# Lesaka Technologies Inc: Form 10-Q for the period ended Sep 30, 2023 - Company: [Lesaka Technologies Inc](/companies/lsak.md) (CIK 1041514) - Form: 10-Q - Filed: 2023-11-07 - Accepted by EDGAR: Nov 7, 2023, 16:10 ET - Period: 2023-09-30 - Accession: 0001562762-23-000403 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1041514/000156276223000403/form10q.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1041514/000156276223000403/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2023-09-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2023-07-01 to 2023-09-30 | $136.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $107.5m | us-gaap:CostOfRevenue | | Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $22.5m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 3 months, 2023-07-01 to 2023-09-30 | $228.0k | us-gaap:OperatingIncomeLoss | | Income tax | 3 months, 2023-07-01 to 2023-09-30 | $264.0k | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2023-07-01 to 2023-09-30 | −$5.7m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.09 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.09 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 60,990 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 3 months, 2023-07-01 to 2023-09-30 | $3.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 3 months, 2023-07-01 to 2023-09-30 | $2.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Share repurchases | 3 months, 2023-07-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock | | Current assets | at 2023-09-30 | $172.8m | us-gaap:AssetsCurrent | | Total assets | at 2023-09-30 | $546.8m | us-gaap:Assets | | Current liabilities | at 2023-09-30 | $109.4m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2023-09-30 | $292.1m | us-gaap:Liabilities | | Long-term debt | at 2023-09-30 | $130.6m | us-gaap:LongTermDebtNoncurrent | | Current portion of debt | at 2023-09-30 | $3.6m | us-gaap:LongTermDebtCurrent | | Shareholders' equity | at 2023-09-30 | $175.3m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 45,809 characters. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2023, and the unaudited condensed consolidated financial statements and the accompanying notes included in this Form 10-Q. 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. ### Forward-looking statements Some of the statements in this Form 10-Q constitute forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, implied or inferred by these forward-looking statements. Such factors include, among other things, those listed under Item 1A.—“Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2023. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially. We undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law. You should read this Form 10-Q and the documents that we reference herein and the documents we have filed as exhibits hereto and thereto and which we have filed with the United States Securities and Exchange Commission completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. ### Recent Developments We experienced continued improvement in our financial performance in the first quarter of fiscal 2024 as a result of positive operational momentum in both of our Merchant and Consumer divisions. Revenue of $136.1 million (ZAR 2.5 billion) was at the upper end of our revenue guidance despite prevailing negative macroeconomic and socio-political conditions in South Africa. We reached an important milestone this quarter, with operating income turning positive to $0.2 million (ZAR 4.2 million), compared with an operating loss of $4.7 million (ZAR 80.0 million) during the first quarter of fiscal 2023. We delivered Group Adjusted EBITDA, a non-GAAP measure, of ZAR 162.5 million ($8.7 million) this quarter, compared to Group Adjusted EBITDA of ZAR 71.9 million ($4.2 million) in fiscal 2023. The continued resilience of our business model in a challenging environment for our merchant and consumer customers demonstrates the value they place on our services. 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 The year-on-year growth achieved by our Merchant Division is supported by the robust secular trends underpinning financial inclusion, cash management and digitalization for micro, small and medium enterprises (“MSMEs”), especially in the informal markets of South Africa, where we have a leading market position. Performance in our Merchant division has been driven by: Kazang, our VAS and supplier payments business, continues to see adoption by MSMEs in the informal sector, with a 34% year-on-year growth in the number of devices deployed. We had approximately 77,000 devices deployed as of September 30, 2023, compared to approximately 57,000 devices one year ago. We experienced a slight slowdown in net device growth during our current quarter, growing by just over 2,000 devices. o The reason for the slight slowdown in net growth is attributed to a more selective device placement strategy that followed the six month period to March 31, 2023, during which we installed a significant number of devices at informal merchants to support their supplier payments to three major FMCG companies in South Africa. Following that accelerated roll out program we have prioritised deployment at merchants where we can sell more products and services through the channel and earn higher margins. Therefore, during the fourth quarter of fiscal 2023 and the first quarter of fiscal 2024 we focused on optimising this new fleet and removing sub-optimal devices. o As communicated in the fourth quarter of fiscal 2023, our product mix for VAS sales has changed with low-margin money transfers reducing significantly, currently approximately 5% of VAS throughput is money transfers, compared to approximately 30% a year ago. The impact on overall profitability has not been material. 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 46,600 as of September 30, 2023, compared to approximately 27,700 a year ago, a growth of 68% in deployed devices; Our Merchant Credit offering includes Capital Connect in the formal market and Kazang Pay Advance in the informal market. We disbursed ZAR 196 million during this quarter, compared to approximately ZAR 226 million in the comparable period last year, representing a 13% decrease. In the formal market we continue to see demand for our merchant credit offering but as previously disclosed, we experienced a slight pullback in credit extension in this business since March 2023 as we tightened our credit criteria in response to the higher interest rate and inflationary pressures in the South African economy. In the informal market, as we innovate and execute quickly in the Merchant Division, we have decided the current Kazang Pay Advance credit product is not suitable to continue with, especially in the high interest rate environment, and have suspended it, while we explore other options with respect to our Kazang Pay Advance offering. Overall, Kazang Pay Advance has generated positive returns despite recent losses incurred being greater than expected. A reduction in origination of new loans, loan book and disbursements is primarily a result of the decision to suspend Kazang Pay Advance during the period but was also partially impacted by the slight pull back in credit extension in Capital Connect. Our automated cash management offering, Cash Connect, effectively puts the “bank” in approximately 4,400 merchants’ stores, compared to approximately 4,200 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. Our new ATM recycler is generating strong interest, and this business has been transferred to our Merchant Division, where it has been fully integrated into our Cash Connect proposition as an alternative to vaults for our merchant customers. ### Consumer Division Over the past five quarters we have consistently referenced the three levers underpinning our strategy of returning the Consumer Division to profitability – (i) growing active EasyPay Everywhere (“EPE”) account numbers, (ii) increasing average revenue per user (“ARPU”) through cross-selling and (iii) cost optimization. The progress on our three key initiatives is as follows: #### Driving customer acquisition o Our total active EPE transactional account base stood at more than 1.3 million at the end of September 2023, of which more than 1.1 million (or more than 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. o 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. Gross EPE account activations, for the permanent base, during our current quarter showed significant improvement due to various strategic initiatives. We achieved approximately 76,000 gross account activations in the first quarter, compared to approximately 45,000 in the first quarter of fiscal 2023\. After adjusting for account churn, net active account growth for the quarter was approximately 42,000 accounts, compared to approximately 2,700 in first quarter of fiscal 2023 #### Progress on cross selling EasyPay Loans o We originated approximately 222,000 loans during the quarter with our consumer loan book, before allowances, increasing 20% to ZAR 423 million as at September 30, 2023, compared to ZAR 351 million as of September 30, 2022. o We have not amended our credit scoring or other lending criteria to grow our Consumer lending book. o The loan conversion rate continues to improve following the implementation of a number of targeted consumer lending campaigns during the current quarter. o The portfolio loss ratio, calculated as the loans written off during the period as a percentage of the total loan book, remains flat at approximately 6% on an annualized basis, compared to the fourth quarter of fiscal 2023. EasyPay Insurance o Our insurance product sales continue to grow and is a material contributor to the improvement in our overall ARPU. We have been able to improve customer penetration to more than 30% of our active permanent grant account base as of September 30, 2023, compared to below 25% as of September 30, 2022. Approximately 37,500 new policies were written in the quarter, compared to approximately 25,000 in the comparable period in fiscal 2023. The total number of active policies has grown by 34% to approximately 359,000 policies as of September 30, 2023, compared to September 30, 2022. ARPU o ARPU for our permanent client base has increased to above ZAR 83 for the first quarter of fiscal 2024, from approximately ZAR 74 in the first quarter of fiscal 2023. ### Economic Environment and Impact of loadshedding Overall, we have seen no significant change in the operating environment during the quarter. The trading environment remains challenging in South Africa with interest rates, inflation and unemployment remaining at elevated levels. These factors are compounded by daily power cuts (known as load-shedding in South Africa), although we did see a reduction in load shedding during this quarter. 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, allowing merchants to make up for lost trading hours. Notwithstanding the challenging operating environment, our Merchant and Consumer Divisions continue to demonstrate the resilience of our business model, which is firmly underpinned by the relevance and value of our offering to our target market. ### Critical Accounting Policies Our unaudited condensed 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. Critical accounting policies are those that reflect significant judgments or uncertainties and may potentially result in materially different results under different assumptions and conditions. We have identified the following critical accounting policies that are described in more detail in our Annual Report on Form 10-K for the year ended June 30, 2023: Business Combinations and the Recoverability of Goodwill; Intangible Assets Acquired Through Acquisitions; Revenue recognition – principal versus agent considerations; Valuation of investment in Cell C; Recoverability of equity securities and equity-accounted investments; Deferred Taxation; Stock-based Compensation; Accounts Receivable and Allowance for Doubtful Accounts Receivable; and Lending. ### Recent accounting pronouncements adopted Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of accounting pronouncements adopted, including the dates of adoption and the effects on our unaudited condensed consolidated financial statements. ### Recent accounting pronouncements not yet adopted as of September 30, 2023 Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of September 30, 2023, including the expected dates of adoption and effects on our 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 ### Three months ended ### Year ended ### September 30, ### June 30, ### 2023 ### 2022 ### 2023 ZAR : $ average exchange rate 18.6457 17.0201 17.7641 Highest ZAR : $ rate during period 19.2202 18.0545 19.7558 Lowest ZAR : $ rate during period 17.6278 16.2035 16.2034 Rate at end of period 18.9236 18.0126 18.8376 ### Translation exchange rates for financial reporting purposes 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 three months ended September 30, 2023 and 2022, vary slightly from the averages shown in the table above. Except as described below, the translation rates we use in presenting our results of operations are the rates shown in the following table: ### Three months ended ### Year ended ### Table 2 ### September 30, ### June 30, ### 2023 ### 2022 ### 2023 Income and expense items: $1 = ZAR 18.7088 17.1307 17.9400 Balance sheet items: $1 = ZAR 18.9236 18.0126 18.8376 We have translated the results of operations and operating segment information for the three months ended September 30, 2023, provided in the tables below using the actual average exchange rates per month (i.e. for each of July 2023, August 2023, and September 2023\) between the USD and ZAR in order to reduce the reconciliation of information presented to our chief operating decision maker. The impact of using this method compared with the average rate for the quarter is not significant, however, it does result in minor differences. We believe that presentation using the average exchange rates per month compared with the average exchange rate per quarter improves the accuracy of the information presented in our external financial reporting and leads to fewer differences between our external reporting measures which are supplementally presented in ZAR, and our internal management information, which is also presented in ZAR. ### Results of Operations The discussion of our consolidated overall results of operations is based on amounts as reflected in our unaudited condensed 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 unaudited condensed 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 between our segment performance measure and net loss before tax (benefits) expense, is presented in our unaudited condensed consolidated financial statements in Note 17 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 2024 and 2023 includes Connect for the entire quarter. 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 Eliminations. ### First quarter of fiscal 2024 compared to first quarter of fiscal 2023 The following factors had a significant impact on our results of operations during the first quarter of fiscal 2024 as compared with the same period in the prior year: ### Higher revenue: Our revenues increased 19% in ZAR, primarily due to an increase in low margin prepaid airtime sales and other value added services, as well as higher transaction, insurance and lending revenues, which was partially offset by lower hardware sales revenue in our POS hardware distribution business given the lumpy nature of bulk sales; ### Operating income generated: Operating income was achieved following years of operating losses as a result of the various cost reduction initiatives in Consumer implemented in prior periods as well as the contribution from Connect; ### Higher net interest charge: The net interest charge increased to $4.5 million (ZAR 83.1 million) from $3.6 million (ZAR 62.1 million) primarily due to higher interest rates; and ### Foreign exchange movements: The U.S. dollar was 9% stronger against the ZAR during the first quarter of fiscal 2024 compared to the prior period, which adversely impacted our U.S. dollar 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 United States Dollars ### Three months ended September 30, ### 2023 ### 2022 ### $ ’000 ### $ ’000 ### change Revenue 136,089 124,786 9% Cost of goods sold, IT processing, servicing and support 107,490 100,528 7% Selling, general and administration 22,515 22,931 (2%) Depreciation and amortization 5,856 5,998 (2%) Operating income (loss) 228 (4,671) nm Reversal of allowance of EMI doubtful debt receivable 250 nm Net gain on disposal of equity-accounted investments 248 nm Interest income 449 411 9% Interest expense 4,909 4,036 22% Loss before income tax expense (3,982) (8,048) (51%) Income tax expense 264 31 752% Net loss before loss from equity-accounted investments (4,246) (8,079) (47%) Loss from equity-accounted investments 1,405 2,617 (46%) Net loss attributable to us (5,651) (10,696) (47%) ### Table 4 ### In South African Rand ### Three months ended September 30, ### 2023 ### 2022 ### ZAR ’000 ### ZAR ’000 ### change Revenue 2,537,659 2,137,671 19% Cost of goods sold, IT processing, servicing and support 2,004,465 1,722,115 16% Selling, general and administration 419,861 392,824 7% Depreciation and amortization 109,166 102,749 6% Operating income (loss) 4,167 (80,017) nm Reversal of allowance of EMI doubtful debt receivable 4,741 nm Net gain on disposal of equity-accounted investments 4,248 nm Interest income 8,368 7,041 19% Interest expense 91,429 69,140 32% Loss before income tax expense (74,153) (137,868) (46%) Income tax expense 4,825 532 807% Net loss before loss from equity-accounted investments (78,978) (138,400) (43%) Loss from equity-accounted investments 26,657 44,831 (41%) Net loss attributable to us (105,635) (183,231) (42%) Revenue increased by $11.3 million (ZAR 0.4 billion), or 9.1% (in ZAR, 18.7%), primarily due to the increase in low margin prepaid airtime sales and other value-added services, as well as higher transaction, insurance and lending revenues, which was partially offset by lower hardware sales revenue in our POS hardware distribution business given the lumpy nature of bulk sales. Cost of goods sold, IT processing, servicing and support increased by $7.0 million (ZAR 0.3 billion), or 6.9% (in ZAR, 16.4%), primarily due to the increase in low margin prepaid airtime sales, which were partially offset by the benefits of various cost reduction initiatives in Consumer and lower insurance-related claims. Selling, general and administration expenses decreased by $0.4 million, or 1.8%, and in ZAR increased by ZAR 27.0 million, or 6.9%. In ZAR, the increase was 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 decreased by $0.1 million, or 2.4% , and in ZAR increased by ZAR 6.4 million or 6.2%. In the ZAR, the increase was due to an increase in depreciation expense related to additional POS devices deployed. Our operating income (loss) margin for the first quarter of fiscal 2024 and 2023 was 0.2% and (3.7%), 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 the first quarter of fiscal 2024 or 2023, respectively. We continue to carry our investment in Cell C at $0 (zero). Refer to Note 4 for the methodology and inputs used in the fair value calculation for Cell C. We recorded a gain of $0.3 million related to the disposal of our entire interest in Carbon during the first quarter of fiscal 2023. Refer to Note 5 to our unaudited condensed consolidated financial statements for additional information regarding this disposal. Interest on surplus cash increased to $0.4 million (ZAR 8.4 million) from $0.4 million (ZAR 7.0 million), primarily due to higher interest rates. Interest expense increased to $4.9 million (ZAR 91.4 million) from $4.0 million (ZAR 69.1 million), primarily as a result of higher overall interest rates and higher overall borrowings during the first quarter of fiscal 2024 compared with comparable period in the prior quarter, which was partially offset by lower interest expense incurred on certain of our borrowing for which we were able to negotiate lower rates of interest during the latter half of fiscal 2023. Fiscal 2024 tax expense was $(0.3) million (ZAR (4.8) million) compared to $0.0 million (ZAR 0.5 million) in fiscal 2023. Our effective tax rate for fiscal 2024 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, 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 2023 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, 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 quarter and its annual results during our fourth quarter. The table below presents the relative (loss) earnings from our equity-accounted investments: ### Table 5 ### Three months ended September 30, ### 2023 ### 2022 ### $ ’000 ### $ ’000 ### change Finbond (1,445) (2,631) (45%) Share of net loss (278) (1,521) (82%) Impairment (1,167) (1,110) 5% Other 40 14 186% ### Total loss from equity-accounted investments (1,405) (2,617) (46%) ### Results of operations by operating segment The composition of revenue and the contributions of our business activities to operating loss are illustrated below: ### Table 6 ### In United States Dollars ### Three months ended September 30, ### 2023 ### % of ### 2022 ### % of ### % change ### Operating Segment ### $ ’000 ### total ### $ ’000 ### total Consolidated revenue: Merchant 121,361 89% 109,782 88% 11% Consumer 15,580 11% 15,004 12% 4% Subtotal: Operating segments 136,941 100% 124,786 100% 10% Eliminations (852) nm ### Total consolidated revenue ### 136,089 ### 100% ### 124,786 ### 100% ### 9% Segment Adjusted EBITDA: Merchant (1) 8,061 92% 7,893 188% 2% Consumer (1) 2,480 28% (1,394) (33%) nm Group costs (1,822) (21%) (2,300) (55%) (21%) Group Adjusted EBITDA (non-GAAP) (2) 8,719 100% 4,199 100% 108% (1) Segment Adjusted EBITDA for Merchant includes retrenchments costs of $0.2 million and Consumer includes retrenchment costs of $0.1 million for the three months ended September 30, 2023. (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 ### Three months ended September 30, ### 2023 ### % of ### 2022 ### % of ### % change ### Operating Segment ### ZAR ’000 ### total ### ZAR ’000 ### total Consolidated revenue: Merchant 2,263,001 89% 1,880,642 88% 20% Consumer 290,629 11% 257,029 12% 13% Subtotal: Operating segments 2,553,630 100% 2,137,671 100% 19% Eliminations (15,971) nm ### Total consolidated revenue ### 2,537,659 ### 100% ### 2,137,671 ### 100% ### 19% Segment Adjusted EBITDA: Merchant (1) 150,181 92% 135,212 188% 11% Consumer (1) 46,302 28% (23,880) (33%) nm Group costs (33,980) (21%) (39,400) (55%) (14%) Group Adjusted EBITDA (non-GAAP) (2) 162,503 100% 71,932 100% 126% (1) Segment Adjusted EBITDA for Merchant includes retrenchments costs of ZAR 4.6 million and Consumer includes retrenchment costs of ZAR 1.5 million for the three months ended September 30, 2023. (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 increase in low margin prepaid airtime sales and other value-added services, which was partially offset by lower hardware sales revenue given the lumpy nature of bulk sales. The increase in Segment Adjusted EBITDA is primarily due to the higher sales activity, 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 margin (calculated as Segment Adjusted EBITDA divided by revenue) for the first quarter of fiscal 2024 and 2023 was 6.6% and 7.2%, respectively. ### Consumer Segment revenue increased primarily due to more transaction fees generated from the higher EPE account holders base, higher insurance revenues, and an increase in lending revenue as a result of an increase in loan originations. This increase in revenue, together with the cost reduction initiatives initiated in fiscal 2022 and through fiscal 2023, have translated into a turnaround in the Consumer Division and the realization of sustained positive Segment Adjusted EBITDA for four consecutive quarters. Our Segment Adjusted EBITDA (loss) margin for the first quarter of fiscal 2024 and 2023 was 15.9% and (9.3%), respectively. ### 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 2024 decreased compared with the prior period due to lower external audit, legal and consulting fees and lower provision for executive bonuses, which was partially offset by higher employee costs. ### 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 8 ### Three months ended ### September 30, ### 2023 ### 2022 ### $ ’000 ### $ ’000 ### Loss attributable to Lesaka - GAAP ### (5,651) ### (10,696) (Earnings) loss from equity accounted investments 1,405 2,617 Net loss before (earnings) loss from equity-accounted investments (4,246) (8,079) Income tax (benefit) expense 264 31 Loss before income tax expense (3,982) (8,048) Interest expense 4,909 4,036 Interest income (449) (411) Reversal of allowance for doubtful EMI loan receivable (250) Net gain on disposal of equity-accounted investment (248) Operating income (loss) 228 (4,671) PPA amortization (amortization of acquired intangible assets) 3,608 3,928 Depreciation and amortization 2,248 2,070 Stock-based compensation charges 1,759 1,462 Lease adjustments 696 812 Once-off items (1) 78 598 Unrealized Loss FV for currency adjustments 102 ### Group Adjusted EBITDA - Non-GAAP ### 8,719 ### 4,199 (1) The table below presents the components of once-off items for the periods presented: ### Table 9 ### Three months ended ### September 30, ### 2023 ### 2022 ### $ ’000 ### $ ’000 Transaction costs 78 203 Expenses incurred related to closure of legacy businesses 395 Total once-off items ### 78 ### 598 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 of Connect over a number of quarters, and the transactions are generally non-recurring. 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. ### Liquidity and Capital Resources As of September 30, 2023, our cash and cash equivalents were $35.1 million and comprised of U.S. dollar-denominated balances of $2.2 million, ZAR-denominated balances of ZAR 586.7 million ($31.0 million), and other currency deposits, primarily Botswana pula, of $1.9 million, all amounts translated at exchange rates applicable as of September 30, 2023. The increase in our unrestricted cash balances from June 30, 2023, was primarily due to a positive contribution from our Merchant and Consumer operations, which was partially offset by the utilization of cash reserves to fund certain scheduled repayments of our borrowings, purchase ATMs and safe assets, and to make an investment in working capital. 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 September 30, 2023: ### Table 10 ### 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 10,833 205,008 Overdraft restricted as to use (1) 73,982 1,400,014 Total overdraft 73,982 1,400,014 10,833 205,008 Indirect and derivative facilities (2) 7,134 134,992 8,273 156,552 ### Total short-term ### facilities available ### 73,982 ### 1,400,014 ### 7,134 ### 134,992 ### 10,833 ### 205,008 ### 8,273 ### 156,552 ### Utilized short-term ### facilities: Overdraft 8,983 169,981 Overdraft restricted as to use (1) 19,754 373,811 Indirect and derivative facilities (2) 1,749 33,100 112 2,119 ### Total short-term ### facilities available ### 19,754 ### 373,811 ### 1,749 ### 33,100 ### 8,983 ### 169,981 ### 112 ### 2,119 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 ($134.2 million translated at exchange rates as of September 30, 2023) as described in Note 8. These borrowings include outstanding long-term borrowings obtained by Lesaka SA of ZAR 1.0 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. We used this revolving credit facility during the three months ended September 30, 2023, and ZAR 10.0 million was drawn as of September 30, 2023, with the remaining balance available for utilization in the future. 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 September 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 September 30, 2023, includes restricted cash of approximately $19.8 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 indirect 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 September 30, 2023, includes restricted cash of approximately $0.1 million that has been ceded and pledged. ### Cash flows from operating activities ### First quarter Net cash provided by operating activities during the first quarter of fiscal 2024 was $3.4 million (ZAR 63.1 million) compared to net cash used in operating activities of $7.7 million (ZAR 131.2 million) during the first quarter of fiscal 2023. Excluding the impact of income taxes, our cash provided by operating activities during the first quarter of fiscal 2024 was positively impacted by the contribution from Merchant and Consumer, which was partially offset by growth in our consumer and merchant finance loans receivable books and temporary working capital movements within our merchant business as a result of quarter-end transaction processing activities closing on a Saturday and settled in the following week. During the first quarter of fiscal 2024, we paid first provisional South African tax payments of $0.6 million (ZAR 10.9 million) related to our 2023 tax year. During the first quarter of fiscal 2023, we paid first provisional South African tax payments of $0.5 million (ZAR 8.2 million) related to our 2023 tax year, and additional second provisional South African tax payments of $0.2 million (ZAR 3.4 million) related to our 2022 tax year. Taxes paid during the first quarter of fiscal 2024 and 2023 were as follows: ### Table 11 ### Three months ended September 30, ### 2023 ### 2022 ### 2023 ### 2022 ### ZAR ### ZAR ### ‘000 ### ‘000 ### ‘000 ### ‘000 First provisional payments 492 8,216 Second provisional payments 191 3,371 Taxation paid related to prior years 572 10,859 Tax refund received (31) (57) (640) (970) Total South African taxes paid 541 626 10,219 10,617 Foreign taxes paid 63 51 1,196 886 ### Total tax paid 604 677 11,415 11,503 ### Cash flows from investing activities ### First quarter Cash used in investing activities for the first quarter of fiscal 2024 included capital expenditures of $2.8 million (ZAR 52.6 million), primarily due to the acquisition of safe assets and POS devices. Cash used in investing activities for the first quarter of fiscal 2023 included capital expenditures of $4.5 million (ZAR 77.1 million), primarily due to the acquisition of safe assets, POS devices and computer equipment. During the first quarter of fiscal 2023, we received proceeds $0.25 million related to the first tranche (of two) from the disposal of our entire interest in Carbon. The second tranche, of $0.25 million, was received in October 2023. ### Cash flows from financing activities ### First quarter During the first quarter of fiscal 2024, we utilized approximately $59.6 million from our South African overdraft facilities to fund our ATMs and our cash management business through Connect, and repaid $62.8 million of those facilities. We utilized approximately $2.5 million of our long-term borrowings to fund the acquisition of certain capital expenditures and for working capital requirements. We repaid approximately $2.6 million of long-term borrowings in accordance with our repayment schedule as well as to settle a portion of our revolving credit facility utilized. During the first quarter of fiscal 2023, we utilized approximately $146.1 million from our South African overdraft facilities to fund our ATMs and our cash management business through Connect, and repaid $136.9 million of those facilities. We utilized approximately $1.1 million of our long-term borrowings to fund our merchant finance loans receivable business and to fund the acquisition of certain capital expenditures. We repaid approximately $1.6 million of long-term borrowings in accordance with our repayment schedule. We paid $0.2 million to repurchase shares from an employee in order for the employee to settle taxes due related to the vesting of shares of restricted stock. ### Off-Balance Sheet Arrangements We have no off -balance sheet arrangements. ### Capital Expenditures We expect capital spending for the second quarter of fiscal 2024 to primarily include spending for acquisition of POS devices, safe assets, computer software, computer and office equipment, as well as for our ATM infrastructure and branch network in South Africa. Our capital expenditures for the first quarter of fiscal 2024 and 2023 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, or, following the Connect acquisition, our asset-backed borrowing arrangement. We had outstanding capital commitments as of September 30, 2023, of $0.7 million. We expect to fund these expenditures through internally generated funds and available facilities. ## Market risk As filed, 1,242 characters. In addition to the tables below, see Note 4 to the unaudited condensed consolidated financial statements for a discussion of market risk. We have short and long-term borrowings in South Africa which attract interest at rates that fluctuate based on changes in the South African prime and 3-month JIBAR interest rates. The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of September 30, 2023, as a result of changes in the South African prime and 3-month JIBAR interest rates, using our outstanding short and long-term borrowings as of September 30, 2023. The effect of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in the interest rates applicable to the borrowings as of September 30, 2023, are shown. The selected 1% hypothetical change does not reflect what could be considered the best- or worst-case scenarios. ### Table 12 ### As of September 30, 2023 ### Annual expected ### interest charge ### ($ ’000) ### Hypothetical ### change in ### interest rates ### Estimated annual ### expected interest ### charge after ### hypothetical change ### in interest rates ### ($ ’000) Interest on South African borrowings 20,667 1% 22,304 (1%) 19,033 ## Controls and procedures As filed, 1,169 characters. 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) promulgated under the Securities Exchange Act of 1934, as amended, as of September 30, 2023. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the group chief executive officer and the group chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023. ### Changes in Internal Control over Financial Reporting There have not been any changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ## Risk factors As filed, 445 characters. See “Item 1A RISK FACTORS” in Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, for a discussion of risk factors relating to (i) our business, (ii) operating in South Africa and other foreign markets, (iii) government regulation, and (iv) our common stock. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023. Filed Nov 7, 2023. Source: SEC EDGAR, the filing index for accession 0001562762-23-000403. Last ingested by Listed: Nov 4, 2026, 17:08 ET. No prices; not investment advice.