb future write-offs.
All of our microfinance loans made are for a period of six months or less and all of our merchant lending through Connect is for
a period
of less
than 12
months. We
have created
an allowance
for doubtful
finance loans
receivable related
to these
books. When
creating the allowance,
management considered
factors including the
period of the
finance loan outstanding,
creditworthiness of
the
customers and the past payment history of the borrower. We consider this policy to be appropriate as it takes into account factors such
as historical bad debts, current
economic trends and changes in our
customer payment patterns. However,
additional allowances may
be required should the ability
of our customers to
make payments when due
deteriorate in the future.
A significant amount of judgment
is required to assess the ultimate recoverability of these microfinance
loan receivables.
We may face competition from other
companies that offer innovative
payment technologies and payment
processing,
which
could
result
in
the
loss
of
our
existing
business
and
adversely
impact
our
ability
to
successfully market additional products and services.
Our primary competitors in
the payment processing
market include other independent
processors, as well
as financial institutions,
independent
sales
organizations,
new
digital
and
fintech
entrants
and,
potentially
card
networks.
Many
of
our
competitors
are
companies who
are larger
than we
are and
have greater
financial and
operational resources
than we
have. These
factors may
allow
them to offer better pricing
terms or incentives to customers, which
could result in a loss of our potential
or current customers and/or
force us to lower our prices. Either of these actions could have a significant effect
on our revenues and earnings.
Our
future
success
will
depend
in
part
on
our
ability
to
attract,
integrate,
retain
and
incentivize
key
personnel
and
a
sufficient
number
of
skilled
employees,
particularly
in
the
technical,
sales
and
senior
management areas.
We believe our management team has the right experience
and skills to execute on our strategy. However,
in order to succeed in
our product
development and
marketing efforts,
we may
need to identify
and attract new
qualified technical
and sales personne
l, as
well as motivate and retain our
existing employees. As a result, an
inability to hire and retain such
employees would adversely affect
our ability to
achieve our strategic
goals and maintain
our technological relevance.
We may face difficulty in
assimilating, transitioning
and integrating
newly-hired
personnel or
management of
any future
acquisitions into
our existing
management team,
and this
may
adversely affect
our business. Competitors
may attempt
to recruit
our top
management and
employees. In
order to attract
and retain
personnel in
a competitive
marketplace, we
must provide
competitive pay
packages, including
cash and equity
-based compensation
and
the
volatility
in
our
stock
price
may
from
time
to
time
adversely
affect
our
ability
to
recruit
or retain
employees.
We
do
not
maintain
any
“key
person”
life
insurance
policies.
If
we
fail
to
attract,
integrate,
retain
and
incentivize
key
personnel
and
skilled
employees, our ability to manage and grow our
business could be harmed and our product
development and marketing activities could
be negatively affected.
System failures, including breaches in the security of our system, could harm our business.
We
may experience
system failures
from time
to time,
and any
lengthy interruption
in the availability
of our
back-end system
computers could harm our business and severely affect our customer relationships. Frequent or persistent interruptions in our services
could cause current or potential
customers and users to
believe that our systems are
unreliable, leading them to
avoid our technology
altogether, and could permanently harm our reputation and brands. These interruptions would increase the burden on our staff, which,
in turn, could delay our
introduction of new applications and
services. Finally, because our customers may use our products
for critical
transactions,
any
system
failures
could
result
in
damage
to
our
customers’
businesses.
These
customers
could
seek
significant
compensation from us for their losses. Even if unsuccessful, this type of
claim could be time-consuming and costly for us to address.
Although certain of our systems
have been designed to reduce
downtime in the event of
outages or catastrophic occurrences, they
remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication
failures, terrorist attacks,
computer viruses, computer denial-of-service attacks and similar events. Some of
our systems are not fully
redundant, and our disaster
recovery planning may not be sufficient for all eventualities.
Protection against fraud is of key
importance to the purchasers and end
users of our solutions. We
incorporate security features,
including encryption
software, biometric
identification and
secure hardware,
into our solutions
to protect
against fraud in
electronic
transactions and
to provide for
the privacy and
integrity of cardholder
data. Our solutions
may be vulnerable
to breaches in
security
due to
defects in
the security
mechanisms, the
operating system
and applications
or the
hardware platform.
Security vulnerabilities
could
jeopardize
the
security
of
information
transmitted
using
our
solutions.
If
the
security
of
our
solutions
is
compromised,
our
reputation and marketplace acceptance
of our solutions may be adversely
affected, which would cause our
business to suffer,
and we
may become subject to damage claims. We
have not yet experienced any significant security breaches affecting
our business.
Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems with our
system could
result in lengthy interruptions
to our services. Our current
business interruption insurance may
not be sufficient to
compensate us for
losses that may result from interruptions in our service as a result of system failures.
Cash
Paymaster
Services,
or
CPS,
has
been
placed
into
liquidation.
While
no
claim
has
been
made
against Lesaka for CPS’ obligations, we cannot provide assurance that no such claim will be made.
CPS has significant obligations and ongoing litigation related to its SASSA contract and has been placed into liquidation. While
no claim has been made against Lesaka to be held liable for CPS’ current
obligations or any future obligations under any future court
judgments, and while we do not believe that there would be a legitimate legal basis for any such claims, we cannot assure you that no
such claim
will be
made against
us. If
SASSA or
another
third party
were to
seek and
ultimately succeed
in obtaining
a judgment
against us in respect of CPS’ liabilities, any such judgment would have a material
adverse effect on our financial condition, results of
operations and cash flows.
Defending
our
intellectual
property
rights
or
defending
ourselves
in
infringement
suits
that
may
be
brought against us is expensive and time-consuming and may not be successful.
Litigation to
enforce our
patents, trademarks
or other
intellectual property
rights or
to protect
our trade
secrets could
result in
substantial costs and may not be successful. Any loss of, or inability to protect, intellectual property in our technology could diminish
our competitive advantage and also seriously harm our business. In addition, the laws of certain foreign countries may not protect our
intellectual property
rights to
the same
extent as
do the
laws in
countries where
we currently
have patent
protection. Our
means of
protecting our intellectual property rights in countries where we currently have patent or trademark protection, or any other country in
which we operate, may not be
adequate to fully protect our intellectual
property rights. Similarly, if third parties claim that we infringe
their intellectual property rights, we may be required to incur significant costs and
devote substantial resources to the defense of such
claims,
to
discontinue
using
and
selling
any
infringing
technology
and
services,
to
expend
resources
to
develop
non-infringing
technology or
to purchase
licenses or
pay royalties
for other
technology.
In addition,
if we
are unsuccessful
in defending
any such
third-party
claims, we
could
suffer
costly judgments
and
injunctions
that could
materially
adversely
affect
our business,
results of
operations or financial condition.
We
may incur
material losses
in connection
with our
movement of
cash through
our infrastructure
in
South Africa.
In our merchant
business we collect
and process large
volumes of cash
from our customers,
assuming the
risk of loss
from the
moment that cash is
deposited into our vaults.
We are then responsible for its
collection and transportation to
processing centers, which
we outsource to various cash in transit service providers. These services extend
across all areas of South Africa.
South Africa
suffers from
high levels of
crime and in
particular cash in
transit heists. We
cannot insure
against certain risks
of
loss or
theft of
cash from
our delivery
and collection
vehicles and
we will
therefore bear
the full
cost of
certain uninsured
losses or
theft in connection with the cash handling process, and such losses could materially and adversely affect our financial condition, cash
flows and results of operations. We
have not incurred any material losses
resulting from cash distribution in
recent years, but there is
no assurance that we will not incur any such material losses in the future.
We depend upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations,
which could harm our business.
We obtain
our smart cards, ATMs,
POS devices, components for our
safe assets, and the other hardware
we use in our business
from a limited number of
suppliers, and do not
manufacture this equipment ourselves. We generally do not have long-term
agreements
with our manufacturers
or component suppliers.
If our suppliers become
unwilling or unable to
provide us with adequate
supplies of
parts or products when we need
them, or if they increase their
prices, we may not be
able to find alternative sources in
a timely manner
and could be faced
with a critical shortage.
This could harm our
ability to meet customer
demand and cause our
revenues to decline.
Even
if we
are able
to secure
alternative
sources in
a timely
manner,
our costs
could increase
as a
result of
supply or
geopolitical
shocks, which may lead to an increase in the prices of goods and services from third
parties. A supply interruption, such as the current
global shortage of semiconductors, or an increase in
demand beyond current suppliers’ capabilities could harm our ability
to distribute
our equipment and thus
to acquire new customers
who use our technology.
Any interruption in the supply
of the hardware necessary
to operate
our technology,
or our
inability to
obtain substitute
equipment at
acceptable prices
in a
timely manner,
could impair
our
ability to meet the demand of our customers, which would have an adverse
effect on our business.
Our Smart Life business exposes us to risks typically experienced by life assurance companies.
Smart Life is a life insurance company and exposes us to risks typically experienced by life assurance companies. Some of these
risks
include
the
extent
to
which
we
are
able
to
continue
to
reinsure
our
risks
at
acceptable
costs,
reinsurer
counterparty
risk,
maintaining regulatory capital adequacy, solvency and
liquidity requirements, our ability
to price our
insurance products appropriately,
the risk
that actual
claims experience
may exceed
our estimates, the
ability to
recover policy
premiums from
our customers
and the
competitiveness of the South African insurance market. If we are unable to maintain our desired level of reinsurance
at prices that we
consider acceptable, we would have to either
accept an increase in our risk exposure
or reduce our insurance writings. If our reinsurers
are unable
to meet
their commitments
to us
in a
timely manner,
or at
all, we may
be unable
to discharge
our obligations
under our
insurance contracts. As such, we are exposed to counterparty risk, including
credit risk, of these reinsurers.
Our
product
pricing
includes
long-term
assumptions
regarding
investment
returns,
mortality,
morbidity,
persistency
and
operating
costs
and
expenses
of
the
business.
Using
the
wrong
assumptions
to
price
our
insurance
products
could
materially
and
adversely affect our financial
position, results of
operations and cash flows.
If our actual
claims experience is
higher than our
estimates,
as we have seen
during the recent COVID-19 pandemic, our
financial position, results of operations and
cash flows could be
adversely
affected. Finally, the South African
insurance industry is
highly competitive. Many
of our competitors
are well-established, represented
nationally and market similar products and we therefore may not be able to
effectively penetrate the South African insurance market.
Risks Relating to Operating in South Africa and Other Foreign Markets
Operating in Southern Africa,
an emerging market, subjects
us to greater risks
than those we would
face
if we operated in more developed markets.
Emerging markets such as
Southern Africa are subject
to greater risks
than more developed markets.
While we focus
our business
primarily
on
emerging
markets
because
that
is
where
we
perceive
the
greatest
opportunities
to
market
our
products
and
services
successfully, the political, economic and market conditions these markets present risks that could make it more difficult to operate our
business successfully.
Some of these risks include:
•
political, legal and economic instability,
including higher rates of inflation and currency fluctuations;
•
high 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, utilities (including electricity and water supply) 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;
•
indigenization and empowerment programs;
•
exposure to liability under the UK Bribery Act; and
•
exposure to
liability under
U.S. securities
and foreign
trade laws,
including the
Foreign Corrupt
Practices Act,
or FCPA,
and regulations established by the U.S. Department of Treasury’s
Office of Foreign Assets Control, or OFAC.
If
we
do
not
achieve
applicable
Broad-Based
Black
Economic
Empowerment
objectives in
our
South
African businesses, we
may be subject
to fines and
we risk losing
our government and/or
private contracts.
In addition,
it is
possible that
we may
be required
to increase
the Black
shareholding of
our company
in a
manner that
could dilute
your ownership
and/or change
the companies
from which
we purchase
goods or
procure services (to companies with a better BEE Status Level).
The legislative framework for the promotion of Broad-Based Black Economic Empowerment (“BEE”), in South Africa
has been
established through
the Broad-Based
Black Economic
Empowerment
Act, No.
53 of
2003, as
amended from
time to
time, and
the
Amended
BEE
Codes
of
Good
Practice,
2013,
or
BEE
Codes,
and
any
sector-specific
codes
of
good
practice,
or
Sector
Codes,
published pursuant
thereto. Sector
Codes are
fully binding
between and
among businesses
operating in
a sector
for which
a Sector
Code has been
published. Achievement
of BEE objectives
is measured by
a scorecard which
establishes a weighting
for the various
elements. Scorecards
are independently
reviewed by
accredited BEE
verification agencies
which issue
a verification
certificate that
presents an
entity’s
BEE Status
Level. This
BEE verification
process must
be conducted
on an
annual basis,
and the
resultant BEE
verification certificate is only
valid for a period
of 12 months from the
date of issue of the verification
certificate.
We currently
have
a level 5 BEE rating for our South African business.
Certain of our South African
businesses are subject to either
the Amended Information and
Communication Technology
Sector
Code, or ICT Sector Code, or the
Amended Financial Services Sector Code,
or the FS Sector Code. The ICT
Sector Code and the FS
Sector Code have been amended and aligned with the new
BEE Codes and were promulgated in November 2016 and December
2017,
respectively.
Licensing
and/
or
regulation
authorities
overseeing
these
South
African
businesses
may
set
minimum
adherence
requirements to BEE standards as a condition for an operating license to trade
.
The BEE scorecard includes
a component relating to management
control, which serves to determine
the participation of Black
people
within
the
board,
as
well
as
at
various
levels
of
management
within
a
measured
entity
(including,
inter
alia
,
Executive
Management, Senior
Management, Middle
Management and
Junior Management).
The BEE
Codes and/or
Sector Codes
define the
terms
"
Senior
Management
",
"
Middle
Management
"
and
"
Junior
Management
"
as
those
occupational
categories
as
determined
in
accordance
with
the
Employment
Equity
Regulations,
with
specific
emphasis
on
improving
participation
in
proportion
to
the
demographics
of the
Economically Active
Population
of South
Africa,
as published
by Statistics
South
Africa,
from time
to time.
Employment Equity legislation
seeks to drive the
alignment of the workforce
with the racial composition
of the economically active
population
of
South
Africa
and
accelerate
the
achievement
of
employment
equity
targets,
introducing
monetary
fines
for
non-
compliance
with
the Employment
Equity
legislation
and misrepresented
submissions.
Annexure
EEA9
to the
Employment
Equity
Regulations sets out the various occupational levels which are determined in accordance with the relevant grading systems applied by
the measured entity and referred to in said Annexure.
We
have taken a
number of actions
as a company
to increase empowerment
of Black (as
defined under applicable
regulations)
South Africans.
For instance,
the South
African competition
authorities approved
the Connect
transaction subject
to certain
public
interest conditions
relating to
employment, increasing
the spread
of ownership
by historically
disadvantaged people
(“HDPs”), and
investing
in both
enterprise and
supplier development.
Further to
increasing the
spread of
ownership
by HDPs,
we are
required
to
establish
an
Employee
Share
Ownership
Plan
scheme
(“ESOP”)
within
months
of
the
implementation
of
the
transaction
that
complies with certain design principles. This will benefit the workers of the merged entity and result in them receiving a shareholding
in our
company equal
in value
to at
least 3%
of the
issued shares
in our
company as
of April
14, 2022.
If within
24 months
of the
implementation date of the transaction, we generate a positive net profit for three consecutive quarters, the ESOP shall increase to 5%
of the issued
shares in our company
as of April 14,
2022. The final structure
of the ESOP is
contingent on shareholder
approval and
relevant regulatory and
governance approvals. The
ESOP had not been
established as of the
date of this Annual
Report on Form
K.
During fiscal 2023, we
made a donation to
The Association for Savings
and Investment South Africa (“ASISA”),
an organization
which serves as a unifying force for the South
Africa's asset managers, collective investment scheme
management companies, linked
investment service providers, multi-managers, and life insurance companies. We
provided donations to eight of our suppliers in order
to enable
them to
promote growth
and strengthen
their capacity
to provide
valuable products
and services
to the
market they
serve.
We
also contributed
to a
non-profit organization
that focuses
on education,
health services,
and sports
development in
underserved
communities, and we
believe our contribution
creates a positive impact
on society and promoting
holistic development among
those
who face
challenges in accessing
essential resources.
However,
it is possible
that these actions
may not
be sufficient
to enable us
to
achieve the applicable BEE objectives set out for specific
financial years. In that event, in order to
maintain competitiveness with both
government
and
private
sector
clients,
we
may
have
to
seek
to
increase
compliance
through
other
means,
including
by
selling
or
placing additional
shares of Lesaka
or of our
South African subsidiaries
to Black
South Africans
(either directly
or indirectly),
over
and above what
has already been
approved. Such sales
or placements of
shares could have
a dilutive impact
on your ownership
interest,
which could cause the market price of our stock to decline.
We
expect that our
BEE Status Level
will be important
in order for
us to remain
competitive in the
South African marketplace
and we continually
seek ways to
improve our BEE
Status Level, especially
the ownership element
(so-called “equity element”)
thereof.
We
may not be
able to effectively
and efficiently
manage the disruption
to our operations
as a result
of
erratic electricity supply in
South Africa, which could
adversely affect our, financial position, cash flows
and
future growth.
Our businesses in
South Africa are
dependent on electricity
generated and supplied
by the state-owned
utility,
Eskom, in order
to operate, and Eskom has been unable to generate and
supply the amount of electricity required by the South African economy which
has resulted in significant and
often unpredictable electricity supply disruptions. Eskom has
implemented a number of short- and
long-
term mitigation plans
to correct these issues
but supply disruptions
continue to occur
regularly and with
no predictability.
As part of
our
business continuity
programs, we
have
installed back-up
diesel generators
in order
for
us to
continue
to operate
our
core data
processing
facilities
in
the
event
of
intermittent
disruptions
to
our
electricity
supply.
We
have
to
perform
regular
monitoring
and
maintenance of these
generators and also
source and manage
diesel fuel levels.
We
may also be
required to replace
these generators
on a more frequent basis due to the additional burden placed on them.
Our results of operations, financial position, cash flows
and future growth could be adversely affected if Eskom is
unable to raise
sufficient funding to operate
and/or commission new electricity-generating
power stations in accordance with its
plans, or at all, or if
we are unable to effectively and efficiently test, maintain,
source fuel for, and replace, our generators.
Fluctuations in
the value
of the
South African
rand have
had, and
will continue
to have,
a significant
impact
on
our
reported
results
of
operations,
which
may
make
it
difficult
to
evaluate
our
business
performance between reporting periods and may also adversely affect our stock price.
The South
African rand,
or ZAR,
is the
primary operating
currency for
our business
operations while
our financial
results are
reported in U.S. dollars. Therefore, any depreciation in
the ZAR against the U.S. dollar, would negatively impact
our reported revenue
and net
income. The
U.S. dollar/ZAR
exchange rate
has historically
been volatile
and we
expect this
volatility to
continue (refer
to
Item
7 - “Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations-Currency
Exchange
Rate
Information.”).
Due
to
the
significant
fluctuation
in
the
value
of
the
ZAR
and
its
impact
on
our
reported
results,
you
may
find
it
difficult to
compare our results
of operations between
financial reporting periods
even though we
provide supplemental information
about our
results of
operations determined
on a
ZAR basis.
Similarly,
depreciation in
the ZAR
may negatively
impact the
prices at
which our stock trades.
We generally do not engage in any currency hedging
transactions intended to reduce the
effect of fluctuations in foreign currency
exchange rates on our results of
operations, other than economic hedging
using forward contracts relating to
our inventory purchases
which are settled in U.S.
dollars or euros. We
cannot guarantee that we will
enter into hedging transactions
in the future or,
if we do,
that these transactions will successfully protect us against currency fluctuations.
South Africa’s
high levels of
poverty, unemployment
and crime may
increase our costs
and impair our
ability to maintain a qualified workforce
While South Africa has a highly developed financial and legal infrastructure, it also has high levels of crime and unemployment,
relative to peer
countries in Africa
and other emerging
economies, and there
are significant differences
in the level
of economic and
social development among its people,
with large parts of the population,
particularly in rural areas, having limited
access to adequate
education, healthcare, housing and other
basic services, including water
and electricity. In addition, South Africa has
a high prevalence
of HIV/AIDS and tuberculosis. Government policies aimed at alleviating and redressing the disadvantages suffered by the majority of
citizens
under
previous
governments
may
increase
our
costs and
reduce
our
profitability,
all of
which
could
negatively
affect
our
business.
These
problems
may
prompt
emigration
of
skilled
workers,
hinder
investment
into
South
Africa
and
impede
economic
growth. As a result, we may have difficulties attracting and retaining
qualified employees.
The
economy
of
South
Africa
is
exposed
to
high
rates
of
inflation,
interest
and
corporate
tax,
which
could
increase
our
operating
costs
and
thereby
reduce
our
profitability.
Furthermore,
the
South
African
government requires additional
income to fund
future government
expenditures and may
be required,
among
other things, to
increase existing income
tax rates, including
the corporate income tax
rate, amend existing
tax legislation or introduce additional taxes.
The economy of
South Africa in the
past has been, and
in the future may
continue to be, characterized
by rates of inflation
and
interest that
are substantially
higher than
those prevailing
in the United
States and
other highly-developed
economies. High
rates of
inflation could increase our South African-based costs and decrease our operating margins. High interest rates increase the cost of our
debt financing, though conversely, they also
increase the amount
of income we
earn on any
cash balances. The
South African corporate
income tax rate, of 27%, is higher than the
U.S. federal income tax rate, of 21%. Any increase
in the effective South African corporate
income tax rate would adversely impact our profitability and cash flow generation.
Risks Relating to Government Regulation
We
are required to
comply with
certain laws
and regulations, including
economic and trade
sanctions,
which could adversely impact our future growth.
We
are
subject
to U.S.
and
other
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.
These
laws and
regulations
place
restrictions
on
our
operations,
trade
practices,
partners
and
investment
decisions.
In particular,
our operations
are subject
to U.S.
and
foreign
trade
control laws
and
regulations,
including various export controls and economic sanctions programs, such as those administered by OFAC. We monitor compliance in
accordance with
the 10
principles as
set out
in the
United Nations
Global Compact
Principles, the
Organisation
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 trade control laws as well as sanctions regulations.
Violations
of
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
trade control laws
and regulations,
including trade controls
and sanctions programs administered
by OFAC,
and provide regular training
to our employees to create awareness
about the risks of
violations of trade
control laws and
sanctions regulations and
to ensure compliance
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 act 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
expansion
into
developing
countries,
and
our
development
of
new
partnerships and joint venture relationships, could increase the risk
of OFAC violations in the
future.
In addition,
our payment
processing and
financial services
activities are
subject to
extensive
regulation.
Compliance with
the
requirements under the various
regulatory regimes may cause
us to incur significant
additional costs and failure
to comply with such
requirements could result in the shutdown of
the non-complying facility, the imposition of liens, fines and/or civil or
criminal liability.
We
are
required
to
comply
with
anti-corruption
laws
and
regulations,
including
the
FCPA
and
UK
Bribery Act, in the
jurisdictions in which we
operate our business, which could
adversely impact our future
growth.
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,
and
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.
The UK
Bribery
Act includes
provisions
that extend
beyond bribery
of foreign
public
officials and also apply to
transactions with individuals not employed
by a government and
the act is 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 or have investments lack a developed
legal system and have higher than normal levels of corruption.
Any
failure
by
us
to
adopt
appropriate
compliance
procedures
and
ensure
that
our
employees,
agents
and
business
partners
comply with
the anti-corruption
laws and
regulations could
subject us
to substantial
penalties, and
the requirement
that we
comply
with these laws could
put us at a
competitive disadvantage against
companies that are not
required to comply.
For example, in many
emerging
markets,
there
may be
significant
levels
of official
corruption,
and
thus, bribery
of public
officials
may
be
a comm
only
accepted cost
of doing
business. Our
refusal to
engage in
illegal behavior,
such as
paying bribes,
may result
in us not
being able
to
obtain business that we
might otherwise have been able
to secure or possibly
even result in unlawful,
selective or arbitrary action being
taken against us.
Violations of anti-corruption laws and regulations are punishable by civil penalties, including fines, 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.,
South African and other international
anti-corruption laws and regulations,
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 or
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.
We
do not
have a South
African banking license
and, therefore, we
provide our EPE
solution through
an arrangement with
a third-party bank,
which limits our
control over this
business and the
economic benefit
we derive from it.
If this arrangement were
to terminate, we would
not be able to operate
our EPE business
without alternate means of access to a banking license.
The
South
African
retail
banking
market
is
highly
regulated.
Under
current
law
and
regulations,
our
EasyPay
Everywhere
(“EPE”) business activities require
us to be registered as
a bank in South Africa
or to have access to an
existing banking license.
We
are not currently so registered,
but we have an agreement
with Grindrod Bank, a subsidiary
of African Bank Limited, that
enables us
to implement
our EPE
program in
compliance
with the
relevant laws
and regulations.
If this
agreement
were to
be terminated,
we
would
not
be
able
to
operate
these
services
unless
we
were
able
to
obtain
access
to
a
banking
license
through
alternate
means.
Furthermore, we
have to
comply with
the strict
anti-money laundering
and customer
identification regulations
of the South
African
Reserve Bank (“SARB”),
when we open
new bank accounts
for our customers
and when they
transact. Failure to
effectively implement
and monitor responses to these regulations may result in significant fines or prosecution
of Grindrod Bank and ourselves.
In
addition,
the
South
African
Financial
Advisory
and
Intermediary
Services
Act,
2002,
requires
persons
who
act
as
intermediaries between financial product suppliers and consumers
in South Africa to register
as financial service providers. Smart
Life
was granted an Authorized Financial Service Provider, or FSP,
license on June 9, 2015, and EasyPay Financial Services (Pty) Ltd and
Net1
Mobile
Solutions
(Pty) Ltd
were
each granted
FSP licenses
on
July
11,
2017.
If
our
FSP licenses
are
cancelled,
we
may
be
stopped from continuing our financial
services businesses in South Africa
unless we are able
to enter into a
representative arrangement
with a third party FSP.
Furthermore, the proposed
Conduct of Financial
Institutions Bill will make
significant changes to
the current licensing
regime.
The second
draft of
the Conduct
of Financial
Institutions Bill
was published
for public
comment on
29 September
2020. While
the
proposals currently
indicate that
existing licenses
will be converted,
if we are
not successful in
our efforts
to obtain
a conversion
of
the existing
licenses or
cannot comply
with the
new conduct
standards to
be published
at the
same time
under the
Financial Sector
Regulation Act, No. 9 of 2017, we may be stopped from continuing
our financial services businesses in South Africa.
We
may
be
subject
to
regulations
regarding
privacy,
data
use
and/or
security,
which
could
adversely
affect our business.
We are
subject to regulations in
a number of the countries
in which we operate
relating to the processing
(which includes,
inter
alia
, the collection, use, retention, security and transfer) of
personal information about the people (whether natural or juristic)
who use
our products
and services.
The interpretation
and application
of user
data protection
laws are
in a
state of
flux. These
laws may
be
interpreted
and
applied
inconsistently
from
country
to
country
and
our
current
data
protection
policies
and
practices
may
not
be
consistent with those interpretations and applications. Complying
with these varying requirements could cause us to incur
substantial
costs or
require us
to change
our business
practices in
a manner
adverse to
our business.
Any failure,
or perceived
failure, by
us to
comply with any regulatory requirements or international
privacy or consumer protection-related laws and regulations could
result in
proceedings
or
actions
against
us
by
governmental
entities
or
others,
subject
us
to
significant
penalties
and
negative
publicity.
In
addition, as
noted above,
we are
subject to
the possibility
of security
breaches, which
themselves may
result in
a violation
of these
laws.
Amendments to
the NCA
were signed into
law in
South Africa
in August 2019.
Compliance with
these
amendments may adversely impact our micro-lending operations in South Africa.
In August 2019, the National Credit Amendment Bill, or debt-relief bill, was signed into law in South Africa.
The effective date
of the debt-relief
bill has not
yet been announced
and has been
significantly delayed.
We
believe that the
debt-relief bill will
restrict
the ability of financial services providers to provide lending
products to certain low-income earners and will increase the
cost of credit
to
these
consumers.
As a
result,
compliance
with
the debt
-relief
bill
may
adversely
impact
our
micro-lending
operations
in
South
Africa. Furthermore, we expect that it will take us, and other financial services providers, some time to fully understand, interpret and
implement this new legislation in
our lending processes and practices.
Non-compliance with the provisions of this
new legislation may
result in financial loss and penalties, reputational loss or other administrative
punishment.
Risks Relating to our Common Stock
If we were
deemed an “investment
company” under the
Investment Company Act,
applicable restrictions
could make it impractical for
us to conduct our business as
an operating company and could
have a material
adverse effect on our business.
We
are an operating
company whose business is
focused on developing
and offering payment
solutions, transaction processing
services and financial technologies across
multiple industries directly and through
our wholly-owned subsidiaries. Our conduct,
public
filings and
announcements
hold us
out as
such an
operating
company
and
do not
hold
us out
as being
engaged
in the
business of
investing, reinvesting or trading
in securities. We own, and
in the
past have owned,
certain assets that
may be deemed
to be
“investment
securities” within
the meaning
of Section
3(a)(2) of
the Investment
Company
Act. The
fluctuating
value of
our assets
that may
be
deemed to be investment securities, could cause us to be deemed to be an
“investment company” under the Investment Company Act
if the value of such investment securities exceeds certain defined thresholds.
If we are deemed
an investment company
and not entitled to
an exception or
exemption from registration
under the Investment
Company Act, we would have to register as
an investment company, modify our asset profile or otherwise change our business so that
it falls outside
the definition
of an investment
company under the
Investment Company
Act. Registering as
an investment
company
pursuant to
the Investment
Company Act
could, among
other things,
materially limit
our ability
to borrow
funds or
engage in
other
transactions and
otherwise would
subject us
to substantial
and costly
regulation. Failure
to register,
if required,
would significantly
impair our ability to continue to engage in our business and would have a material
adverse impact on our business and operations.
Our stock price has been and may continue to be volatile.
Our stock price has periodically experienced significant volatility. During the 2023 fiscal year, our stock
price ranged from a low
of $3.02 to a high of $5.97. We
expect that the trading price of our common stock may
continue to be volatile as a result of a number
of factors, including, but not limited to the following:
•
any adverse developments in litigation or regulatory actions in which we are
involved;
•
fluctuations in currency exchange rates, particularly the U.S. dollar/ZAR exchange
rate;
•
announcement
of
additional
BEE
transactions,
especially
one
involving
the
issuance
or
potential
issuance
of
equity
securities or dilution or sale of our existing business in South Africa;
•
quarterly variations in our operating results;
•
significant fair value adjustments or impairment in respect of investments or
intangible assets;
•
announcements of acquisitions or disposals;
•
the timing of, or delays in the commencement, implementation or completion
of major projects;
•
large purchases or sales of our common stock; and
•
general conditions in the markets in which we operate.
Additionally,
shares of
our common
stock can
be expected
to be
subject to
volatility resulting
from purely
market forces
over
which we have no control.
The put
right we granted
to the IFC
Investors on the
occurrence of certain
triggering events may
have
adverse impacts on us.
In May
2016, we
issued an
aggregate of
9,984,311
shares of
our common
stock to
the IFC Investors,
of which,
as of
June 30,
2023,
the
IFC
Investors
held
7,366,866
shares.
We
granted
the
IFC
Investors
certain
rights,
including
the
right
to
require
us
to
repurchase
any
share held
by the
IFC Investors
pursuant
to
the
May
2016 transaction
upon
the occurrence
of specified
triggering
events,
which
we refer
to as
a
“put
right.”
The put
price
per share
will be
the higher
of the
price
per share
paid
to us
by
the IFC
Investors and
the volume-weighted
average price
per share prevailing
for the 60
trading days preceding
the triggering
event, except
that with respect
to a put right
triggered by rejection
of a bona
fide offer,
the put price
per share will
be the highest
price offered
by
the offeror.
If a put triggering event occurs, it could adversely impact
our liquidity and capital resources. In addition, the
existence of
the put right could also affect whether or on what terms a third party might in the future offer to purchase our company.
Our response
to any such offer could also be complicated, delayed or otherwise influenced
by the existence of the put right.
Approximately
37%
of
our
outstanding
common
stock
is
owned by
two shareholders.
The
interests of
these shareholders may conflict with those of our other shareholders.
There is a concentration of ownership
of our outstanding common stock because
approximately 37% of our outstanding common
stock is owned by two
shareholders. Based on their most
recent SEC filings disclosing
ownership of our shares, Value Capital Partners
(Pty) Ltd, or VCP,
and IFC Investors, beneficially own approximately 25% and 12% of our outstanding common
stock as of June 30,
2023, respectively.
The interests of
VCP and the
IFC Investors may
be different
from or conflict
with the interests
of our other
shareholders. As a
result of
the significant
combined ownership
by VCP
and the
IFC Investors,
they may
be able,
if they
act together,
to significantly
influence the
voting outcome
of all
matters requiring
shareholder approval.
This concentration
of ownership
may have
the effect
of
delaying or preventing
a change of control of
our company,
thus depriving shareholders
of a premium for
their shares, or facilitating
a change of control that other shareholders may oppose.
We may seek to raise
additional financing by
issuing new securities
with terms or
rights superior to
those
of shares of our common stock, which could adversely affect the market price of such shares.
We
may require
additional financing
to fund future
operations, including
expansion in
current and new
markets, programming
development and acquisition,
capital costs and
the costs of any
necessary implementation of
technological innovations or
alternative
technologies, or to fund acquisitions. We may also wish to raise additional equity funding to
reduce the amount of debt funding on our
balance sheet. Because of the exposure to market risks associated
with economies in emerging markets, we may not
be able to obtain
financing on favorable terms or at all.
If we raise additional funds by
issuing equity securities, the percentage ownership of our
current
shareholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of
common stock,
which could
adversely affect
the market
price and
voting power
of shares
of common
stock. If
we raise
additional
funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior
to those of the holders of
shares of common stock, and the terms of these debt securities could impose restrictions on operations and
create a significant interest
expense for us.
Issuances
of significant
amounts of
stock in
the future
could potentially
dilute
your equity
ownership
and adversely affect the price of our common stock.
We
believe that
it is necessary
to maintain
a sufficient
number of
available authorized
shares of our
common stock
in order
to
provide
us
with
the flexibility
to
issue shares
for
business
purposes
that
may
arise
from time
to
time.
For example,
we
could
sell
additional shares to raise
capital to fund our
operations, to reduce debt
or to acquire other
businesses, issue shares in
a BEE transaction,
issue additional shares under our stock incentive plan or declare a stock dividend. Our board may authorize
the issuance of additional
shares of common stock without notice to, or further
action by, our shareholders, unless shareholder approval is required by law or the
rules of the NASDAQ Stock
Market. The issuance of additional
shares could dilute the equity
ownership of our current shareholders
and any such additional shares would likely be freely tradable, which could
adversely affect the trading price of our common
stock.
Failure to maintain effective internal control over financial
reporting in accordance with Section 404
of the
Sarbanes-Oxley
Act, especially
over companies
that we
may acquire,
could have
a material
adverse
effect on our business and stock price.
Under Section 404
of the Sarbanes-Oxley
Act of 2002,
or Sarbanes, 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 annual
or interim financial statements will not be prevented or detected on
a timely basis.
The
requirement
to
evaluate
and
report
on
our
internal
controls
also
applies
to
companies
that
we
acquire.
Some
of
these
companies may not
be required
to comply with
Sarbanes prior
to the
time we
acquire them.
The integration of
these acquired
companies
into our internal
control over financial
reporting could require
significant time and
resources from our
management and other
personnel
and may increase our compliance costs.
If we fail to successfully
integrate the operations of these
acquired companies into our internal
control over financial reporting, our internal control over financial reporting
may not be effective.
While
we
continue
to
dedicate
resources
and
management
time
to
ensuring
that
we
have
effective
controls
over
financial
reporting, failure to
achieve and maintain
an effective internal
control environment could
have a material
adverse effect on
the market’s
perception of our business and our stock price.
You
may
experience
difficulties
in
effecting
service
of
legal
process,
enforcing
foreign
judgments
or
bringing
original
actions
based
upon
U.S.
laws,
including
federal
securities
laws
or
other
foreign
laws,
against us or certain of our directors and officers and experts.
While Lesaka is incorporated in the state of Florida, United States, the company is headquartered in Johannesburg, South Africa
and substantially all of the company’s
assets are located outside the United
States. In addition, the majority of
Lesaka’s directors
and
all
its
officers
reside
outside
of
the
United
States
and
the
majority
of
our
experts,
including
our
independent
registered
public
accountants, are based in South Africa.
As a
result, even
though you
could effect
service of
legal process
upon Lesaka,
as a
Florida corporation,
in the
United States,
you may not be able
to collect any judgment obtained
against Lesaka in the United
States, including any judgment based
on the civil
liability
provisions
of
U.S.
federal
securities
laws,
because
substantially
all
of
our
assets
are
located
outside
the
United
States.
Moreover, it may not be possible for
you to effect service of legal process upon the majority of
our directors and officers or upon our
experts within
the United
States or
elsewhere outside
South Africa
and any
judgment obtained
against any
of our
foreign directors,
officers and experts in
the United States, including
one based on the
civil liability provisions of the
U.S. federal securities laws,
may
not be collectible in the United States and may not be enforced by a South
African court.
South Africa
is not
a party
to any
treaties regarding
the enforcement
of foreign
commercial judgments,
as opposed
to foreign
arbitral awards. Accordingly, a foreign judgment that
is not recognized in
South Africa has
no extra territorial effect, and
is not directly
enforceable in South Africa, but
constitutes a cause of action
which may be recognized and enforced
by South African courts provided
that:
•
the court which
pronounced the judgment
had international jurisdiction
and competence to entertain
the case according to
the principles recognized by South African law with reference to the jurisdiction
of foreign courts;
•
the judgment is final and conclusive (that is, it cannot be altered by the court which
pronounced it);
•
the judgment has not lapsed;
•
the recognition and
enforcement of the
judgment by South African
courts would not
be contrary to public
policy in South
Africa, including observance of the rules of natural justice which require
that no award is enforceable unless the defendant
was duly served with documents
initiating proceedings, that he
or she was given a
fair opportunity to be
heard and that he
or she enjoyed the right to be legally represented in a free and fair trial before an impartial
tribunal;
•
the judgment was not obtained by improper or fraudulent means;
•
the
judgment
does
not involve
the
enforcement
of a
penal
or
foreign
revenue
law or
any
award
of multiple
or punitive
damages; and
•
the enforcement of the judgment is not otherwise precluded by the provisions of
the Protection of Business Act 99 of 1978
(as amended), of the Republic of South Africa.
It has been 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. South African courts have awarded compensation to shareholders who have suffered damages as
a result
of a
diminution in
the value
of their
shares based
on various
actions by
the corporation
and its
management. Although
the
award
of punitive
damages
is generally
unenforceable
in the
South
African legal
system, that
does not
mean
that such
awards are
necessarily
contrary
to
public
policy.
The
award
of
punitive
damages
is
governed
by
the
relevant
South
African
legislation,
the
Conventional Penalties Act 15 of 1962 (as amended).
Whether a judgment
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 judgment and cannot
act as a court of appeal or review over the foreign court. Further, if a foreign judgment is enforced by a South African court,
it will be
payable in South African currency unless approval is obtained from SARB or an Authorised Dealer of SARB, to settle the judgement
in another
currency.
Also, under
South Africa’s
exchange control
laws, the
approval of
SARB or
an Authorised
Dealer is
required
before a defendant
resident in South Africa
may pay money to
a non-resident plaintiff
in satisfaction of a
foreign judgment enforced
by a court in South Africa.
It is
doubtful
whether an
original action
based on
United States
federal
securities laws
may
be brought
before South
African
courts. A plaintiff who
is not 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 authenticated for the purpose of use in South African courts. In reaching the foregoing conclusions in respect of South
Africa, we consulted with our South African legal counsel, Werksmans
Inc.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED
STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
We lease our corporate
headquarters facility which consists of approximately 87,000 square feet in Johannesburg,
South Africa.
We also lease properties throughout South
Africa, including an
approximately 36,000 square foot
manufacturing facility in Lazer
Park,
Johannesburg, 194 financial
services branches, 26 financial service
express stores and 22 satellite
branches. We
also lease additional
office space
in Johannesburg,
Cape Town
and Durban, South
Africa; and Gaborone,
Botswana. These leases
expire at various
dates
through
2028,
assuming
the
exercise
of
options
to
extend.
We
believe
that
we
have
adequate
facilities
for
our
current
business
operations.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
Litigation related to CPS
As
a
result
of
significant
obligations
relating
to,
and
ongoing
litigation
arising
out
of,
CPS’
SASSA
contract,
including
the
exhaustion
of CPS’
legal appeals
against a
court judgment
to repay
additional SASSA
implementation
costs, CPS
was placed
into
liquidation in October
2020. As a
result, CPS’ liquidators
are currently in
control of the CPS
liquidated estate
and are managing
the
affairs in
relation thereto.
We
have proven
our claims
and are
noted as
a creditor
along with
other creditors
in the
liquidated estate.
See Item
1A - “Risk Factors
-Cash Paymaster
Services, or
CPS, has
been placed
into liquidation.
While no
claim has
been made
against Lesaka for CPS’ obligations, we cannot provide assurance that
no such claim will be made” for additional information.
There are no other material pending legal proceedings, other than ordinary
routine litigation incidental to our business, to which
we are a party or of which any of our property is the subject.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART
II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market information
Our common stock is listed on The NASDAQ Global Select Market, or Nasdaq, in the United States under
the symbol “LSAK”
and on the JSE in South Africa under the symbol “LSK.” The Nasdaq is our
principal market for the trading of our common stock and
we have a secondary listing on the JSE.
Our transfer
agent in
the United
States is
Computershare
Shareowner Services
LLC, 480
Washington
Blvd, Jersey
City,
New
Jersey,
07310.
According
to
the
records
of
our
transfer
agent,
as
of
August
31,
2023,
there
were
shareholders
of
record
of
our
common stock.
We
believe that
a substantially
greater number
of beneficial
owners of
our common
stock hold
their shares
though
banks, brokers,
and other financial
institutions (i.e. “street
name”). Our transfer
agent in South
Africa is JSE
Investor Services (Pty)
Ltd, One Exchange Square, 2 Gwen Lane, Sandown, Sandton, 2196,
South Africa.
Dividends
We
have not
paid any
dividends on
shares of
our common
stock during
our last
two fiscal
years and
presently intend
to retain
future earnings to finance the expansion of the
business. We do not anticipate paying any cash dividends in the
foreseeable future. The
future dividend policy will depend on our earnings, capital requirements, debt commitments, expansion plans, financial condition and
other relevant factors.
Issuer purchases of equity securities
On
February
5,
2020,
our
board
of
directors
approved
the
replenishment
of
our
existing
share
repurchase
authorization
to
repurchase up to an aggregate of $100 million of common stock. The authorization
has no expiration date.
The table
below presents
information relating
to purchases
of shares
of our
common stock
during the
fourth quarter
of fiscal
2023:
Period
(a)
Total
number of
shares purchased
(b)
Average price
paid per share ($)
(c)
Total
number of shares
purchased as part of
publicly announced
plans or programs
(d)
Maximum dollar value
of shares that may yet
be purchased under the
plans or programs ($)
April 2023
-
-
100,000,000
May 2023
(1)
246,606
3.26
-
100,000,000
June 2023
(1)
2,881
3.96
-
100,000,000
Total
249,487
-
(1) Relates to the delivery of shares of our common
stock to us by certain of our employees to settle their income
tax liabilities.
These shares do not reduce the repurchase authority under the share repurchase
program.
Share performance graph
The chart
below compares
the five-year
cumulative return,
assuming the
reinvestment of
dividends, where
applicable, on
our
common stock with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph assumes
$100 was invested on June 30,
2018, in each of our common stock, the companies in the S&P 500 Index, and the companies in the
NASDAQ Industrial Index.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
[RESERVED]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
The following
discussion and
analysis should
be read
in conjunction
with Item
8 - “Financial Statements
and Supplementary
Data.” In
addition
to historical
consolidated
financial
information,
the following
discussion
and
analysis contains
forward-looking
statements that involve risks, uncertainties and assumptions. See Item 1A -
“Risk Factors” and “Forward Looking Statements.”
U.S. securities laws
require that when
we publish any
non-GAAP measures, we
disclose the reason
for using these
non-GAAP
measures
and
provide
reconciliations
to
the
most
directly
comparable
GAAP
measures.
We
discuss
why
we
consider
it
useful
to
present these non-GAAP
measures and the
material risks and
limitations of these
measures, as well
as a reconciliation
of these non-
GAAP measures
to the
most directly
comparable GAAP
financial measure
below at
“-Results of Operations
-Use of Non-GAAP
Measures” below.
Overview
We are a provider of financial technology,
or fintech, products and services to unbanked and underbanked individuals and small
businesses, predominantly
in South Africa.
We
have developed and
own most of
our payment technologies,
and where possible,
we
utilize this technology to
provide financial and
value-added services to
our customers by
including them in the
formal financial system.
Sources of Revenue
We
generate our
revenues by
charging
transaction fees
to merchants,
financial service
providers, utility
providers, bill
issuers
and consumers;
by selling
pinned airtime
to merchants;
by providing
loans to
merchants and
consumers, and
insurance products
to
consumers and by selling hardware, licensing software and providing
related technology services to merchants.
We act
as a service provider whereby we
own and operate the technology and
apply it in a system ourselves,
charging one-time
and ongoing fees for the use of the system either on
a fixed or ad valorem basis. For instance, through
the acquisition of Connect, we
now provide cash management and payment services to merchant customers through a digital vault (safe asset) which is located at the
customer’s premises and
generate processing revenue from
the provision of these services.
We also
offer merchant customers
access
to platforms through
which we (a) generate
revenue from the sale
of prepaid airtime and
(b) generate fees from
distribution of VAS,
including prepaid
airtime, prepaid
electricity,
gaming voucher,
and other
services, to
users of
our platforms.
We
also generate
fees
from debit
and credit
card transaction
processing and
interest revenue
from qualifying
merchant
customers
who are
able to
access
short-term loans. The revenue and costs associated with these services and
sales are included in our merchant operating segment.
We
provide consumers with
bank accounts from
which we generate
a monthly fee
and also charge
fees on an ad
valorem basis
for goods
and services
purchased. Usage
of our
bank accounts
also provides
our customers
with access
to short-term
loans and
life
insurance products.
We
also generate
fees from
consumers utilizing
our ATM
network. The
revenue and
costs associated
with this
approach are reflected in our consumer operating segment.
Developments during Fiscal 2023
Fiscal 2023 represents a milestone for Lesaka. We
made significant progress in our turnaround strategy and delivered continued
growth for Lesaka despite challenging macroeconomic and socio-political
conditions.
We
reported a
net loss
attributable to
us of
$35.1 million
(ZAR 629.2
million) during
fiscal 2023
compared with
a net
loss of
$43.9 million (ZAR 666.8 million) during fiscal 2022. Our Consumer Division (“Consumer”) returned to
profitability and contributed
three
sequential
quarters
of
positive
Segment
Adjusted
EBITDA,
with
our
Merchant
Division
“(Merchant”)
continuing
to
display
strong
growth
and
Segment
Adjusted
EBITDA
profitability
during
the
entire
fiscal
year.
We
delivered
Group
Adjusted
EBITDA
profit,
a non-GAAP measure, of ZAR 497.6 million ($27.7 million) in fiscal 2023, compared with a Group Adjusted EBITDA loss of
ZAR 267.7
million ($17.6
million) in
fiscal 2022, demonstrating
successful execution
against a
carefully considered
transformation
and growth strategy.
Group Adjusted EBITDA
is a non-GAAP measure,
refer to reconciliation below
at “-Results of Operations-
Use of Non-GAAP Measures”.
Our mission at Lesaka is
to enable merchants to compete and
grow, and to improve the lives of
South Africa’s grant beneficiaries
by providing access
to innovative financial
technology and value
creating solutions. We
achieve this through our
vision to build
and
operate the
leading full-service
fintech platform
in Southern
Africa, offering
cash management,
payment processing,
Value
Added
Services (“VAS”),
capital and financial services to merchants and underserved consumers.
Merchant Division outperformance
Our Merchant Division has
shown significant growth in our offering
to MSME, which is supported
by the robust secular trends
underpinning financial inclusion, cash management and digitalization
for MSMEs.
Performance in our Merchant division has been driven by:
●
Kazang, which is our VAS and Supplier Payments Business, has seen
strong adoption by MSMEs in
the informal sector, with
a 47% year-on-year
growth in the
number of devices
deployed. We
had approximately
75,000 devices deployed
as of June
30, 2023, compared to approximately 51,000 devices one year ago;
●
We
provide card acquiring
solutions in the informal
sector via Kazang
Pay and in
the formal sector we
provide this service
through
Card
Connect.
Card-enabled
POS
devices
increased
to
approximately
44,900
as
of
June
30,
2023,
compared
to
approximately 22,650 a year ago, a growth of 98% in deployed devices;
●
We provide merchants access to credit through Capital
Connect and Kazang Pay
Advance. We continue to see strong demand
for this merchant
credit offering
and disbursed
just over ZAR
1.0 billion
during the
year, compared
to approximately
ZAR
0.6 billion in the comparable period last year, representing
growth of 62%.
●
Our automated cash management and payments business, Cash
Connect, effectively puts the “bank” in approximately
4,390
merchants’ stores (compared to approximately 4,080 merchants’
stores a year ago). Cash
Connect is a provider of
robust cash
vaults in the
formal sector,
and is building
a presence
in the informal
sector.
Cash Connect enables
our merchant
customer
base to significantly mitigate their operational risks pertaining to cash management
and security.
Consumer Division contributing sequential positive Segment Adjusted EBITDA
and poised for growth
Over the past four quarters we have consistently referenced the
three levers underpinning our strategy of returning the Consumer
Division
to
profitability
-
growing
active
EasyPay
Everywhere
(“EPE”)
account
numbers,
increasing
average
revenue
per
user
(“ARPU”) through cross-selling and cost optimization.
The progress on our three key initiatives is as follows:
●
Driving customer acquisition
○
Our total active EPE transactional account base
stood at approximately 1.3 million at
the end of June 2023,
of which
approximately
1.1 million
(or approximately
85%) are
permanent grant
recipients. The
balance
comprises Social
Relief of
Distress (“SRD”)
grant
recipients, which
was introduced
during the
COVID pandemic
and extended
in
calendar 2023. As of the end of June
2023, we increased our permanent grant account base by 2% on
a net basis and
our
total
grant
base
by
10%
on
a
net
basis,
compared
to
the
prior
year.
The
net
growth
of
our
permanent
grant
recipient base has
been slower
than anticipated as
we continue to
transition the business
into a
sales driven, customer-
centric, financial services provider.
○
Our priority
is to grow
our permanent
grant recipient
customers base,
where we
can build
deeper relationships
by
offering other products such as insurance and lending. We do not offer the same breadth of service to the SRD grant
base due to the temporary nature of the grant.
○
We continue to focus our efforts on designing and implementing products and services that we believe will enhance
the lives of these people and their families. This in turn should improve account
activation and utilization.
●
Progress on cross
selling
EasyPay Loans
o
We originated approximately 850,000 loans in fiscal 2023 with our net consumer loan book increasing 19% to ZAR
million
as
of
June
30,
2023,
compared
to
ZAR
million
as
of
June
30,
2022.
The
loan
conversion
rate
continues to
improve following
the implementation
of a
number of
targeted loan
campaigns over
the last
quarter.
The portfolio loss ratio,
calculated as the loans
written off during the
period as a percentage
of the total loan book,
remains encouragingly low at approximately 6% per annum.
EasyPay Insurance
o
Our insurance product sales
continues
to grow and
is a material
contributor to the
improvement in our
overall ARPU.
We
have been
able to improve
customer penetration
to approximately
30% of our
active permanent
grant account
base as of June 30, 2023, compared to just below 20% as of June 30, 2022. Over 124,700 new policies were written
during fiscal 2023, compared to approximately 27,600 in the comparable period in fiscal 2022. The total number of
active policies has
grown by 36%
to approximately 335,000 policies
as of June
30, 2023, compared to
June 30, 2022.
o
We
have experienced
a reduction in
the number of
insurance claims incurred
following the cancellation
of certain
offerings and also as a result of reduction in the number of pandemic
-related deaths.
ARPU
o
ARPU for our
permanent client base
has increased
to approximately ZAR
80 for the
fourth quarter of
fiscal 2023,
from approximately ZAR 74 in the fourth quarter of fiscal 2022.
●
Cost optimization
o
Successful execution
of the
cost optimization
initiatives has
contributed
to our
achievement of
three consecutive
quarters of positive
Segment Adjusted EBITDA.
These initiatives included
branch rationalizations, deployment
of
our
ATMs
in
third
party
merchant
stores
and
reductions
in
our
cash
management
expenditures.
We
continue
to
evaluate
and
implement
further
optimization
measures,
particularly
around
our
branch
infrastructure
and
ATM
network, as we grow our Consumer Division.
Strengthening our relationships with key
stakeholders
We continue to build our relationship with the South African Social Security Agency (“SASSA”) through proactive engagement
at a local, provincial, and national level.
We
have
also
made
good
progress
in
enhancing
our
relationships
with
our
shareholders,
regulators,
suppliers
and
other
key
participants across our industry.
Economic Environment and Impact of loadshedding
The
trading
environment
remains
challenging
in
South
Africa.
High
interest
rates,
inflation
and
unemployment
are
being
compounded by daily power
cuts (known as load-shedding
in South Africa). The power
disruptions adversely impact our
customers,
especially in our
Merchant Division, where
they lose valuable
trading hours if
they do not
have access to
alternative power supplies
and
back-up
facilities
to
process
electronic
payments
and
value-added
services.
The
negative
impact
is,
however,
to
some
extent
mitigated as our customer base is geographically diversified, and the rotational nature of load-shedding results in
localized power cuts
over shorter time periods.
According to data published by EskomSePush, our customers experienced significantly higher level of load-shedding during the
first six months of calendar 2023 of just over five hours, on average, per day,
compared with just over two hours, on average,
per day
during calendar 2022. Specifically, these power cuts intensified during
the fourth quarter of
fiscal 2023, frequently exceeding 10 hours
per day.
This deterioration
has severely
impacted our
merchant’s
ability to
make up
lost trading
hours and
recharge back
up power
supplies where available.
Notwithstanding
the
challenging
operating
environment
our
teams
have
delivered
growth
in
the
Merchant
and
Consumer
Divisions, demonstrating the resilience of our business model which is firmly underpinned by
the relevance and value of our offering
to our target market.
Improvement in our Broad Based Black Economic
Empowerment (“B-BBEE”) rating to level 5
B-BBEE is
key
strategic priority
for us.
Achievement
of B-BBEE
objectives
is measured
by a
scorecard which
establishes a
weighting
for
various
elements.
Scorecards
are
independently
reviewed
by
accredited
BEE
verification
agencies
which
issue
a
certificate that presents
an entity’s
BEE Contributor Status
Level, with level 1
being the highest and
“no rating” (a level
below level
8) as the lowest.
During fiscal 2023, we
made significant progress in terms
of improving our empowerment credentials
and are pleased
to report
that our
independently
verified
B-BBEE rating
has improved
to a
level 5
rating from
a level
8 rating.
Together
with the
various other B-BBEE initiatives and programmes being
rolled out, including our Youth
Employment Services (“YES”) programme,
we aim to achieve a level 4 rating by the end of fiscal year 2024.
Employee Share Ownership Plan (“ESOP”)
Under
the
South
African
Competition
Tribunal’s
approval
of
the
Connect
acquisition,
we
are
required
to
establish
an
ESOP
within 36 months of
the implementation of the
transaction that complies with certain
design principles. This will
benefit the workers
of the merged
entity and result in
them receiving a shareholding
in our company equal
in value to at
least 3% of the
issued shares in
our company as of April 14, 2022. If within 24 months of the implementation date of the transaction, we generate a positive net profit
for three consecutive
quarters, the
ESOP shall
increase to
5% of
the issued
shares in
our company
as of
April 14,
2022. We
expect
that the majority
of our South African
workforce will be
eligible to participate
in the ESOP.
We
expect that participating
employees
will be required
to earn the
shares awarded over
a period of
time, currently
estimated at approximately
seven years,
but this vesting
period, as well as other
terms of ESOP,
have not been finalized
as of the date of
filing this Annual Report
on Form 10-K and
will be
subject to shareholder approval.
We
currently
expect to
issue up
to 5%
of our
issued share
capital to
the ESOP
and
we believe
that this
transaction
will be
a
qualifying transaction under South Africa’s Broad Based Black Economic Empowerment
Act, and is a key strategic imperative for us
in achieving a target BBEE level 4 rating by 30
June 2024. We are
pleased to report that we progressed well on this
initiative and are
confident that we will achieve this condition of the Connect acquisition within
the time frames agreed.
Critical Accounting Policies
Our audited consolidated
financial statements have
been prepared in accordance
with U.S. GAAP,
which requires management
to
make
estimates
and
assumptions
about
future
events
that
affect
the
reported
amount
of
assets
and
liabilities
and
disclosure
of
contingent
assets and liabilities. As future
events and their effects
cannot be determined with
absolute certainty,
the determination of
estimates requires
management’s
judgment based
on a
variety of
assumptions and
other determinants
such as
historical experience,
current
and
expected
market
conditions
and
certain
scientific
evaluation
techniques.
Management
believes
that
the
following
accounting policies
are critical due
to the degree
of estimation required
and the impact
of these policies
on the understandi
ng of the
results of our operations and financial condition.
Business Combinations and the Recoverability of Goodwill
A significant component
of our growth
strategy is to acquire
and integrate businesses
that complement
our existing operations.
The purchase
price of
an acquired
business is
allocated to
the tangible
and intangible
assets acquired
and liabilities
assumed
based
upon their estimated
fair value at the
date of purchase.
The difference between
the purchase price and
the fair value of
the net assets
acquired is
recorded as goodwill.
In determining
the fair value
of assets acquired
and liabilities assumed
in a business
combination,
we use various
recognized valuation methods, including
present value modeling.
Further, we make assumptions
using certain valuation
techniques, including discount rates and timing of future cash flows.
We review the carrying value of goodwill annually
or more frequently if circumstances indicating impairment have occurred. In
performing this review,
we are required to estimate
the fair value of goodwill that
is implied from a valuation of
the reporting unit to
which the goodwill
has been allocated
after deducting the
fair values of
all the identifiable
assets and liabilities
that form part
of the
reporting
unit.
The determination
of
the fair
value
of a
reporting
unit requires
us
to
make
significant
judgments
and estimates.
In
determining the fair value of reporting units for
fiscal 2023
and 2022, we considered entity-specific growth rates, future expected cash
flows
to
be
used
in
our
discounted
cash
flow
model,
and
the
weighted-average
cost
of
capital
applicable
to
peer
and
industry
comparables of the reporting units.
We base
our estimates on assumptions
we believe to be reasonable
but that are unpredictable and
inherently uncertain. In addition, we make
judgments and assumptions in allocating assets
and liabilities to each of
our reporting units.
The results of our impairment tests during fiscal 2023
indicated that the fair value of our reporting units exceeded
their carrying
values,
with
the
exception
of
the
$7.0
million
of
goodwill
impaired
during
fiscal
2023,
as
discussed
in
Note
to
our
audited
consolidated financial statements. The
results of our impairment tests
during fiscal 2022
indicated that the fair value
of our reporting
units exceeded their carrying values and so did not require impairment.
Intangible Assets Acquired Through Acquisitions
The
fair values
of the
identifiable
intangible
assets acquired
through
acquisitions
were determined
by management
using
the
purchase
method
of accounting.
We
completed
the acquisition
of
Connect
during
fiscal 2022
where
we
identified
and
recognized
intangible assets. We
used the relief
from royalty
method to value
identified brands
and the multi-period
excess earnings method
to
value the
integrated platform
and identified
customer relationships.
We
have used
the relief
from royalty
method, the
multi-period
excess earnings method, the income approach and the cost approach
to value other historic acquisition-related intangible assets. In so
doing,
we
made
assumptions
regarding
expected
future
revenues
and
expenses
to
develop
the
underlying
forecasts,
applied
contributory asset charges, discount rates, exchange rates,
cash tax charges and useful lives.
The valuations were based on information available at the
time of the acquisition and the expectations and
assumptions that were
deemed reasonable by us. No assurance can be given, however,
that the underlying assumptions or events associated with such assets
will occur as
projected. For these
reasons, among others,
the actual cash
flows may vary
from forecasts of
future cash flows.
To
the
extent actual cash flows vary, revisions to the useful life or impairment of intangible assets may be necessary.
Management assess the
useful life of
the acquired intangible
assets upon initial
recognition and revisions
to the useful
life or impairment
of these intangible
assets may be necessary in the future.
Revenue recognition - principal versus agent considerations
We generate
revenue from the provision of transaction-processing
services through our various platforms
and service offerings.
We
use
these
platforms
to
(a)
sell
prepaid
airtime
and
(b)
distribute
VAS,
including
prepaid
airtime,
prepaid
electricity,
gaming
voucher, and other services, to
users of our
platforms. The determination
of whether we
act as
a principal or
as an agent
when providing
these services
requires a
significant amount
of judgement
and is based
on whether
(i) we
are primarily
responsible for
fulfilling the
promise to provide the specified goods or service, (ii) we have inventory risk before the specified good
or service has been transferred
to a customer
and (iii) we
have discretion
in establishing
the price
for the specified
good or
service. When
we are the
principal in
a
transaction,
such as
when we
purchase (and
thus control
and assume
inventory risk)
prepaid airtime
before selling
it to
customers
utilizing our platform,
revenue is reported
on a gross
basis. When we
are an agent
in a transaction,
such as when
we distribute VAS
on behalf of our customers, and do not control the good or service to be provided, revenue is recognized
based on the amount that we
are contractually entitled to receive for performing the distribution
service on behalf of our customers using our platform.
Valuation
of investment in Cell C
We have elected to measure
our investment in
Cell C, an
unlisted equity security, at fair
value using the
fair value option.
Changes
in
the
fair
value
of
this
equity
security
are
recognized
in
the
caption
“change
in
fair
value
of
equity
securities”
in
our
audited
consolidated statements of operations. The tax impact related to the change in
fair value of equity securities is included in income tax
expense in our audited
consolidated statements of operation.
The determination of
the fair value of this
equity security requires us
to
make significant judgments
and estimates.
We base our estimates
on assumptions we
believe to be
reasonable but that
are unpredictable
and inherently uncertain. Refer
to Note 6
of our audited consolidated
financial statements regarding the
valuation inputs and
sensitivity
related to our investment in Cell C.
We used a discounted cash flow model to determine the fair value of our investment in Cell C as of June 30, 2023 and 2022, and
valued Cell C at
$0.0 (zero) as
of each of
June 30, 2023
and 2022. We
utilized the latest approved
business plan provided
by Cell C
management for
the period
ended December
31, 2025,
for the
June 30,
and 2022
valuations, and
the following
key valuation
inputs were used:
Weighted Average
Cost of Capital:
Between 20% and 31% over the period of the forecast
Long-term growth rate:
4.5% (3% as of June 30, 2022)
Marketability discount:
20% (10% as of June 30, 2022)
Minority discount:
24% (15% as of June 30, 2022)
Net adjusted external debt - June 30, 2023:
(1)
ZAR 8.1 billion ($0.4 billion), no lease liabilities included
Net adjusted external debt - June 30, 2022:
(2)
ZAR 13.5 billion ($0.8 billion), no lease liabilities included
(1) translated from ZAR to U.S. dollars at exchange rates applicable
as of June 30, 2023.
(2) translated from ZAR to U.S. dollars at exchange rates applicable
as of June 30, 2022.
We
believe the
Cell C
business plan
is reasonable
based on
the current
performance and
the expected
changes in
the business
model. Refer to the sensitivity analysis included in
Note 6 to our audited consolidated financial statements
related to our valuation of
Cell C as of June 30, 2023.
Recoverability of equity securities and equity-accounted investments
We
review our
equity securities
and equity-accounted
investments for
impairment whenever
events or
circumstances indicate
that the
carrying amount
of the
investment may
not be
recoverable.
In performing
this review,
we are
required to
estimate the
fair
value of our
equity-accounted investments and other
equity securities. The
determination of the
fair value of
these investments requires
us to make significant judgments and estimates.
Other equity securities include our investments in MobiKwik and CPS. These equity securities do not have readily determinable
fair
values
and
therefore
we
have
elected
to
measure
these
investments
at
cost
minus
impairment,
if
any,
plus
or
minus
changes
resulting
from
observable
price
changes
in
orderly
transactions
for
the
identical
or
a
similar
investment
of
the
same
issuer.
If
we
identify an impairment indicator related
to these equity
securities, we are required
to assess the
carrying value of these
equity securities
against their fair
value. We
did not identify
any impairment indicators
during each
of fiscal 2023,
and 2021,
and therefore did
not recognize any impairment losses related to these equity securities during
those years.
The determination of the fair value of an investment requires us to make significant judgments and estimates. We are required to
base our
estimates on
assumptions
which we
believe to
be reasonable,
but these
assumptions may
be unpredictable
and inherently
uncertain.
The Company did not
identify any observable transactions during
either of the
years ended June 30,
and 2022, and therefore
there was no
change in the
fair value of
MobiKwik during
the year.
During the year
ended June 30,
2021, MobiKwik
entered into a
number of separate
agreements with new
shareholders to raise
additional capital through the
issuance of additional
shares. Specifically,
we used the
following transactions as
the basis for
our fair value
adjustments to our
investment in MobiKwik
during the year
ended
June 30, 2021: (i) in
early November 2020, $135.54 per
share; (ii) in March 2021, $170.33
per share; and (iii) in June
2021, $245.50
per share. We
considered each of these transactions to
be an observable price change in
an orderly transaction for similar or
identical
equity securities issued by MobiKwik. Accordingly,
the carrying value of our investment in MobiKwik increased
from $27.0 million
as of June 30, 2020, to $76.3 million as of June 30, 2021. The change in the fair value
of MobiKwik for the year ended June 30, 2021,
of
$49.3
million,
is
included
in
the
caption
“Change
in
fair
value
of
equity
securities”
in
our
audited
consolidated
statement
of
operations for the year ended June 30, 2021.
We did
not identify any impairment indicators
during fiscal 2022 and therefore
did not recognize any impairment
losses related
to our
equity-accounted investments
during that
year.
We
performed impairment
assessments
during fiscal
and 2021,
for our
investment in
Finbond Group
Limited “(Finbond”)
following the
identification of
certain impairment
indicators. The
results of
our
impairment tests during
fiscal 2023
and 2021, resulted
in impairments of
$1.1 million and
$21.1 million, respectively,
related to our
equity-accounted investments. These impairments are discussed in
Note 9 to our audited consolidated financial statements.
For fiscal 2023, in determining the fair value of Finbond,
as it is listed on the Johannesburg Stock Exchange,
its market price as
of the impairment assessment dates,
adjusted for a liquidity discount
of 25%. For fiscal 2021,
in determining the fair value of
certain
of our equity-accounted investments, we
have considered (i) for Finbond
specifically, its market price as of the
impairment assessment
date, adjusted for a liquidity discount of 15%,
and (ii) the net asset
value of the equity-accounted investment being assessed as a proxy
of fair value because reasonable cash flow forecasts were not available.
We
base our estimates on
assumptions we believe to
be reasonable but that
are unpredictable and inherently
uncertain. The fair
value of our investment in Finbond is sensitive to movements in its market price, which is quoted in ZAR, because we use the market
price as the basis of our valuation.
Deferred Taxation
We
estimate
our
tax
liability
through
the
calculations
done
for
the
determination
of
our
current
tax
liability,
together
with
assessing temporary
differences
resulting
from the
different
treatment of
items for
tax and
accounting purposes.
These differ
ences
result in deferred tax assets and liabilities which are disclosed on our balance
sheet.
Management then
has to assess
the likelihood
that deferred tax
assets are more
likely than not
to be realized
in the foreseeable
future. A valuation allowance is
created if it is determined
that a deferred tax asset will not
be realized in the foreseeable
future. Any
change to the valuation allowance
would be charged or
credited to income in the period
such determination is made. In
assessing the
need for a valuation allowance,
historical levels of income, expectations
and risks associated with estimates of
future taxable income
and ongoing prudent and
practicable tax planning strategies
are considered. During fiscal 2023
and 2022, respectively we recorded
a
net decrease
of $8.0 million
and $1.7 million,
to our valuation
allowance, and during
fiscal 2021 we
recorded a net
increase of $1.5
million. As of June 30,
2023 and 2022, the valuation
allowance related to deferred
tax assets was $109.1 million
and $117.1 million,
respectively.
Stock-based Compensation
Management is required to make estimates and assumptions related to our valuation and recording of stock-based
compensation
charges under
current accounting
standards. These standards
require all share-based
compensation to employees
to be recognized
in
the
statement
of
operations
based on
their
respective
grant date
fair
values
over
the requisite
service
periods
and
also
requires
an
estimation of forfeitures when calculating compensation expense.
We utilize the Cox Ross
Rubinstein binomial model to
measure the fair
value of stock
options granted to
employees and directors.
We
have also utilized
a bespoke adjusted Monte
Carlo simulation discounted
cash flow model to
measure the fair value
of restricted
stock with market
conditions granted to
employees and directors.
The stock-based compensation
cost related to
these valuations has
been
recognized
on
a
straight-line
basis.
These
valuation
models
require
estimates
of
a
number
of
key
valuation
inputs
including
expected volatility, expected dividend yield, expected term and
risk-free interest rate. Our
management has estimated forfeitures based
on
historic
employee
behavior
under
similar
compensation
plans.
The
fair
value
of
stock
options
is
affected
by
the
assumptions
selected. The fair value calculation is especially sensitive
to our valuation assumption with respect to expected volatility. For instance,
a 5% increase (to 55%) or decrease (to 45%) in the expected volatility used (of 50%) to value stock options granted in February 2022,
would
result
in a
charge
that was
9%
higher
(if 55%
were used)
or 9%
lower (if
45%
were used).
Net
stock-based
compensation
expense from continuing operations was $7.3 million, $3.0 million and $0.3
million for fiscal 2023, 2022 and 2021, respectively.
Accounts Receivable and Allowance for Doubtful Accounts Receivable
We maintain an allowance for doubtful accounts receivable
related to our Merchant
and Consumer segments with respect
to sales
or rental
of hardware,
support and
maintenance
services provided;
or sale
of licenses
to customers;
or the
provision of
transaction
processing services to our customers.
Our
policy
is
to
regularly
review
the
aging
of
outstanding
amounts
due
from
customers
and
adjust
the
provision
based
on
management’s estimate of
the recoverability of the amounts outstanding.
Management
considers
factors including
period outstanding,
creditworthiness
of the
customers, past
payment
history and
the
results
of
discussions
by
our
credit
department
(and
in
some cases
including
our
sales and
finance
teams)
with
the
customer.
We
consider this policy to be appropriate taking into account factors such as historical
bad debts, current economic trends and changes in
our customer
payment patterns.
Additional provisions
may be
required should
the ability
of our
customers to
make payments
when
due
deteriorate
in
the
future.
Judgment
is
required
to
assess
the
ultimate
recoverability
of
these
receivables,
including
ongoing
evaluation of the creditworthiness of each customer.
Lending
Merchant lending
We maintain
an allowance for doubtful finance loans
receivable related to our Merchant services
segment with respect to short-
term loans
to qualifying
merchant
customers.
Our policy
is to
regularly
review
the ageing
of outstanding
amounts due
from
these
merchants and
an allowance is
created for
the full amount
outstanding if
the customer is
in arrears for
more than 15
days. We
write
off
loans and
related
interest and
fees when
it is
evident
that reasonable
recovery
procedures,
including
where
deemed
necessary,
formal legal action, have failed.
Our
risk
management
procedures
include
adhering
to
our
proprietary
lending
criteria
which
uses
an
online-system
loan
application process, obtaining necessary customer transaction-history data and credit bureau checks.
We consider these procedures to
be
appropriate
because
it takes
into
account
a
variety
of
factors
such
as the
customer’s
credit
capacity
and
customer-specific
risk
factors when originating a loan.
Consumer microlending
We maintain an allowance for doubtful finance
loans receivable related to our Consumer services segment with respect to short-
term loans to qualifying customers.
Our policy is to
regularly review the ageing
of outstanding amounts due from
borrowers and adjust
the provision based on management’s
estimate of the recoverability of finance loans receivable. We
write off microlending loans and
related service fees if a borrower is in arrears with repayments for more than three months or
dies.
Credit bureau checks as well as an affordability test are
conducted as part of the origination process, both of which being in
line
with local regulations. We consider this policy to be appropriate because the affordability
test we perform takes into account a variety
of
factors
such
as
other
debts
and
total
expenditures
on
normal
household
and
lifestyle
expenses.
Additional
allowances
may
be
required should the ability of our customers to make payments when
due deteriorates in the future. A significant amount of
judgment
is required to assess the ultimate recoverability of these
finance loan receivables, including ongoing evaluation of the creditworthiness
of each customer.
Recent Accounting Pronouncements
Recent accounting pronouncements adopted
Refer
to
Note
2 of
our
audited consolidated
financial
statements for
a full
description
of recent
accounting
pronouncements,
including the dates of adoption and effects on financial
condition, results of operations and cash flows.
Recent accounting pronouncements not yet adopted as of June 30, 2023
Refer to Note 2
of our audited consolidated
financial statements for a
full description of recent
accounting pronouncements not
yet adopted as of June 30, 2023, including the expected dates of adoption
and effects on financial condition, results of operations and
cash flows.
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and at the end of the periods presented were
as follows:
Table 1
June 30,
ZAR : $ average exchange rate
17.7641
15.2154
15.4146
Highest ZAR : $ rate during period
19.7558
16.2968
17.6866
Lowest ZAR : $ rate during period
16.2034
14.1630
13.4327
Rate at end of period
18.8376
16.2903
14.3010
Translation Exchange Rates
We are required
to translate our results of operations from ZAR to U.S. dollars on a monthly
basis. Thus, the average rates used
to translate this data for the years ended June 30, 2023, 2022 and 2021, vary slightly from the averages shown in the table above. The
translation rates we use in presenting our results of operations are the rates shown
in the following table:
Table 2
June 30,
Income and expense items: $1 = ZAR
17.9400
15.1978
15.7162
Balance sheet items: $1 = ZAR
18.8376
16.2903
14.3010
Results of operations
The discussion
of our
consolidated overall
results of
operations is
based on
amounts
as reflected
in our
audited consolidated
financial statements which are prepared in accordance
with U.S. GAAP.
We analyze our
results of operations both in U.S. dollars, as
presented in the audited consolidated financial statements, and supplementally in ZAR, because ZAR is the functional currency of the
entities which contribute the majority of our results and is the currency
in which the majority of our transactions are initially incurred
and
measured.
Presentation
of
our
reported
results
in
ZAR
is
a
non-GAAP
measure.
Due
to
the
significant
impact
of
currency
fluctuations between
the U.S. dollar
and ZAR on
our reported
results and
because we
use the
U.S. dollar as
our reporting
currency,
we believe that
the supplemental presentation
of our results
of operations in
ZAR is useful
to investors to
understand the changes
in
the underlying trends of our business.
Our
operating
segment
revenue
presented
in
“-Results
of
operations
by
operating
segment”
represents
total
revenue
per
operating segment before intercompany
eliminations. A reconciliation between
total operating segment revenue and
revenue,
as well
as the reconciliation because our segment performance measure and net loss before tax (benefits) expense, is presented in our audited
consolidated financial
statements in
Note 21
to those
statements. Our
chief operating
decision maker
is our
Group Chief
Executive
Officer
and
he
evaluates
segment
performance
based
on
segment
earnings
before
interest,
tax,
depreciation
and
amortization
(“EBITDA”), adjusted for
items mentioned in
the next sentence
(“Segment Adjusted EBITDA”)
for each operating
segment. We
do
not
allocate
once-off
items
(as
defined
below),
stock-based
compensation
charges,
depreciation
and
amortization,
impairment
of
goodwill or other intangible
assets, certain lease charges
(“Lease adjustments”), other
items (including gains or
losses on disposal of
investments, fair value adjustments to equity securities, fair value adjustments to currency options), interest
income, interest expense,
income tax
expense or
loss from
equity-accounted investments
to our
reportable segments.
Once-off
items represents
non-recurring
expense items, including costs related to acquisitions and
transactions consummated or ultimately not pursued. The Lease
adjustments
reflect lease charges and the Stock-based compensation adjustments reflect stock-based
compensation expense and are both excluded
from
the
calculation
of
Segment
Adjusted
EBITDA
and
are
therefore
reported
as
reconciling
items
to
reconcile
the
reportable
segments’ Segment Adjusted EBITDA to our loss before income tax
expense.
Group
Adjusted
EBITDA
represents
Segment
Adjusted
EBITDA
after
deducting
group
costs.
Refer
also
“Results
of
Operations-Use of Non-GAAP Measures” below.
Fiscal 2023 includes
Connect for
the entire fiscal
year and
fiscal 2022 includes
consolidation of
Connect from
April 14, 2022.
Refer also to Note 3 to the audited consolidated financial statements for
additional information regarding this transaction.
We analyze our business and operations in terms of two
inter-related but independent operating segments: (1) Merchant Division
and (2)
Consumer Division.
In addition,
corporate activities
that are
impracticable to
allocate directly
to the
operating segments,
as
well as
any inter-segment
eliminations, are
included in
Group costs.
Inter-segment revenue
eliminations are
included in
Corporate/
Eliminations.
Fiscal 2023 Compared to Fiscal 2022
The following factors had
a significant influence on
our results of
operations during fiscal
2023 as compared
with the same
period
in the prior year:
●
Higher revenue:
Our revenues
increased by
180.0% in
ZAR, primarily
due to
the contribution
from Connect
in Merchant
and an increase in account fees and insurance revenues in Consumer;
●
Lower operating
losses:
Operating
losses decreased,
delivering
an improvement
of 55%
in ZAR
compared
with the
prior
period
primarily
due
to
the
contribution
from
Connect,
strong
hardware
sales,
and
the
implementation
of
various
cost
reduction
initiatives
in
Consumer,
which
was
partially
offset
by
an
increase
in
acquisition
related
intangible
asset
amortization;
●
Higher
net
interest
charge:
The
net
interest
charge
increased
to
ZAR
299.9
million
from
ZAR
56.8
million
due
to
the
additional borrowings
incurred in
order to
fund the
acquisition of
Connect as
well as
the debt
acquired within
the Connect
business itself;
●
Significant transaction costs:
We expensed $6.0 million of transaction
costs related to
the Connect acquisition in
fiscal 2022;
and
●
Foreign exchange movements:
The U.S. dollar was 18.0% stronger against the ZAR
during fiscal 2023, which impacted our
reported results.
Consolidated overall results of operations
This discussion is based on the amounts prepared in accordance with U.S. GAAP.
The following tables show the changes in the items comprising our statements of operations,
both in U.S. dollars and in ZAR:
Table 3
In U.S. Dollars
Year
ended June 30,
$ %
$ ’000
$ ’000
change
Revenue
527,971
222,609
137%
Cost of goods sold, IT processing, servicing and support
417,544
168,317
148%
Selling, general and administration
95,050
74,993
27%
Depreciation and amortization
23,685
7,575
213%
Impairment loss
7,039
-
nm
Reorganization costs
-
5,894
nm
Transaction costs related to Connect acquisition
-
6,025
nm
Operating loss
(15,347)
(40,195)
(62%)
Gain related to fair value adjustment to currency options
-
3,691
nm
Loss on disposal of equity-accounted investment
(45%)
Gain on disposal of equity securities
-
nm
Interest income
1,853
2,089
(11%)
Interest expense
18,567
5,829
219%
Loss before income tax (benefit) expense
(32,266)
(39,900)
(19%)
Income tax (benefit) expense
(2,309)
nm
Net loss before loss from equity-accounted investments
(29,957)
(40,227)
(26%)
Loss from equity-accounted investments
(5,117)
(3,649)
40%
Net loss attributable to us
(35,074)
(43,876)
(20%)
Table 4
In South African Rand
Year
ended June 30,
ZAR %
ZAR ’000
ZAR ’000
change
Revenue
9,471,800
3,383,166
180%
Cost of goods sold, IT processing, servicing and support
7,490,739
2,558,047
193%
Selling, general and administration
1,705,196
1,139,728
50%
Depreciation and amortization
424,909
115,123
269%
Impairment loss
126,280
-
nm
Reorganization costs
-
89,576
nm
Transaction costs related to Connect acquisition
-
91,567
nm
Operating loss
(275,324)
(610,875)
(55%)
Gain related to fair value adjustment to currency options
-
56,095
nm
Loss on disposal of equity-accounted investment
3,678
5,714
(36%)
Gain on disposal of equity securities
-
10,942
nm
Interest income
33,243
31,748
5%
Interest expense
333,092
88,587
276%
Loss before income tax (benefit) expense
(578,851)
(606,391)
(5%)
Income tax (benefit) expense
(41,423)
4,970
nm
Net loss before loss from equity-accounted investments
(537,428)
(611,361)
(12%)
Loss from equity-accounted investments
(91,799)
(55,457)
66%
Net loss attributable to us
(629,227)
(666,818)
(6%)
Revenue increased by $305.4 million (ZAR 6.1 billion), or 137.2% (in ZAR, 180.0%), primarily due to the inclusion of Connect
for
the entire
fiscal year,
which has
substantial low
margin
prepaid
airtime sales
in addition
to its
core processing
revenue and
an
increase in account fees and insurance revenues.
Cost of
goods sold,
IT processing,
servicing and
support increased
by $249.2
million (ZAR
4.9 billion),
or 148.1%
(in ZAR,
192.8%), primarily due to the inclusion of Connect,
which were partially offset by the benefits of
various cost reduction initiatives in
Consumer and lower insurance-related claims.
Selling, general and administration expenses increased by $20.1 million (ZAR 0.6 billion), or 26.7% (in ZAR, 49.6%), primarily
due
to
higher
employee-related
expenses
related
to
the
expansion
of
our
senior
management
team,
the
year-over-year
impact
of
inflationary
increases
on
employee-related
expenses
and
the
inclusion
of
expenses
related
to
Connect’s
operations,
which
were
partially offset by the benefits of various cost reduction initiatives in Consumer.
Depreciation and
amortization expense
increased by $16.1
million (ZAR 0.3
billion), or 212.7%
(in ZAR, 269.1%),
due to the
inclusion of acquisition-related intangible asset amortization related
to intangible assets identified pursuant to
the Connect acquisition,
as well as the inclusion of depreciation expense related to Connect’s
property, plant and equipment.
During fiscal 2023, we
recorded an impairment loss
of $7.0 million related
to the impairment of
our hardware/ software supply
business
unit’s
allocated
goodwill.
Refer
to
Note
of
our
audited
consolidated
financial
statements
for
additional
information
regarding these impairment losses.
We embarked on a retrenchment process on January 10, 2022, and incurred reorganization expenses of $5.9 million during fiscal
2022.
Transaction
costs related
to Connect
acquisition in
fiscal 2022
includes fees
paid to
external service
providers associated
with
the contract drafting and negotiations; corporate finance advisory services; legal, financial and tax due diligence
activities performed;
warranty and
indemnity insurance
related to the
transaction; and other
advisory services procured;
as well as
our portion
of the fees
paid to competition authorities related to the regulatory filings made in
various jurisdictions.
Our operating loss
margin in fiscal
and 2022
was
(2.9%) and
(18.1%), respectively.
We
discuss the
components of operating
loss margin under “-Results of operations by operating
segment.”
We
did
not
record
any
changes
in
the
fair
value
of
equity
interests
in
MobiKwik
and
Cell
C
during
fiscal
and
2022,
respectively.
We continue
to carry our investment
in Cell C at $0
(zero). Refer to Note
9 to our consolidated financial
statements for
the methodology
and inputs used
in the fair
value calculation for
MobiKwik and Note
6 for the
methodology and
inputs used in
the
fair value calculation for Cell C.
Gain related to fair value adjustment to currency
options represents the realized gain related to foreign exchange
option contracts
entered into in November 2021
in order to manage the risk of
currency volatility and to fix
the USD amount to be utilized
for part of
the Connect purchase
consideration settlement. The
foreign exchange option
contracts matured on
February 24, 2022.
Refer to Note
6 to our consolidated financial statements for additional information
related to these currency options.
We
recorded
a
net
loss
of
$0.2
million
comprising
a
loss
of
$0.4
million
related
to
the
disposal
of
a
minor
portion
of
our
investment in Finbond and a $0.25 million gain related to
the disposal of our entire interest in Carbon
during fiscal 2023. We recorded
a loss of $0.4 million related to the disposal
of a minor portion of our investment in Finbond during fiscal
2022. Refer to Note 9 to our
consolidated financial statements for additional information regarding
these disposals.
We recorded
a gain of $0.7 million related to the disposal of our entire interest
in an equity security during fiscal 2022. Refer to
Note 9 to our consolidated financial statements for additional information
regarding this gain.
Interest on surplus cash decreased to $1.9 million (ZAR
33.2 million) from $2.1 million (ZAR 31.7 million), primarily
due to the
inclusion of Connect, which was partially offset by lower overall surplus
cash balances following the acquisition of Connect.
Interest expense increased
to $18.6 million
(ZAR 333.1 million)
from $5.8 million
(ZAR 88.6 million),
primarily as a result
of
additional
interest
expense
incurred
related
to
borrowings
obtained
to
partially
fund
the acquisition
of
Connect,
interest
expenses
incurred in Connect to fund our cash management, digitization and VAS offerings, and a higher utilization of our facilities to fund our
ATMs,
which was also coupled with an increase in base interest rates.
Fiscal 2023
tax benefit was $(2.3) million (ZAR (41.4) million) compared
to a tax expense of $0.3 million (ZAR 5.0 million) in
fiscal 2022. Our effective tax rate for fiscal 2023 was impacted by a reduction in
the enacted South African corporate income tax rate
from
28%
to
27%
from
January
(but
backdated
to
July
1,
2022),
the
tax
expense
recorded
by
our
profitable
South
African
operations, a deferred
tax benefit related to
acquisition-related intangible asset
amortization, non-deductible
expenses, a deferred tax
benefit related
to an
expense paid
by Connect
before we
acquired the
business and
which subsequently
has been
determined to
be
deductible
for
tax
purposes,
the
on-going
losses
incurred
by
certain
of
our
South
African
businesses
and
the
associated
valuation
allowances created related to the deferred tax assets recognized regarding
net operating losses incurred by these entities.
Our effective
tax rate
for fiscal
2022 was
impacted by
the tax
expense recorded
by our
profitable South
African operations,
a
deferred
tax
benefit
related
to
acquisition-related
intangible
asset
amortization,
non-deductible
expenses
(including
transaction
expenses
related
to
the
acquisition
of
Connect),
the
on-going
losses
incurred
by
certain
of
our
South
African
businesses
and
the
associated valuation allowances created
related to the deferred
tax assets recognized regarding
net operating losses incurred
by these
entities.
Finbond is listed on the Johannesburg Stock Exchange
and reports its six-month results during
our first half and its
annual results
during
our fourth
quarter.
We
recorded
impairment
losses related
to
our investment
in Finbond
in fiscal
following
on-going
losses reported
by Finbond
and its
lower listed
share price.
Refer to
Note 9
to our
consolidated
financial statements
for additional
information regarding the impairments.
The table below presents the relative loss from our equity accounted investments:
Table 5
Year
ended June 30,
$ %
$ ’000
$ ’000
change
Finbond
(5,206)
(3,665)
42%
Share of net (loss) income
(4,096)
(3,665)
12%
Impairment
(1,110)
-
nm
Other
456%
Share of net income (loss)
456%
Total
loss from equity-accounted investment
(5,117)
(3,649)
40%
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating
(loss) income are illustrated below:
Table 6
In U.S. Dollars
Year
ended June 30,
% of
% of
%
Operating Segment
$ ’000
total
$ ’000
total
change
Consolidated revenue:
Merchant
463,701
88%
156,689
70%
196%
Consumer
62,801
12%
65,932
30%
(5%)
Subtotal: Operating segments
526,502
100%
222,621
100%
137%
Not allocated to operating segments
1,469
-
-
-
nm
Corporate/Eliminations
-
-
(12)
-
nm
Total
consolidated revenue
527,971
100%
222,609
100%
137%
Group Adjusted EBITDA:
Merchant
33,531
121%
12,646
(72%)
165%
Consumer
(1)
3,314
12%
(21,674)
123%
nm
Group costs
(9,109)
(33%)
(8,587)
49%
6%
Group Adjusted EBITDA (non-GAAP)
(2)
27,736
100%
(17,615)
100%
nm
(1) Consumer Segment Adjustment EBITDA for fiscal 2022 includes reorganization
cost of $5.9 million.
(2) Group Adjusted EBITDA is a non-GAAP measure, refer to reconciliation
below at “-Results of Operations-Use of Non-
GAAP Measures”.
Table 7
In South African Rand
Year
ended June 30,
% of
% of
%
Operating Segment
ZAR ’000
total
ZAR ’000
total
change
Consolidated revenue:
Merchant
8,318,796
88%
2,381,323
70%
249%
Consumer
1,126,650
12%
1,002,021
30%
12%
Subtotal: Operating segments
9,445,446
100%
3,383,344
100%
179%
Not allocated to operating segments
26,354
-
-
-
nm
Corporate/Eliminations
-
-
(178)
-
nm
Total
consolidated revenue
9,471,800
100%
3,383,166
100%
180%
Group Adjusted EBITDA:
Merchant
601,546
121%
192,197
(72%)
213%
Consumer
(1)
59,453
12%
(329,403)
123%
nm
Group costs
(163,415)
(33%)
(130,503)
49%
25%
Group Adjusted EBITDA (non-GAAP)
(2)
497,584
100%
(267,709)
100%
nm
(1) Consumer Segment Adjustment EBITDA for fiscal 2022 includes
reorganization cost of ZAR 89.6 million.
(2) Group Adjusted EBITDA
is a non-GAAP measure, refer
to reconciliation below at
“-Results of Operations-Use of
Non-
GAAP Measures”.
Merchant
Segment
revenue
increased
due
to
the
contribution
from
Connect
for
the
full fiscal
year
compared
with
only
two
and a
half
months in fiscal
2022. This increase
was partially offset
by lower hardware
sales revenue given
the lumpy nature
of bulk sales.
The
increase in
Segment Adjusted
EBITDA is
also due
to the inclusion
of Connect,
which was partially
offset by
lower hardware
sales.
Connect records a significant proportion of its airtime sales in revenue and cost of sales, while only earning a relatively small margin.
This significantly depresses the Segment Adjusted EBITDA margins
shown by the business.
Our Segment
Adjusted EBITDA
(loss) margin
(calculated as
Segment Adjusted
EBITDA (loss)
divided by
revenue) in
fiscal
and 2022 was 7.2% and 8.1%, respectively.
Consumer
Segment revenue increased primarily due to higher insurance revenues and higher account holder fees, though this was partially
offset by
lower ATM
transaction fees.
We
embarked on a
retrenchment process
during the third
quarter of fiscal
2022 and recorded
an expense of
$5.9 million which is
included in Segment
Adjusted EBITDA loss. The
cost reduction initiatives
we initiated in
fiscal
2022 delivered
a significant
reduction in
Consumer’s operating
expenses which
resulted in
a significantly
lower Segment
Adjusted
EBITDA
loss
compared
with
fiscal
2022.
Specifically,
expenses
associated
with
operating
a
mobile
distribution
network
were
discontinued
in
early
fiscal
2022,
and
we
have
streamlined
our
fixed
distribution
network
through
reductions
in
certain
expenses
including
employee-related
costs,
security,
guarding
and
premises costs.
In
June
we
recalibrated
our
allowance
for
doubtful
microlending finance
loans receivable
from 10%
of the
lending book
outstanding to
6.5% of
the lending
book, which
resulted in
a
release from the allowance in fiscal 2022.
Our Segment
Adjusted EBITDA loss
margin in
fiscal 2023
and 2022
was 5.3% and
(32.9%), respectively.
After adjusting for
the
reorganization
charge
our fiscal
Segment
Adjusted
EBITDA
loss margin
was
(23.9%).
Segment
Adjusted
EBITDA
loss
margin before the reorganization charge is a non-GAAP measure. We believe that the presentation of our Segment Adjusted EBITDA
loss margin
before the
reorganization
charge
is useful
to investors
to understand
the improvement
in the
operating performance
in
Consumer, before the reorganization
charge, in fiscal 2023 compared with fiscal 2022.
Group costs
Our group
costs primarily
include employee
related costs
in relation
to employees
specifically hired
for group
roles and
costs
related
directly
to
managing
the
US-listed
entity;
expenditures
related
to
compliance
with
the
Sarbanes-Oxley
Act
of
2002;
non-
employee directors’ fees; legal fees; group and US-listed related audit
fees; and directors’ and officers’ insurance premiums.
Our
group
costs
for
fiscal
increased
compared
with
the
prior
period
due
to
higher
employee
costs
and
an
increase
in
directors’ and officers’ insurance premiums.
Fiscal 2022 Compared to Fiscal 2021
The following factors had
a significant influence on
our results of
operations during fiscal
2022 as compared with
the same period
in the prior year:
●
Higher revenue:
Our revenues increased
by 64.6% in
ZAR, primarily due
to the contribution
from Connect, an
increase in
hardware
sales,
an
increase
in
merchant
transaction
processing
fees,
and
a
moderate
increase
in
lending
and
insurance
revenues;
●
Lower operating
losses:
Operating
losses decreased,
delivering
an improvement
of 28%
in ZAR
compared
with the
prior
period
primarily
due
to
the
positive
contribution
from
Connect,
the
closure
of
the
loss-making
IPG
operations
and
the
implementation of
various cost reduction
initiatives in our
Consumer business,
which was partially
offset by
an increase in
acquisition
related
intangible
asset
amortization
and
transaction
costs.
During
fiscal
2022,
we
recorded
a
reorganization
charge of $5.9 million related to the retrenchment process we
commenced in January 2022;
●
Significant transaction costs:
We expensed $6.0 million of transaction
costs related to
the Connect acquisition in
fiscal 2022;
and
●
Foreign exchange movements:
The U.S. dollar was 3.3% stronger
against the ZAR during fiscal 2022,
which impacted our
reported results.
The following tables show the changes in the items comprising our statements of
operations, both in U.S. dollars and in ZAR:
Table 8
In U.S. Dollars
Year
ended June 30,
$ %
$ ’000
$ ’000
change
Revenue
222,609
130,786
70%
Cost of goods sold, IT processing, servicing and support
168,317
96,248
75%
Selling, general and administration
74,993
84,063
(11%)
Depreciation and amortization
7,575
4,347
74%
Reorganization costs
5,894
-
nm
Transaction costs related to Connect acquisition
6,025
-
nm
Operating loss
(40,195)
(53,872)
(25%)
Change in fair value of equity securities
-
49,304
nm
Gain related to fair value adjustment to currency options
3,691
-
nm
Loss on disposal of equity-accounted investment
2,792%
Gain on disposal of equity securities
-
nm
Loss on disposal of equity-accounted investment - Bank Frick
-
nm
Interest income
2,089
2,416
(14%)
Interest expense
5,829
2,982
95%
Loss before income tax expense
(39,900)
(5,619)
610%
Income tax expense
7,560
(96%)
Net loss before loss from equity-accounted investments
(40,227)
(13,179)
205%
Loss from equity-accounted investments
(3,649)
(24,878)
(85%)
Net loss attributable to us
(43,876)
(38,057)
15%
Table 9
In South African Rand
(US GAAP)
Year
ended June 30,
ZAR %
ZAR ’000
ZAR ’000
change
Revenue
3,383,166
2,055,459
65%
Cost of goods sold, IT processing, servicing and support
2,558,047
1,512,653
69%
Selling, general and administration
1,139,728
1,321,151
(14%)
Depreciation and amortization
115,123
68,318
69%
Reorganization costs
89,576
-
nm
Transaction costs related to Connect acquisition
91,567
-
nm
Operating loss
(610,875)
(846,663)
(28%)
Change in fair value of equity securities
-
774,872
nm
Gain related to fair value adjustment to currency options
56,095
-
nm
Loss on disposal of equity-accounted investment
5,714
2,701%
Gain on disposal of equity securities
10,942
-
nm
Loss on disposal of equity-accounted investment - Bank Frick
-
7,418
nm
Interest income
31,748
37,970
(16%)
Interest expense
88,587
46,866
89%
Loss before income tax expense
(606,391)
(88,309)
587%
Income tax expense
4,970
118,814
(96%)
Net loss before loss from equity-accounted investments
(611,361)
(207,123)
195%
Loss from equity-accounted investments
(55,457)
(390,988)
(86%)
Net loss attributable to us
(666,818)
(598,111)
11%
Revenue increased
by $91.8
million (ZAR
1.3 billion),
or 70.2%
(in ZAR,
64.6%), primarily
due to
the inclusion
of Connect,
which has
substantial low
margin prepaid
airtime sales
in addition
to its
core processing
revenue, an
increase in
hardware sales,
an
increase in merchant transaction processing fees, and moderate increases in lending
and insurance revenues.
Cost of goods
sold, IT processing,
servicing and support
increased by $72.1
million (ZAR 1.0
billion), or 74.9%
(in ZAR, 69.1%),
primarily due
to the
inclusion of
Connect, an
increase in
the cost
of hardware
sales, higher
costs related
to transaction
fees and
an
increase in insurance-related claims experience, which
were partially offset by the benefits of various cost reduction
initiatives in our
Consumer business.
Selling, general and administration expenses decreased by $9.1
million (ZAR 0.2 billion), or 10.8% (in ZAR, 13.7%), primarily
due
to
lower
IPG-related
expenses
incurred
following
its
closure,
some
benefits
from
our
cost
reduction
initiatives,
as
well
as
a
recalibration, in June 2022, of
our allowance for doubtful microlending finance loans
receivable, in our Consumer business, from 10%
of the
lending book
outstanding to
6.5% of
the lending
book, which
resulted in
a release
from the
allowance in
fiscal 2022.
These
reductions were partially offset by the
inclusion of expenses related to
Connect’s operations, higher employee-related expenses related
to
the
expansion
of
our
senior
management
team,
and
the
year-over-year
impact
of
inflationary
increases
on
employee-related
expenses.
Depreciation and amortization expense increased by $3.2 million (ZAR 46.8 million), or 74.3% (in ZAR, 68.5%),
increased due
to
the
inclusion
of
acquisition-related
intangible
asset
amortization
related
to
intangible
assets
identified
pursuant
to
the
Connect
acquisition, as well as the inclusion of depreciation expense related to
Connect’s property,
plant and equipment.
We embarked on a retrenchment process on January 10, 2022, and incurred reorganization expenses of $5.9 million during
fiscal
2022.
Transaction
costs related
to
Connect
acquisition
includes
fees
paid
to
external
service
providers
associated
with
the
contract
drafting and
negotiations; corporate
finance advisory
services; legal,
financial and
tax due
diligence activities
performed; warranty
and indemnity
insurance related
to the
transaction; and
other advisory
services procured;
as well
as our
portion
of the
fees paid
to
competition authorities related to the regulatory filings made in various jurisdictions
.
Our operating loss margin
in fiscal 2022 and 2021
was
(18.1%) and
(41.2%),
respectively. Adjusting
for the restructuring and
transaction costs incurred, the underlying
operating loss margin in fiscal
2022 was (12.7%). We
discuss the components of operating
loss margin under “-Results of operations by operating
segment.”
The
change
in
fair
value
of
equity
securities
during
fiscal
represents
a
non-cash
fair
value
adjustment
gain
related
to
MobiKwik. We
continue to
carry our investment
in Cell C
at $0 (zero).
Refer to Note
9 to our
consolidated financial
statements for
the methodology
and inputs used
in the fair
value calculation for
MobiKwik and Note
6 for the
methodology and
inputs used in
the
fair value calculation for Cell C.
Gain related to fair value adjustment to currency
options represents the realized gain related to foreign exchange
option contracts
entered into in November 2021
in order to manage the risk of
currency volatility and to fix
the USD amount to be utilized
for part of
the Connect purchase
consideration settlement. The
foreign exchange
option contracts matured
on February 24,
2022. Refer to
Note
6 to our consolidated financial statements for additional information
related to these currency options.
We recorded
a gain of $0.7 million related to the disposal of our
entire interest in an equity security during fiscal 2022.
Refer to
Note 9 to our consolidated financial statements for additional information
regarding this gain.
We
recorded a
loss of $0.4
million related
to the
disposal of
a minor
portion of
our investment
in Finbond
during fiscal
2022.
Refer to Note 9 to our consolidated financial statements for additional information
regarding these disposals.
We recorded
a loss of $0.5 million related to the disposal of Bank Frick during fiscal 2021.
Interest on surplus cash decreased to $2.1 million (ZAR
31.7 million) from $2.4 million (ZAR 38.0 million),
primarily due to the
utilization of a significant portion
of our surplus cash
reserves to acquire Connect as
well as lower average daily
cash balances in fiscal
2022.
Interest
expense increased
to $5.8
million (ZAR
88.6) million
from $3.0
million (ZAR
46.9 million),
primarily
as a
result of
additional
interest
expense
incurred
related
to
borrowings
obtained
to
partially
fund
the acquisition
of
Connect,
interest
expenses
incurred in Connect to fund our cash management, digitization and VAS offerings, and a higher utilization of our facilities to fund our
ATMs
.
Fiscal 2022 tax expense
was $0.3 million (ZAR
5.0 million) compared
to $7.6 million (ZAR
118.8 million)
in fiscal 2021. Our
effective tax rate for fiscal 2022 was impacted
by the tax expense recorded by our profitable South
African operations, a deferred tax
benefit related to acquisition-related intangible asset amortization, non-deductible expenses (including transaction expenses related to
the
acquisition
of
Connect),
the
on-going
losses
incurred
by
certain
of
our
South
African
businesses
and
the
associated
valuation
allowances created related to the deferred tax assets recognized regarding
net operating losses incurred by these entities.
Our effective tax rate for fiscal 2021 was
impacted by the tax effect on the
change in the fair value
of our equity securities, which
is at
a lower
tax rate
than
the South
African
statutory
rate, the
tax charge
related
to our
profitable
South
African operations,
non-
deductible expenses, the on-going losses incurred by certain of our
South African businesses and the associated valuation allowances
created related to the deferred
tax assets recognized regarding net
operating losses incurred by these
entities, which was partially offset
by the reversal of the deferred tax liability related to one of our equity-accounted
investments following its impairment.
The disposal of certain of our equity-accounted investments in
fiscal 2021, as well as a number of impairments,
has impacted the
comparability of our
loss from
equity-accounted investments. We disposed of
our investment
in Bank Frick
in fiscal
2021.
We
recorded
an impairment loss related to our investment in Finbond in fiscal 2021
following a slow-down in its business activity and lower listed
share price.
Refer to Note 9
to our audited consolidated financial statements
for additional information regarding our equity-accounted
investments, including disclosure regarding the disposals and impairments.
The table below presents the relative loss from our equity accounted investments:
Table 10
Year
ended June 30,
$ ’000
$ ’000
$ % change
Finbond
(3,665)
(22,009)
(83%)
Share of net (loss) income
(3,665)
(4,359)
(16%)
Impairment
-
(17,650)
nm
Bank Frick
-
1,156
nm
Share of net income
-
1,156
nm
Other
(4,025)
nm
Share of net loss
(531)
nm
Impairment
-
(3,494)
nm
Total
loss from equity-accounted investments
(3,649)
(24,878)
(85%)
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to
operating income are illustrated below:
Table 11
In U.S. Dollars
Year
ended June 30,
% of
% of
%
Operating Segment
$ ’000
total
$ ’000
total
change
Consolidated revenue:
Merchant
156,689
70%
62,944
48%
149%
Consumer
65,932
30%
66,149
51%
(0%)
Subtotal: Operating segments
222,621
100%
129,093
99%
72%
Not allocated to operating segments
-
-
1,693
1%
nm
Corporate/Eliminations
(12)
-
-
-
nm
Total
consolidated revenue
222,609
100%
130,786
100%
70%
Group Adjusted EBITDA:
Merchant
12,646
(72%)
5,411
(14%)
134%
Consumer
(1)
(21,674)
123%
(25,962)
68%
(17%)
Not allocated to operating segments
-
-
(10,899)
28%
nm
Group costs
(8,587)
49%
(6,965)
18%
23%
Group Adjusted EBITDA (non-GAAP)
(2)
(17,615)
100%
(38,415)
100%
(54%)
(1) Consumer Segment Adjustment EBITDA for fiscal 2022 includes
reorganization cost of $5.9 million.
(2) Group Adjusted EBITDA
is a non-GAAP measure, refer
to reconciliation below at
“-Results of Operations-Use of
Non-
GAAP Measures”.
Table 12
In South African Rand
Year
ended June 30,
% of
% of
%
Operating Segment
ZAR ’000
total
ZAR ’000
total
change
Consolidated revenue:
Merchant
2,381,323
70%
989,241
48%
141%
Consumer
1,002,021
30%
1,039,611
51%
(4%)
Subtotal: Operating segments
3,383,344
100%
2,028,852
99%
67%
Not allocated to operating segments
-
-
26,607
1%
nm
Corporate/Eliminations
(178)
-
-
-
nm
Total
consolidated revenue
3,383,166
100%
2,055,459
100%
65%
Group Adjusted EBITDA:
Merchant
192,197
(72%)
85,040
(14%)
126%
Consumer
(1)
(329,403)
123%
(408,024)
68%
(19%)
Not allocated to operating segments
-
-
322,984
28%
nm
Group costs
(130,503)
49%
(109,463)
18%
19%
Group Adjusted EBITDA (non-GAAP)
(2)
(267,709)
100%
(603,738)
100%
(56%)
(1) Consumer Segment Adjustment EBITDA for fiscal 2022 includes
reorganization cost of ZAR 89.6 million.
(2) Group Adjusted EBITDA
is a non-GAAP measure, refer
to reconciliation below at
“-Results of Operations-Use of
Non-
GAAP Measures”.
Merchant
Segment revenue
increased due
to the
inclusion of
Connect for
two and
a half
months and
an increase
in hardware
sales and
processing fees. The
increase in Segment
Adjusted EBITDA is
primarily due to
the inclusion of
Connect, which was
partially offset
by higher costs related
to processing fees
and higher employee-related expenses. Connect
records a significant proportion
of its airtime
sales in revenue
and cost of
sales, while only
earning a relatively
small margin. This depresses
the Segment Adjusted EBITDA
margins
shown by the business.
Our Segment Adjusted EBITDA margin for fiscal 2022
and 2021
was 8.1% and 8.6%, respectively.
Consumer
The underlying decrease in revenue was primarily due to
lower processing fees, partially offset by higher insurance
and lending
revenue
and account
holder fees.
We
embarked
on a
retrenchment process
during
the third
quarter of
fiscal 2022
and recorded
an
expense
of
$5.9
million
which
is
included
in
the
Segment
Adjusted
EBITDA
loss,
refer
to
Note
to
our
consolidated
financial
statements for
additional information
regarding this
process.
Segment Adjusted
EBITDA loss,
excluding the
reorganization charge,
has
decreased
primarily
due
to
the
implementation
of
various
cost
reduction
initiatives
and
a
recalibration,
in
June
2022,
of
our
allowance for doubtful microlending finance loans receivable from 10% of the lending book outstanding to 6.5% of the lending book,
which resulted in a release from the allowance in
fiscal 2022, which decreases were partially offset by an increase in
insurance-related
claims experience.
Our Segment Adjusted EBITDA
loss margin for fiscal
and 2021 was
(32.9%) and
(39.2%), respectively.
After adjusting
for the reorganization
charge our fiscal 2022
Segment Adjusted EBITDA loss
margin was (23.9%)
.
We
believe that the presentation
of our Segment Adjusted EBITDA loss margin before
the reorganization charge is useful to investors to understand
the improvement
in the operating performance in Consumer, before
the reorganization charge, in fiscal 2022
compared with fiscal 2021.
Group costs
Our group costs increased primarily due to higher employee
costs, an increase in audit fees and directors’
and officers’
insurance
premiums.
Use of Non-GAAP Measures
U.S. securities laws
require that when
we publish any
non-GAAP measures, we
disclose the reason
for using these
non-GAAP
measures and provide reconciliations to the most directly comparable GAAP measures. The presentation of Group Adjusted EBITDA
is
a
non-GAAP
measure.
We
provide
this
non-GAAP
measure
to
enhance
our
evaluation
and
understanding
of
our
financial
performance.
Non-GAAP Measures
Group
Adjusted
EBITDA
is
earnings
before
interest,
tax,
depreciation
and
amortization
(“EBITDA”),
adjusted
for
non-
operational transactions (including loss on disposal
of equity-accounted investments, gain related to
fair value adjustments to currency
options), (earnings) loss from
equity-accounted investments, stock-based compensation charges, lease
adjustments and once-off items.
Lease
adjustments
reflect
lease
charges
and
once-off
items
represents
non-recurring
expense
items,
including
costs
related
to
acquisitions and transactions consummated or ultimately not pursued.
The table below presents the reconciliation between GAAP net loss attributable
to Lesaka to Group Adjusted EBITDA:
Table 13
Years
ended June 30,
$ ’000
$ ’000
$ ’000
Loss attributable to Lesaka - GAAP
(35,074)
(43,876)
(38,057)
Loss from equity accounted investments
5,117
3,649
24,878
Net loss before loss from equity-accounted investments
(29,957)
(40,227)
(13,179)
Income tax (benefit) expense
(2,309)
7,560
Loss before income tax expense
(32,266)
(39,900)
(5,619)
Interest expense
18,567
5,829
2,982
Interest income
(1,853)
(2,089)
(2,416)
Gain on disposal of equity securities
-
(720)
-
Net loss on disposal of equity-accounted investment
Loss on sale of Bank Frick
-
-
Gain related to fair value adjustment to currency options
-
(3,691)
-
Change in fair value of equity securities
-
-
(49,304)
Operating loss
(15,347)
(40,195)
(53,872)
Impairment loss
7,039
-
-
PPA amortization
(amortization of acquired intangible assets)
15,149
3,826
Depreciation
8,536
3,749
3,987
Stock-based compensation charges
7,309
2,962
Lease adjustments
2,906
3,955
4,148
Once-off items
(1)
1,922
8,088
6,618
Unrealized Loss FV for currency adjustments
-
-
Group Adjusted EBITDA - Non-GAAP
27,736
(17,615)
(38,415)
(1) The table below presents the components of once-off
items for the periods presented:
Table 14
Years
ended June 30,
$ ’000
$ ’000
$ ’000
Non-recurring revenue not allocated to segments
(1,469)
-
-
Employee misappropriation of company funds
1,202
-
-
Transaction costs
6,460
1,879
Expenses incurred related to closure of legacy businesses
-
-
Indirect taxes provision
-
-
Separation of employee expense
-
-
Legacy processing adjustments
-
1,628
-
Allowance for doubtful EMI loans receivable
-
-
4,739
Total once-off
items
1,922
8,088
6,618
Once-off items are non-recurring in nature, however, certain
items may be reported in
multiple quarters. For instance, transaction
costs include costs incurred related to acquisitions and
transactions consummated or ultimately not pursued. The transactions can span
multiple quarters, for instance in fiscal 2022 we
incurred significant transaction costs related to the acquisition Connect over
a number
of quarters, and the transactions are generally non-recurring.
Non-recurring revenue not
allocated to segments
includes once off
revenue recognized that
we believe does
not relate to
either
our Merchant
or Consumer
divisions. Employee
misappropriation of
company funds
represents a
once-off
loss incurred.
Expenses
incurred
related
to
close
of
legacy
businesses
represents
costs
incurred
related
to
subsidiaries
which
we
are
in
the
process
of
deregistering/ liquidation
and therefore we
consider these costs non-operational
and ad hoc in
nature. Indirect tax
provision includes
non-recurring indirect taxes
which have been
provided related to
prior periods following
an on-going
investigation from a
tax authority.
We
incurred separation
costs related
to the
termination of
certain senior-level
employees, including
an executive
officer and
senior
managers, during
the fiscal
year and
we consider
these specific
terminations to
be of
a non-recurring
nature. The
legacy processing
adjustments represents amounts we
identified during fiscal 2022
related to prior
periods that are
payable to third
parties.
The allowance
for doubtful
EMI loans
receivable relates
to provision
created in
fiscal 2021
related to
loan provided
to certain
of our
then equity-
accounted investments.
Liquidity and Capital Resources
At June 30,
2023, our unrestricted
cash and cash
equivalents were $35.5
million and comprised
of ZAR-denominated
balances
of ZAR
0.6 million ($29.2
million), U.S. dollar-denominated
balances of $4.5
million, and other
currency deposits, primarily
Botswana
pula, of
$1.8 million,
all amounts translated
at exchange
rates applicable
as of
June 30,
2023. The
decrease in
our unrestricted
cash
balances
from
June
30,
2022,
was
primarily
due
to
the
utilization
of
cash
reserves
to
fund
certain
scheduled
repayments
of
our
borrowings, fully settle our revolving credit facility, purchase ATMs
and safe assets, and to make an investment in working capital in
our
Consumer
and
Merchant
operation,
which
was
partially
offset
by
the
utilization
of
our
available
borrowings
and
a
positive
contribution from Connect and certain of our Consumer operations.
We generally
invest any surplus cash held by our
South African operations in overnight
call accounts that we maintain at
South
African banking institutions,
and any surplus
cash held by
our non-South African
companies in
U.S. dollar-denominated money market
accounts.
Historically,
we have financed
most of our
operations, research and
development, working capital,
and capital expenditures,
as
well
as
acquisitions
and
strategic
investments,
through
internally
generated
cash
and
our
financing
facilities.
When
considering
whether to borrow under our financing
facilities, we consider the cost
of capital, cost of financing, opportunity cost
of utilizing surplus
cash and
availability of
tax efficient
structures to
moderate financing
costs. For
instance, in
fiscal 2022,
we obtained
loan facilities
from RMB
to fund
a portion
of our
acquisition of
Connect.
Following the
acquisition of
Connect, we
now utilize
a combination
of
short
and
long-term
facilities to
fund our
operating
activities and
a long-term
asset-backed
facility to
fund
the acquisition
of POS
devices and
safe assets.
Refer to
Note 12
to our
consolidated financial
statements for
the year
ended June
30, 2023,
for additional
information related to our borrowings.
Available short-term
borrowings
Summarized below are our short-term facilities available and utilized as of
June 30, 2023:
Table 15
RMB Facility E
RMB Indirect
RMB Connect
Nedbank
$ ’000
ZAR ’000
$ ’000
ZAR ’000
$ ’000
ZAR ’000
$ ’000
ZAR ’000
Total
short-term facilities
available, comprising:
Overdraft
-
-
-
-
10,882
205,000
-
-
Overdraft restricted as to
use
(1)
74,319
1,400,000
-
-
-
-
-
-
Total overdraft
74,319
1,400,000
-
-
10,882
205,000
-
-
Indirect and derivative
facilities
(2)
-
-
7,167
135,000
-
-
8,311
156,556
Total
short-term facilities
available
74,319
1,400,000
7,167
135,000
10,882
205,000
8,311
156,556
Utilized short-term
facilities:
Overdraft
-
-
-
-
9,025
170,000
-
-
Overdraft restricted as to
use
(1)
23,021
433,654
-
-
-
-
-
-
Indirect and derivative
facilities
(2)
-
-
1,757
33,100
-
-
2,110
Total
short-term facilities
available
23,021
433,654
1,757
33,100
9,025
170,000
2,110
Interest rate, based on South
African prime rate
11.75%
11.65%
(1) Overdraft may only be used to fund ATMs
and upon utilization is considered restricted cash.
(2) Indirect and derivative facilities may only be used for guarantees, letters of credit and forward
exchange contracts to support
guarantees issued by RMB and Nedbank to various third parties on our behalf.
Long-term borrowings
We have
aggregate long-term borrowing
outstanding of ZAR 2.5 billion
($133.1 million translated at exchange
rates as of June
30, 2023) as
described in Note
12. These borrowings
include outstanding
long-term borrowings
obtained by Lesaka
SA of ZAR
0.9
billion,
including
accrued
interest,
which
was
used
to
partially
fund
the
acquisition
of
Connect.
The
Lesaka
SA
borrowing
arrangements were amended
in March 2023
to include a
ZAR 200 million
revolving credit facility.
The revolving credit
facility had
been repaid in full as of June 30, 2023, and the entire balance is available for utilization. In contemplation of the Connect transaction,
Connect obtained
total facilities
of approximately
ZAR 1.3
billion, which
were utilized
to repay
its existing
borrowings,
to fund
a
portion of its capital expenditures and to settle obligations under the transaction documents, and which has subsequently been upsized
for its
operational requirements
and has
an outstanding
balance as
of June
30, 2023,
of ZAR
1.2 billion,
We
also have
a revolving
credit facility, of ZAR 300.0 million
which is utilized to fund a portion of our merchant finance loans receivable book.
Restricted cash
We
have credit
facilities with RMB
in order
to access cash
to fund
our ATMs
in South Africa.
Our cash, cash
equivalents and
restricted cash
presented in
our consolidated
statement of
cash flows
as of
June 30,
2023, includes
restricted cash
of approximately
$23.0
million
related
to
cash withdrawn
from
our
debt
facility
to
fund
ATMs.
This
cash
may
only
be
used
to
fund
ATMs
and
is
considered restricted as to use and therefore is classified as restricted cash on
our consolidated balance sheet.
We
have also
entered into
cession and
pledge agreements
with Nedbank
related to
our Nedbank
credit facilities
and we
have
ceded and
pledged certain
bank accounts
to Nedbank.
The funds
included in
these bank
accounts are
restricted as
they may
not be
withdrawn without
the express permission
of Nedbank. Our
cash, cash equivalents
and restricted cash
presented in our
consolidated
statement of cash flows as of June 30, 2023, includes restricted cash of approximately
$0.2 million that has been ceded and pledged.
Cash flows from operating activities
Net cash provided
by operating activities
during fiscal
was $0.4 million
(ZAR 7.4 million)
compared to
net cash utilized
by
operating
activities
of
$37.2
million
(ZAR
565.3
million)
during
fiscal
2022.
Excluding
the
impact
of
income
taxes,
our
cash
provided by operating activities
during fiscal 2023
was impacted by
the positive contribution from
Connect and certain
business within
our consumer
business, which was
partially offset
by growth
in our consumer
and merchant finance
loans receivable
books. During
fiscal 2023, we
observed fluctuations in
our working capital, primarily
within our merchant business,
as a result of
monthly changes
in our inventory and prepayment
account balances as a result of
payments made to secure prepaid
airtime inventory.
Certain of these
purchases were funded from our borrowing arrangements and the
impact of the funding is included in financing activities.
Net cash used in operating activities during fiscal 2022 was $37.2 million (ZAR 565.3 million) compared to $58.4 million (ZAR
887.1 million) generated during fiscal
2021. Excluding the impact of income
taxes, our cash used in operating activities during
fiscal
2022 was impacted by
the cash losses incurred by
the majority of our
continuing operations, the reorganization
costs paid during the
third quarter of
fiscal 2022, and
transactions costs paid
related to our
acquisition of Connect.
In fiscal 2022,
we absorbed $5
million
into working capital compared to a $4.7 million release from working capital
in fiscal 2021.
During fiscal 2023,
we paid our
first provisional South
African tax payments
of $3.0 million
(ZAR 50.8 million)
related to our
tax year. During fiscal 2023, we
also made our second
provisional South African tax
payments
of $4.1 million (ZAR
76.1 million
related to our 2023 tax
year and received tax refunds
of $0.2 million (ZAR (3.8)
million). We
also paid taxes totaling $0.4
million in
other tax jurisdictions, primarily in the Botswana.
During fiscal 2022,
we made our
first provisional South
African tax payments
of $0.6 million
(ZAR 9.1 million)
related to our
tax year. During fiscal 2022, we
also made our second
provisional South African tax
payments
of $0.7 million (ZAR
10.9 million
related to our 2022 tax year and made an additional tax payment of $0.0 million (ZAR
0.0 million) related to our 2021 tax year.
During fiscal 2021, we made our first provisional South
African tax payments
of $0.8 million (ZAR 11.9 million)
related to our
tax year. During fiscal 2021, we also
made our second provisional South African
tax payments
of $0.5 million (ZAR 8.0
million)
related to our 2021 tax year and made an additional
tax payment of $0.8 million (ZAR 11.6
million) related to our 2020 tax year.
We
also paid taxes totaling $4.3 million in other tax jurisdictions, primarily in the U.S.
Taxes paid during
fiscal 2023, 2022 and 2021 were as follows:
Table 16
Year
ended June 30,
$
$
$
ZAR
ZAR
ZAR
‘000
‘000
‘000
‘000
‘000
‘000
First provisional payments
2,955
50,798
9,142
11,934
Second provisional payments
4,079
76,089
10,929
8,038
Taxation paid related
to prior years
11,620
Tax refund received
(210)
(300)
(1,339)
(3,756)
(4,542)
(19,245)
Total South African
taxes paid
6,839
123,404
15,548
12,347
Foreign taxes paid
4,263
6,482
2,482
62,302
Total
tax paid
7,200
1,138
5,001
129,886
18,030
74,649
We expect to make additional provisional
income tax payments in South Africa related to our 2023 tax year in the first quarter of
fiscal 2024, however, the amount was not quantifiable
as of the date of the filing of this Annual Report on Form 10-K.
Cash flows from investing activities
Cash used
in investing
activities for
fiscal 2023
included capital
expenditures of
$16.2 million
(ZAR 289.8
million), primarily
due to the
acquisition of ATMs
.
During fiscal 2023,
we received proceeds
of $0.25 million
related to the
first tranche (of
two) from
the disposal of our entire equity interest in Carbon and $0.4 million related to
the sale of minor positions in Finbond.
During fiscal
2022, we
paid approximately
$4.6 million
(ZAR 69.3
million), primarily
due to
the roll
out of
our new
express
branches, acquisitions of ATMs and the acquisition of
computer equipment. During fiscal
2022, we paid approximately
$202.2 million
(ZAR 2.9 billion), net of cash acquired, for 100% of Connect. We
also received funds totaling approximately $11.4
million related to
the sale of Bank
Frick in fiscal
2021, proceeds from sale of
property, plant and equipment of $4.2 million,
and proceeds of $0.9
million
and $0.7 million, respectively, related to the sale of minor positions in Finbond and from the disposal of our entire interest in Revix in
fiscal 2022.
During
fiscal
2021,
we paid
approximately
$4.3 million
(ZAR 65.1
million),
primarily
for
the acquisition
of motor
vehicles,
which largely comprised a fleet of customized mobile ATMs
used to deliver a service to rural communities, computer equipment
and
leasehold improvements in South
Africa. In February 2021, we disposed
of our investment in Bank
Frick and received $18.6 million
of the $30.0 million
sales proceeds, the remainder
of which was expected
to be received in
fiscal 2022 and 2023.
We
received $20.1
million in September 2020 related to the sale of our South Korean
business in fiscal 2020 following the successful refund application
of
the
amounts
withheld
and
paid
to
the
South
Korean
tax
authorities
pursuant
to
that
transaction.
We
received
$6.0
due
on
the
remaining deferred sale proceeds related to the fiscal 2020 sale of DNI. We also extended loan funding of $1.0 million to V2 and $0.2
million to Revix.
Cash flows from financing activities
During fiscal 2023, we utilized approximately $520.1
million from our South African overdraft facilities to fund
our ATMs
and
our cash management business through Connect and repaid
$547.3 million of these facilities. We utilized approximately $24.4 million
of our long-term
borrowings to settle approximately
$10.5 million of our
revolving credit facilities,
fund our merchant
finance loans
receivable business, and to fund the acquisition of certain capital expenditures
.
We repaid approximately
$17.5 million of these long-
term, including approximately $10.5 million to settle our
revolving credit balance in full. We
received $0.5 million from the exercise
of stock options. We also paid $1.3 million to repurchase shares from employees in order for the employees to settle taxes due related
to the vesting of shares of restricted stock and to settle the strike price due and taxes
due related to the exercise of stock options.
During fiscal 2022, we utilized approximately $570.9 million
from our South African overdraft facilities to fund our ATMs
and
our cash management business through Connect and
repaid $525.5 million of these facilities.
We utilized approximately $78.9 million
of our long-term borrowings
to fund a portion
of the acquisition of Connect,
to fund our merchant
finance loans receivable business,
and to fund the acquisition
of certain capital expenditures. We
repaid approximately $5.6 million
of these long-term borrowings.
We
also received $0.8 million from the exercise of stock options.
During fiscal 2021, we utilized approximately $360.1 million
from our South African overdraft facilities to fund our ATMs
and
repaid $365.4 million of these facilities.
Contractual Obligations
The following table sets forth our contractual obligations as of June 30, 2023:
Table 17
Payments due by Period, as of June 30, 2023 (in $ ’000s)
Total
Less than 1
year
2-3 years
3-5 years
Thereafter
Short-term credit facilities
(A)
32,046
32,046
-
-
-
Long-term borrowings
Principal repayments
(A)(B)
133,118
3,663
68,901
60,554
-
Interest payments
(A)(B)
55,766
16,861
28,313
10,592
-
Operating lease liabilities, including imputed interest
(C)
5,813
2,123
2,055
1,635
-
Purchase obligations
3,010
3,010
-
-
-
Capital commitments
-
-
-
Other long-term obligations reflected on our balance
sheet
(D)(E)
1,982
-
-
-
1,982
Total
231,789
57,757
99,269
72,781
1,982
(A) - Refer to Note 12 to our audited consolidated financial statements.
(B) - Long-term
borrowings principal
repayments for the
3-5 year period
includes all unamortized
fees as of
June 30, 2023.
Interest payments based on
applicable interest rates as of
June 30, 2023, and expected
outstanding long-term borrowings over
the period. All amounts converted from ZAR to USD using the June 30, 2023,
USD/ ZAR exchange rate.
(C) - Refer to Note 8 to our audited consolidated financial statements.
(D) - Includes policyholder liabilities of $1.8 million related to
our insurance business. All amounts are translated at exchange
rates applicable as of June 30, 2023.
(E) -
We
have excluded
cross-guarantees in
the aggregate
amount of
$0.1 million
issued as
of June
30, 2023,
to RMB
and
Nedbank
to secure
guarantees it
has issued
to third
parties on
our behalf
as the
amounts that
will be
settled in
cash are
not
known and the timing of any payments is uncertain.
Off-Balance Sheet Arrangements
We have no off
-balance sheet arrangements.
Capital Expenditures
Capital expenditures for the years ended June 30, 2023, 2022 and 2021
were as follows:
Table 18
$
$
$
ZAR
ZAR
ZAR
‘000
‘000
‘000
‘000
‘000
‘000
Consumer
3,170
1,712
3,433
56,870
26,019
52,174
Merchant
12,986
2,846
232,969
43,253
12,949
Total
16,156
4,558
4,285
289,839
69,272
65,123
Our capital expenditures
for fiscal 2023,
2022 and 2021, are
discussed under “-Liquidity
and Capital Resources-Cash
flows
from investing activities.”
All of our capital expenditures
for the past three fiscal
years were funded through
internally-generated funds, except
for certain
capital
expenditures
of
POS devices
and
safe
assets, made
by
Connect
which
were funded
through
the utilization
of asset-backed
borrowings.
We
had
outstanding
capital commitments
as of
June 30,
2023,
of $0.1
million.
We
expect
to fund
these expenditures
through
internally-generated
funds.
In
addition
to
these
capital
expenditures,
we
expect
that
capital
spending
for
fiscal
will
include acquisition
of POS devices,
safe assets, vehicles,
computer and office
equipment, as well
as for our
ATM
infrastructure and
branch
network
in
South
Africa.
These
assets
will
be
funded
through
the
use
of
internally-generated
funds
and
our
asset-backed
borrowing arrangement.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We seek to manage our exposure to currency exchange, translation, interest rate, credit, microlending credit and equity price and
liquidity risks as discussed below.
Currency Exchange Risk
We
are subject
to currency
exchange risk
because we
purchase components
for safe
assets, that
we assemble,
and inventories
that we
are required
to settle
in other
currencies, primarily
the euro,
renminbi, and
U.S. dollar.
We
have used
forward contracts
in
order to limit our exposure in these transactions to
fluctuations in exchange rates between the South African rand (“ZAR”), on the one
hand, and the U.S. dollar and the euro, on the other hand.
We
had no outstanding foreign exchange contracts as of June 30,
2023 and 2022.
Translation Risk
Translation risk relates to the risk that our
results of operations will vary significantly as
the U.S. dollar is our
reporting currency,
but we earn a significant amount of our revenues and
incur a significant amount of our expenses in ZAR. The U.S. dollar
to the ZAR
exchange rate has
fluctuated significantly over
the past three
years. As exchange rates
are outside our
control, there can
be no assurance
that future fluctuations will not adversely affect our results
of operations and financial condition.
Interest Rate Risk
As a result
of our normal borrowing
activities, our operating results
are exposed to fluctuations
in interest rates,
which we manage
primarily through regular
financing activities. Interest
rates in South
Africa are trending upwards
and we expect higher
interest rates
in the foreseeable future which will increase our cost of
borrowing. We periodically evaluate the cost and effectiveness of interest rate
hedging strategies
to manage this
risk. We
generally maintain
investments in
cash equivalents and
held to maturity
investments and
have occasionally invested in marketable securities.
We have
short and long-term borrowings in South
Africa as described in Note 12
to our consolidated financial statements which
attract interest
at rates
that fluctuate
based on
changes in
the South
African prime
and 3-month
JIBAR interest
rates. The
following
table illustrates the effect on
our annual expected interest charge,
translated at exchange rates
applicable as of June 30,
2023, as a result
of changes in the South African prime and 3-month JIBAR interest
rates, using our outstanding short and long-term borrowings
as of
June 30, 2023. The effect of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in the interest rates applicable to the
borrowings as of June 30,
2023, are shown. The
selected 1% hypothetical change does
not reflect what could be considered
the best-
or worst-case scenarios.
Table 19
As of June 30, 2023
Annual expected
interest charge
($ ’000)
Hypothetical
change in
interest rates
Impact of
hypothetical
change in
interest rates
($ ’000)
Estimated annual
expected interest
charge after
hypothetical change
in interest rates
($ ’000)
Interest on South Africa borrowings
21,111
1%
1,663
22,774
(1%)
(1,660)
19,451
Credit Risk
Credit risk
relates to
the risk of
loss that we
would incur
as a
result of non-performance
by counterparties.
We
maintain credit
risk
policies
in
respect
of
our
counterparties
to
minimize
overall
credit
risk.
These
policies
include
an
evaluation
of
a
potential
counterparty’s
financial
condition,
credit
rating,
and
other
credit
criteria
and
risk
mitigation
tools
as
our
management
deems
appropriate.
With
respect to
credit risk
on financial
instruments,
we maintain
a policy
of entering
into such
transactions only
with
South African and European financial institutions that have a credit rating
of “B” (or its equivalent) or better, as determined
by credit
rating agencies such as Standard & Poor’s, Moody’s
and Fitch Ratings.
Consumer microlending credit risk
We are exposed
to credit risk in our Consumer microlending activities, which provides unsecured short-term loans
to qualifying
customers. Credit bureau checks as well as an affordability test are conducted as part of the origination process, both of
which are line
with local regulations.
We
consider this policy to be appropriate because the affordability test we perform takes into account a variety
of
factors
such
as
other
debts
and
total
expenditures
on
normal
household
and
lifestyle
expenses.
Additional
allowances
may
be
required should the
ability of our customers
to make payments when
due deteriorate in
the future. A significant
amount of judgment
is required to assess the ultimate recoverability of these
finance loan receivables, including ongoing evaluation of the creditworthiness
of each customer.
Merchant lending
We
maintain an allowance
for doubtful finance
loans receivable related
to its Merchant
services segment with
respect to short-
term loans
to qualifying
merchant customers.
Our risk
management procedures
include adhering
to our
proprietary lending
criteria
which uses an online-system loan
application process, obtaining necessary customer transaction-history data and
credit bureau checks.
We
consider these procedures to be appropriate because it
takes into account a variety of
factors such as the customer’s credit capacity
and customer-specific risk factors when originating a loan.
Equity Securities Price Risk
Equity price risk relates to the risk
of loss that we would incur as
a result of the volatility in the exchange
-traded price of equity
securities that we hold. As of June 30, 2023, we did not have any equity securities that
were exchange-traded and held as available for
sale. Historically, exchange
-traded equity securities held as available for sale were expected to be held for an extended period of time
and we were
not concerned with
short-term equity price volatility
with respect to
these securities provided that
the underlying business,
economic and management characteristics of the company remained
sound.
The market price of these exchange-traded equity securities may fluctuate for a variety of reasons
and, consequently, the amount
we may obtain in a subsequent sale of these securities may significantly differ
from the reported market value.
Equity Securities Liquidity Risk
Equity liquidity risk
relates to the
risk of loss
that we would
incur as a
result of the
lack of liquidity
on the exchange
on which
those securities are
listed.
We
may not
be able to
sell some or
all of these
securities at one
time, or over
an extended period
of time
without influencing the exchange-traded price, or at all.
We monitor these investments for impairment and make appropriate reductions in carrying value when an impairment is deemed
to be other-than-temporary.
We hold approximately 27.8% of the issued share capital
of Finbond which are exchange-traded equity
securities, however, from
April 1, 2016,
we have accounted
for them using
the equity method.
The fair value
of these securities
of $4.6 million
as of June
30,
2023,
represented approximately 0.8% of our total assets, including these securities.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS
AND SUPPLEMENTARY
DATA
Our
audited
consolidated
financial
statements,
together
with the
report of
our
independent
registered
public
accounting
firm,
appear on pages through of this Annual Report on Form 10-K.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls
and procedures
Under the supervision and
with the participation of
our management, including our
Group Chief Executive Officer and
our Group
Chief Financial
Officer,
we conducted
an evaluation
of our
disclosure controls
and procedures,
as such
term is
defined under
Rule
13a-15(e) under the
Securities Exchange Act
of 1934, as amended
(the “Exchange Act”).
Based on this evaluation,
our Group Chief
Executive Officer and Group Chief Financial Officer
concluded that our disclosure controls and procedures
were effective as of June
30, 2023.
Internal Control over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision of,
our Group Chief Executive Officer
and Group Chief Financial Officer, or persons performing
similar functions, and effected by our board of directors, management, and
other
personnel,
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial
statements for external purposes in accordance with U.S. GAAP.
Internal control over financial reporting includes
those policies and procedures that
(1) pertain to the
maintenance of records that,
in reasonable detail, accurately and fairly
reflect the transactions and dispositions of
our assets; (2) provide reasonable
assurance that
transactions are recorded as
necessary to permit preparation of
financial statements in accordance
with U.S. GAAP,
and that receipts
and expenditures of the company are being made only in accordance with authorizations of our officers and directors; and (3) provide
reasonable assurance regarding prevention
or timely detection of unauthorized
acquisition, use or disposition
of our assets that could
have a material effect on our audited consolidated financial statements.
Inherent Limitations in Internal Control
over Financial Reporting
Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of
its inherent
limitations.
Internal
control
over
financial reporting
is a
process that
involves
human
diligence
and
compliance
and
is
subject
to
lapses
in
judgment and
breakdowns
resulting
from human
failures.
Internal
control over
financial
reporting
also
can
be
circumvented by collusion or improper
management override. Because of such
limitations, there is a risk that
material misstatements
may not
be prevented
or detected
on a
timely basis
by internal
control over
financial reporting.
However,
these inherent
limitations
are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards
to reduce, though
not eliminate, this risk.
Management’s
Report on Internal Control Over Financial Reporting
Management, including our Group Chief
Executive Officer and our Group
Chief Financial Officer, is responsible for
establishing
and maintaining
adequate internal control
over our financial
reporting. Management
conducted an evaluation
of the effectiveness
of
internal control over financial reporting based on criteria established in Internal Control - Integrated Framework (2013) issued
by the
Committee
of Sponsoring
Organizations
of the
Treadway
Commission
(COSO). Based
on this
evaluation, management
concluded
that our internal control over financial reporting was effective as of
June 30, 2023. Deloitte & Touche (South Africa), our independent
registered public accounting firm, has issued an audit report on our internal control
over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended June 30, 2023,
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the shareholders
and the Board of Directors of Lesaka Technologies,
Inc.
Opinion on Internal Control over Financial Reporting
We have audited
the internal control over financial reporting of Lesaka Technologies,
Inc. and subsidiaries (the “Company”) as
of
June
30,
2023,
based
on
criteria
established
in
Internal
Control
-
Integrated
Framework
(2013)
issued
by
the
Committee
of
Sponsoring Organizations
of the Treadway
Commission (COSO).
In our
opinion, the
Company maintained,
in all material
respects,
effective internal
control over financial
reporting as of
June 30, 2023,
based on criteria
established in
Internal Control
- Integrated
Framework (2013)
issued by COSO.
We
have
also audited,
in accordance
with the
standards of
the Public
Company Accounting
Oversight Board
(United States)
(PCAOB), the
consolidated
financial statements
as of
and for
the year
ended June
30, 2023,
of the
Company and
our report
dated
September 12, 2023, expressed an unqualified opinion on those financial
statements.
Basis for Opinion
The
Company’s
management
is
responsible
for
maintaining
effective
internal
control
over
financial
reporting
and
for
its
assessment of
the effectiveness
of internal
control over
financial reporting,
included in
the accompanying
Management’s
Report on
Internal Control over Financial Reporting. Our
responsibility is to express
an opinion on the Company’s internal control over financial
reporting based
on our
audit. We
are a
public accounting
firm registered
with the
PCAOB and
are required
to be
independent with
respect to the
Company in accordance
with the U.S. federal
securities laws and
the applicable rules
and regulations of
the Securities
and Exchange Commission and the PCAOB.
We conducted
our audit in accordance with
the standards of the PCAOB. Those
standards require that we plan
and perform the
audit to
obtain reasonable
assurance about
whether effective
internal control
over financial
reporting was
maintained in
all material
respects. Our audit
included obtaining an understanding
of internal control over
financial reporting, assessing
the risk that a
material
weakness
exists,
testing
and
evaluating
the
design
and
operating
effectiveness
of
internal
control
based
on
the
assessed
risk,
and
performing such
other procedures as
we considered necessary
in the circumstances.
We
believe that our
audit provides a
reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A
company’s
internal
control
over
financial
reporting
is
a
process
designed
to
provide
reasonable
assurance
regarding
the
reliability of financial
reporting and the
preparation of financial
statements for external
purposes in accordance with
generally accepted
accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted
accounting principles, and that
receipts and expenditures of the
company are being made only
in
accordance
with
authorizations
of
management
and
directors
of
the
company;
and
(3)
provide
reasonable
assurance
regarding
prevention or timely detection of
unauthorized acquisition, use, or disposition
of the company’s assets that could have
a material effect
on the financial statements.
Because
of
its
inherent
limitations,
internal
control
over
financial
reporting
may
not
prevent
or
detect
misstatements.
Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ Deloitte & Touche
Deloitte & Touche
Registered Auditors
Johannesburg, South Africa
September 12, 2023

---

ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION
Not applicable.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
about
our
executive
officers
is
set
out
in
Part
I,
Item
under
the
caption
“Our
Executive
Officers.”
The
other
information required
by this
Item is incorporated
by reference
to the
sections of
our definitive
proxy statement
for our
2023 annual
meeting of shareholders entitled “Board of Directors and Corporate
Governance” and “Additional Information.”

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the sections of our definitive proxy
statement for our 2023
annual meeting of shareholders entitled
“Executive Compensation,” “Board of
Directors and Corporate Governance-Compensation
of Directors” and “-Remuneration Committee Interlocks and Insider Participation.”

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated by reference to the sections of our definitive
proxy statement for our 2023
annual
meeting
of
shareholders
entitled
“Security
Ownership
of
Certain
Beneficial
Owners
and
Management”
and
“Equity
Compensation Plan Information.”

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN
RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated by reference to the sections of our definitive proxy
statement for our 2023
annual
meeting
of
shareholders
entitled
“Certain
Relationships
and
Related
Transactions”
and
“Board
of
Directors
and
Corporate
Governance.”

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTANT
FEES AND SERVICES
The information required by this Item is incorporated by reference to the sections of our definitive proxy
statement for our 2023
annual meeting of shareholders entitled “Audit and Non-Audit Fees.”
PART
IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
a)
The following documents are filed as part of this report
1. Financial Statements
The following financial statements are included on pages through.
Report of the Independent Registered Public Accounting Firm
- Deloitte & Touche (South
Africa) (PCAOB
Firm ID 0
)
Consolidated balance sheets as of June 30, 2023 and 2022
Consolidated statements of operations for the years ended June 30, 2023,
2022 and 2021
Consolidated statements of comprehensive (loss) income for the years ended June 30, 2023, 2022 and 2021
Consolidated statements of changes in equity for the years ended June 30, 2023, 2022 and 2021
Consolidated statements of cash flows for the years ended June 30, 2023, 2022 and 2021
Notes to the consolidated financial statements
2. Financial Statement Schedules
Financial statement schedules have been
omitted since they are
either not required, not
applicable, or the
information is otherwise
included.
(b) Exhibits
Incorporated by Reference Herein
Exhibit
No.
Description of Exhibit
Included
Herewith
Form
Exhibit
Filing Date
2.1
Sale of Shares Agreement, dated October 31, 2021,
by and among Net1 Applied Technologies South
Africa Proprietary Limited; Net1 UEPS
Technologies, Inc.; Old Mutual Life Assurance
Company (South Africa) Limited; Lirast (Mauritius)
Company Limited; SIG International Investment
(BVI) Limited; Aldgate International Limited; Ivan
Michael Epstein; PFCC (BVI) Limited; PCF
Investments (BVI) Limited; Ovobix (RF) Proprietary
Limited; Luxanio 227 Proprietary Limited; Vista
Capital Investments Proprietary Limited; Vista
Treasury Proprietary Limited; K2021477132 (South
Africa) Proprietary Limited; and Cash Connect
Management Solutions Proprietary Limited.
8-K
10.1
November 2, 2021
3.1
Amended and Restated Articles of Incorporation
8-K
3.1
May 17, 2022
3.2
Amended and Restated By-Laws of Lesaka
Technologies, Inc.
8-K
3.2
May 17, 2022
4.1
Form of common stock certificate
10-K
4.1
September 9, 2022
4.2
Description of registrant’s securities
X
10.1*
Form of Restricted Stock Agreement
10-Q
10.49
February 7, 2023
10.2*
Form of Stock Option Agreement
10-Q
10.50
February 7, 2023
10.3*
Form of Restricted Stock Agreement (non-employee
directors)
10-Q
10.51
February 7, 2023
10.4*
Form of Indemnification Agreement
10-K
10.4
September 9, 2022
10.5*
Form of non-employee director agreement
10-K
10.5
August 24, 2017
10.6*
Amended and Restated 2022 Stock Incentive Plan of
Lesaka Technologies, Inc.
14A
A
September 30, 2022
10.7*
Contract of Employment, dated as of June 30, 2021,
between Net1 Applied Technologies South Africa
(Pty) Ltd and Christopher Guy Butt Meyer
8-K
10.1
June 30, 2021
10.8*
Restrictive Covenants Agreement, dated as of June
30, 2021, between Net1 Applied Technologies South
Africa (Pty) Ltd and Christopher Guy Butt Meyer
8-K
10.2
June 30, 2021
10.9*
Employment Agreement, dated as of June 30, 2021,
between Net 1 UEPS Technologies, Inc. and
Christopher Guy Butt Meyer
8-K
10.3
June 30, 2021
10.10*
Restrictive Covenants Agreement, dated as of June
30, 2021, between Net 1 UEPS Technologies, Inc.
and Christopher Guy Butt Meyer
8-K
10.4
June 30, 2021
10.11*
Contract of Employment, effective February 5, 2021,
between Net1 Applied Technologies South Africa
Proprietary Limited and Lincoln Mali
8-K
10.1
February 11, 2021
10.12*
Restrictive Covenants Agreement, effective February
5, 2021, between Net1 Applied Technologies South
Africa Proprietary Limited and Lincoln Mali
8-K
10.2
February 11, 2021
10.13*
Contract of Employment, dated as of December 9,
2021, between Net1 Applied Technologies South
Africa (Pty) Ltd and Naeem Kola
8-K
10.1
December 10, 2021
10.14*
Restrictive Covenants Agreement, dated as of
December 9, 2021, between Net1 Applied
Technologies South Africa (Pty) Ltd and Naeem Kola
8-K
10.2
December 10, 2021
10.15*
Employment Agreement, dated as of December 9,
2021, between Net 1 UEPS Technologies, Inc. and
Naeem Kola
8-K
10.3
December 10, 2021
10.16*
Restrictive Covenants Agreement, dated as of
December 9, 2021, between Net 1 UEPS
Technologies, Inc. and Naeem Kola
8-K
10.4
December 10, 2021
10.17*
Employment Agreement, dated as of February 8,
2023, between Lesaka Technologies, Inc. and Steven
John Heilbron
10-Q
10.52
May 9, 2023
10.18*
Restrictive Covenants Agreement, dated as of
February 8, 2023, between Lesaka Technologies, Inc.
and Steven John Heilbron
10-Q
10.53
May 9, 2023
10.19*
Contract of Employment, effective March 1, 2018,
between Net1 Applied Technologies South Africa
Proprietary Limited and Alexander Michael Ramsay
Smith
8-K
10.80
March 1, 2018
10.20*
Restrictive Covenants Agreement, effective March 1,
2018, between Net1 Applied Technologies South
Africa Proprietary Limited and Alexander Michael
Ramsay Smith
8-K
10.81
March 1, 2018
10.21*
Employment Agreement, effective March 1, 2018,
between Net 1 UEPS Technologies, Inc. and
Alexander Michael Ramsay Smith
8-K
10.82
March 1, 2018
10.22*
Restrictive Covenants Agreement, effective March 1,
2018, between Net 1 UEPS Technologies, Inc. and
Alexander Michael Ramsay Smith
8-K
10.83
March 1, 2018
10.23*
Addendum to Contract of Employment, dated as of
December 9, 2021, between Net1 Applied
Technologies South Africa (Pty) Ltd and Alex M.R.
Smith
8-K
10.5
December 10, 2021
10.24*
Amendment to Employment Agreement, dated as of
December 9, 2021, between Net 1 UEPS
Technologies, Inc. and Alex M.R. Smith
8-K
10.6
December 10, 2021
10.25*
Mutual Separation Agreement, dated January 11,
2023, by and between the Lesaka Technologies, Inc.
and Alex M.R. Smith
8-K
10.1
January 17, 2023
10.26*
Mutual Separation Agreement, dated January 11,
2023, by and between the Lesaka Technologies (Pty)
Ltd and Alex M.R. Smith
8-K
10.2
January 17, 2023
10.27*
First Amendment to Restrictive Covenant
Agreements, dated as of December 9, 2021
8-K
10.7
December 10, 2021
10.28*
Consulting Agreement, dated August 5, 2020, by and
between the Company and Ali Mazanderani
8-K
10.2
August 5, 2020
10.29
Agreement of Lease, Memorandum of an agreement
entered into by and between Buzz Trading 199 (Pty)
Ltd and Net 1 Applied Technologies South Africa
(Pty) Ltd dated May 7, 2013
10-Q
10.25
May 9, 2013
10.30
Addendum to the Lease Agreement made and entered
into by and between Buzz Trading 199 (Pty) Ltd and
Net 1 Applied Technologies South Africa (Pty) Ltd
dated 14 June 2022
10-K
10.26
September 9, 2022
10.31
Facility Letter between Nedbank Limited and Net1
Applied Technologies South Africa Limited and
certain of its subsidiaries dated as of December 13,
2013 and First Addendum thereto dated as of
December 18, 2013
8-K
10.27
December 19, 2013
10.32
Letter from Nedbank Limited to Net1 Applied
Technologies South Africa Proprietary Limited and
certain of its subsidiaries, dated December 7, 2016
8-K
10.50
December 9, 2016
10.33
Policy Agreement, dated April 11, 2016, among the
Company and the IFC Investors
8-K
10.32
April 12, 2016
10.34
Cooperation Agreement, dated May 13, 2020, by and
between Net 1 UEPS Technologies, Inc. and VCP
(Proprietary) Limited
8-K
10.1
May 14, 2020
10.35
Amendment No. 1 to Cooperation Agreement, dated
December 9, 2020, by and between Net 1 UEPS
Technologies, Inc. and Value Capital Partners (Pty)
Ltd
8-K
10.1
December 10, 2020
10.36
Amendment No. 2 to Cooperation Agreement, dated
March 22, 2022, by and between Net 1 UEPS
Technologies, Inc. and Value Capital Partners (Pty)
Ltd
10-K
10.32
September 9, 2022
10.37
Securities Purchase Agreement, dated March 22,
2022, among Net1 UEPS Technologies, Inc., Net1
Applied Technologies South Africa Proprietary
Limited and Value Capital Partners Proprietary
Limited
10-Q
10.58
May 10, 2022
10.38
Amendment No. 1 to Securities Purchase Agreement
dated March 16, 2023, among Lesaka Technologies,
Inc. (formerly Net1 UEPS Technologies, Inc.),
Lesaka Technologies Proprietary Limited (formerly
Net1 Applied Technologies South Africa Proprietary
Limited) and Value Capital Partners Proprietary
Limited
8-K
10.3
March 22, 2023
10.39
Senior Facility E Agreement, dated September 26,
2018, among Net1 Applied Technologies South
Africa Proprietary Limited, FirstRand Bank Limited
(acting through its Rand Merchant Bank division), as
lender, and FirstRand Bank Limited (acting through
its Rand Merchant Bank division), as agent
8-K
10.96
October 2, 2018
10.40
Letter of Amendment, dated August 2, 2021, among
Net1 Applied Technologies South Africa Proprietary
Limited and FirstRand Bank Limited (acting through
its Rand Merchant Bank division), as lender, related
to the amendment to the Senior Facility E Agreement
8-K
10.1
August 2, 2021
10.41
Fifth Amendment and Restatement Agreement, dated
March 16, 2023, between Lesaka Technologies
Proprietary Limited (as borrower), and FirstRand
Bank Limited (acting through its Rand Merchant
Bank division) (as lender), and FirstRand Bank
Limited (acting through its Rand Merchant Bank
division) (as facility agent)
8-K
10.1
March 22, 2023
10.42
First Amendment and Restatement Agreement, dated
March 22, 2023, between Cash Connect Management
Solutions Proprietary Limited (as borrower), arranged
by FirstRand Bank Limited (acting through its Rand
Merchant Bank division) (as mandated lead arranger),
and FirstRand Bank Limited (acting through its Rand
Merchant Bank division) (as facility agent)
8-K
10.2
March 22, 2023
10.43
Revolving Credit Facility Agreement, dated
November 29, 2022, between Cash Connect Capital
Proprietary Limited, the Parties Listed in Part I of
Schedule 1 (the Original Guarantors) and FirstRand
Bank Limited (acting through its Rand Merchant
Bank division) (as Lender)
8-K
10.1
December 5, 2022
Code of Ethics
X
Subsidiaries of Registrant
X
Consent of Independent Registered Public
Accounting Firm
X
31.1
Certification of Principal Executive Officer pursuant
to Rules 13a-14(a) and 15d-14(a) under the Securities
Exchange Act of 1934, as amended
X
31.2
Certification of Principal Financial Officer pursuant
to Rules 13a-14(a) and 15d-14(a) under the Securities
Exchange Act of 1934, as amended
X
Certification pursuant to 18 USC Section 1350
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy
Extension Schema
X
101.CAL
XBRL Taxonomy
Extension Calculation Linkbase
X
101.DEF
XBRL Taxonomy
Extension Definition Linkbase
X
101.LAB
XBRL Taxonomy
Extension Label Linkbase
X
101.PRE
XBRL Taxonomy
Extension Presentation Linkbase
X
Cover Page Interactive Data File (formatted as inline
XBRL and continued in Exhibit 101)
X
* Indicates a management contract or compensatory plan or arrangement.