LESAKA TECHNOLOGIES, INC. The following discussion should be read in conjunction with our Annual Report on
Form 10-K for the year ended
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
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
Recent Developments
The
Rapid growth of our Merchant business
Our Merchant business has been transformed by the successful conclusion of the
Connect acquisition. Connect's micro, small and medium enterprises ("MSMEs").
offering has been combined with our EasyPay platform to target the larger
merchants, and along with our point-of-sale business, provides a suite of
products and services to address the needs of the entire spectrum of merchants
in
Progress to date includes: ?Merging EasyPay and Kazang under a single leadership team; ?The integration of the Cash Connect vault business and the ATM business, creating a complete cash solution proposition for key merchants; ?The EasyPay Money Market concept which had been launched in select Merchant stores; and ?The Activation of cash-out for customers which allows consumers to withdraw grants at Kazang Merchants.
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?Our vault business effectively puts the bank in approximately 4,200 merchants'
stores (compared to approximately 3,700 merchants' stores a year ago).
Historically Connect has been placing vaults into formal sector merchant stores
but are now also penetrating the informal sector. This has provided significant
operational and risk benefits for our informal merchant customer base;
?In the card acquiring business, card-enabled POS devices increased to
approximately 27,700 as of
Returning the Consumer business to profitability and positioning this segment for growth
Significant progress has been made toward returning the Consumer segment to
profitability and
?Driving customer acquisition oLesaka believes it now has the right team and right products in place ending the first quarter of fiscal 2023 with 1.17 million active EPE clients (excluding EPE lite) compared to 1.04 million at the end of the first quarter of fiscal 2022. oLesaka achieved approximately 85,000 EPE account activations in the first quarter of fiscal 2023 and the churn rate for the first quarter of fiscal 2023 averaged well below 5% evidencing traction in our focused consumer strategy mentioned above. oNotably churn is at the higher end ofLesaka's expected churn rate range partly attributable to volatility in the SRD grant base oLesaka continues to refine its points of presence and is pursuing a strategy of partnering with various retailers rather than maintaining a distinct branch network in order to improve visibility, awareness and service levels. ?Progress on cross selling oWe issued approximately 78,000 new loans in the quarter, achieving a consistent penetration of our active EPE client base. The average loan size grew 4% toZAR 1,476 , while 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 around 1.00% for the quarter (i.e. approximately 4% per annum), as a result of our ongoing application of prudent credit scoring and a culture of responsible lending. oThe average take-up rate of loans is above 80% highlighting progress made in understanding the needs of our customers and executing on implementing a refined, affordable, and compelling value proposition for customers. oOur funeral insurance product provides an important growth opportunity for our cross-selling strategy, with penetration levels now around 23% of the active account base. Over 24,000 new standalone policies were initiated during the first quarter of fiscal 2023, growing the total number of active policies to approximately 268,000, up 10% compared with the first quarter of fiscal 2022. Sales in the first quarter of fiscal 2023 were at their highest level since the loss of the grant payment contract. oOur low loss rate and high cash collection rate in insurance emphasizes our compelling value proposition in offering fit for purpose solutions to millions of consumers desperately needing financial services. oAverage revenue per user ("ARPU") for the first quarter of fiscal 2023 remains broadly within our targeted ARPU range.Lesaka remains focused on cross-selling opportunities to the current client base, to increase ARPU.
?Progress on cost optimization oWe put all of the members of our sales team through a performance review process during the first quarter of fiscal 2023, which resulted in approximately 400 people leaving us. This has not had a significant impact on sales performance and the intention is to replace some of these positions with suitably qualified individuals.
Strengthening our relationships with key stakeholders
We continue to build our relationship with the
We have also made good progress on building relationships with our various key stakeholders, be it shareholders, regulators, suppliers and other participants in our sectors.
Investments
There has been no change in the carrying value of our investment in MobiKwik in the quarter. MobiKwik's regulatory approval for an IPO has now expired and while this remains the strategic aim, their board will keep market conditions under review before re-obtaining the necessary approvals to IPO. The underlying business continues to grow strongly, particularly in the buy now pay later business, and is optimistic about achieving annual EBITDA profitability within the next two financial years.
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The recapitalization of Cell C became effective on
During the first quarter of fiscal 2023 we sold our 25% stake in Carbon to the
founders for
Impact of COVID-19
During the most recent quarter, we did not experience any significant
disruptions from the COVID-19 outbreak, and the risk relating to the outbreak
appears to have substantially reduced. Refer to Part I, Item 1A. "Risk Factors-
We are unable to ascertain the full impact the COVID-19 pandemic will have on
our future financial position, operations, cash flows and stock price" in our
Annual Report on Form 10-K for the year ended
Critical Accounting Policies
Our unaudited condensed consolidated financial statements have been prepared in
accordance with
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
?Business Combinations and the Recoverability ofGoodwill ; ?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; and ?Accounts Receivable and Allowance for Doubtful Accounts Receivable.
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
Refer to Note 1 to our unaudited condensed consolidated financial statements for
a full description of recent accounting pronouncements not yet adopted as of
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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,
2022 2021 2022ZAR : $ average exchange rate 17.0201 14.6246 15.2154 Highest ZAR : $ rate during period 18.0545 15.3110 16.2968 Lowest ZAR : $ rate during period 16.2035 14.1630 14.1630 Rate at end of period
18.0126 15.1150 16.2903
[[Image Removed: Picture 1]]
Translation exchange rates for financial reporting purposes
We are required to translate our results of operations from ZAR to
Three months ended Year ended
Table 2 September 30, June 30,
2022 2021 2022
Income and expense items:
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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
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 presented in our unaudited condensed consolidated financial statements is included in Note 17 to those statements. Our chief operating decision is 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"). We do not allocate depreciation and amortization, impairment of goodwill or other intangible assets, certain lease charges ("Lease adjustments"), stock-based compensation charges ("Stock-based compensation 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. 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 the Company's loss before income tax expense. Unless otherwise stated, reference to EBITDA in the discussion below relates to Segment Adjusted EBITDA.
Fiscal 2023 includes Connect for the entire quarter, and this business is not included in the results for fiscal 2022.
We analyze our business and operations in terms of three inter-related but independent operating segments: (1) Consumer, (2) Merchant and (3) Other. In addition, corporate and corporate office activities that are impracticable to allocate directly to any of the other operating segments, as well as any inter-segment eliminations, are included in Corporate/Eliminations.
First quarter of fiscal 2023 compared to first quarter of fiscal 2022
The following factors had a significant impact on our results of operations during the first quarter of fiscal 2023 as compared with the same period in the prior year:
?Higher revenue: Our revenues increased 324% in ZAR, primarily due to the contribution from Connect and a moderate increase in account fees, lending and insurance revenues which was partially offset by a decrease in hardware sales due to shipping delays; ?Lower operating losses: Operating losses decreased, delivering an improvement of 51% in ZAR compared with the prior period primarily due to the contribution from Connect, 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; ?Higher net interest charge: The net interest charge increased toZAR 62.0 million fromZAR 6.0 million due to the additional borrowings incurred in order to fund the acquisition of Connect as well as the debt within the Connect business itself; and ?Foreign exchange movements: TheU.S. dollar was 17% stronger against the ZAR during the first quarter of fiscal 2023, which impacted our reported results. 37
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Consolidated overall results of operations
This discussion is based on the amounts prepared in accordance with
The following tables show the changes in the items comprising our statements of
operations, both in
Table 3 In United States Dollars
Three months ended September 30,
2022 2021
$ '000 $ '000 change
Revenue 124,786 34,504 262%
Cost of goods sold, IT processing, servicing and
support 100,528 24,207 315%
Selling, general and administration 22,931 20,442 12%
Depreciation and amortization 5,998 895 570%
Transaction costs related to Connect Group
acquisition - 185 nm
Operating loss (4,671) (11,225) (58%)
Net gain on disposal of equity-accounted
investments 248 - nm
Interest income 411 389 6%
Interest expense 4,036 816 395%
Loss before income tax expense (8,048) (11,652) (31%)
Income tax expense 31 186 (83%)
Net loss before loss from equity-accounted
investments (8,079) (11,838) (32%)
Loss from equity-accounted investments (2,617) (1,156) 126%
Net loss attributable to us (10,696) (12,994) (18%)
Table 4 In South African Rand
Three months ended September 30,
2022 2021
ZAR '000 ZAR '000 change
Revenue 2,137,671 504,204 324%
Cost of goods sold, IT processing, servicing and
support 1,722,115 353,734 387%
Selling, general and administration 392,824 298,717 32%
Depreciation and amortization 102,749 13,079 686%
Transaction costs related to Connect Group
acquisition - 2,703 nm
Operating loss (80,017) (164,029) (51%)
Net gain on disposal of equity-accounted
investments 4,248 - nm
Interest income 7,041 5,684 24%
Interest expense 69,140 11,924 480%
Loss before income tax expense (137,868) (170,269) (19%)
Income tax expense 532 2,718 (80%)
Net loss before loss from equity-accounted
investments (138,400) (172,987) (20%)
Loss from equity-accounted investments (44,831) (16,893) 165%
Net loss attributable to us (183,231) (189,880) (4%)
The increase in revenue was primarily due to the inclusion of Connect, which has substantial low margin prepaid airtime sales in addition to its core processing revenue and a modest increase in account fees, lending and insurance revenues, which was partially offset by a decrease in hardware sales due to shipping delays.
The increase in cost of goods sold, IT processing, servicing and support was primarily due to the inclusion of Connect and higher costs related to transaction fees in our Consumer business, which were partially offset by the benefits of various cost reduction initiatives in our Consumer business and lower insurance-related claims.
In ZAR, the increase in selling, general and administration expenses 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 our Consumer business.
Depreciation and amortization expense increased in the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022 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.
Transaction costs related to the
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Our operating loss margin for the first quarter of fiscal 2023 and 2022 was (3.7%) and (32.5%), 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 2023 and 2022, respectively. We
continue to carry our investment in Cell C at
We recorded a gain of
In ZAR, interest on surplus cash increased to
Interest expense increased to
Fiscal 2023 tax expense was
Our effective tax rate for fiscal 2022 was impacted by 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.
Finbond is listed on theJohannesburg 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, 2022 2021 $ % $ '000 $ '000 change Finbond (2,631) (1,156) 128% Share of net loss (1,521) (1,156) 32% Impairment (1,110) - nm Other 14 - nm
Total loss from equity-accounted investments (2,617) (1,156) 126%
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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 United States Dollars
Three months ended September 30,
2022 % of 2021 % of
Operating Segment $ '000 total $ '000 total % change
Consolidated revenue:
Consumer 15,004 12% 17,164 50% (13%)
Merchant 109,437 88% 17,072 49% 541%
Other 374 - 427 1% (12%)
Subtotal: Operating segments 124,815 100% 34,663 100% 260%
Corporate/Eliminations (29) - (159) - (82%)
Total consolidated revenue 124,786 100% 34,504 100% 262%
Segment Adjusted EBITDA:
Consumer (1,394) (39%) (9,356) 103% (85%)
Merchant 7,852 218% 1,932 (21%) 306%
Other 41 1% 143 (2%) (71%)
Total Segment Adjusted EBITDA 6,499 180% (7,281) 80% nm
Corporate/eliminations (2,898) (80%) (1,816) 20% 60%
Subtotal 3,601 100% (9,097) 100% nm
Less: Lease adjustments 812 924
Less: Stock-based compensation 1,462 309
Less: Depreciation and amortization 5,998 895
Total consolidated operating loss (4,671) (11,225)
Table 7 In South African Rand
Three months ended September 30,
2022 % of 2021 % of
Operating Segment ZAR '000 total ZAR '000 total % change
Consolidated revenue:
Consumer 257,029 12% 250,816 50% 2%
Merchant 1,874,732 88% 249,471 49% 651%
Other 6,407 - 6,240 1% 3%
Subtotal: Operating segments 2,138,168 100% 506,527 100% 322%
Corporate/Eliminations (497) - (2,323) - (79%)
Total consolidated revenue 2,137,671 100% 504,204 100% 324%
Segment Adjusted EBITDA:
Consumer (23,880) (39%) (138,150) 104% (83%)
Merchant 134,510 218% 27,545 (21%) 388%
Other 702 1% 2,090 (2%) (66%)
Total Segment Adjusted EBITDA 111,332 180% (108,515) 81% nm
Corporate/eliminations (49,645) (80%) (24,418) 19% 103%
Subtotal 61,687 100% (132,933) 100% nm
Less: Lease adjustments 13,910 13,502
Less: Stock-based compensation 25,045 4,515
Less: Depreciation and amortization 102,750 13,079
Total consolidated operating loss (80,018) (164,029)
Consumer
Segment revenue increased primarily due to higher lending and insurance revenues and higher account holder fees, though this was partially offset by lower ATM transaction fees. The cost reduction initiatives we initiated in fiscal 2022 delivered a significant reduction in our Consumer segment's operating expenses which resulted in a significantly lower 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.
Our EBITDA loss margin (calculated as EBITDA loss divided by revenue) for the first quarter of fiscal 2023 and 2022 was (9.3%) and (54.5%), respectively.
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Merchant
Segment revenue increased sixfold due to the contribution from inclusion of Connect which was partially offset by a decrease in hardware sales due to shipping delays. The increase in segment EBITDA is primarily due to the inclusion of Connect, which was partially offset by 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 significantly depresses the EBITDA margins shown by the business.
Our EBITDA margin for the first quarter of fiscal 2023 and 2022 was 7.2% and 11.3%, respectively.
Other
In ZAR, segment revenue increased modestly primarily due to an increase in hardware sales. EBITDA decreased as a result of an allowance for doubtful debts created as well as inflationary increases in staff and other operating costs, which were at a higher percentage increase than the increase in revenue.
Our EBITDA (loss) margin for the Other segment was 11.0% and 33.5% during the first quarter of fiscal 2023 and 2022, respectively.
Corporate/Eliminations
Our corporate expenses generally include acquisition-related intangible asset amortization; expenses incurred related to corporate actions; expenditures related to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors' fees; Group CEO and Group CFO compensation costs, certain employee and executive bonuses; legal fees; audit fees; directors and officer's insurance premiums; and elimination entries.
Our corporate expenses for fiscal 2023 increased compared with the prior period due to higher employee costs and an increase in director and officer's insurance premiums.
Liquidity and Capital Resources
As of
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
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, with the balance being funded from cash
resources. 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
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Available short-term borrowings
Summarized below are our short-term facilities available and utilized as of
Table8 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 - - - - 13,766 247,954 - - Overdraft restricted as to use(1) 77,723 1,400,000 - - - - - - Total overdraft 77,723 1,400,000 - - 13,766 247,954 - - Indirect and derivative facilities(2) - - 7,495 135,000 - - 8,691 156,566 Total short-term facilities available 77,723 1,400,000 7,495 135,000 13,766 247,954 8,691 156,566 Utilized short-term facilities: Overdraft - - - - 11,381 205,001 - - Overdraft restricted as to use(1) 57,951 1,043,847 - - - - - - Indirect and derivative facilities(2) - - 1,838 33,106 - - 5,114 92,110 Total short-term facilities available 57,951 1,043,847 1,838 33,106 11,381 205,001 5,114 92,110 Interest rate, based on South African prime rate 9.75% 9.65%
(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
Our credit agreement with RMB requires that we achieve certain milestones by
Restricted cash
We have credit facilities with RMB in order to access cash to fund our ATMs in
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
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Cash flows from operating activities
First quarter
Net cash used in operating activities during the first quarter of fiscal 2023
was
During the first quarter of fiscal 2023, we paid first provisional South African
tax payments of
Taxes paid during the first quarter of fiscal 2023 and 2022 were as follows:
Table 9 Three months ended September 30,
2022 2021 2022 2021
$ $ ZAR ZAR
'000 '000 '000 '000
First provisional payments 492 - 8,216 -
Second provisional payments 191 - 3,371 -
Tax refund received (57) (25) (970) (376)
Total South African taxes paid (received) 626 (25) 10,617 (376)
Foreign taxes paid 51 36 886 525
Total tax paid 677 11 11,503 149
Cash flows from investing activities
First quarter
Cash used in investing activities for the first quarter of fiscal 2023 included
capital expenditures of
Cash used in investing activities for the first quarter of fiscal 2022 included
capital expenditures of
Cash flows from financing activities
First quarter
During the first quarter of fiscal 2023, we utilized approximately
During the first quarter of fiscal 2022, we utilized approximately
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
We expect capital spending for the second quarter of fiscal 2023 to primarily
include investments into our ATM infrastructure and branch network in
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