What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-07 compared with 2022-11-08 · 269 added, 143 removed, 180 unchanged (70% of the section changed)

12 unchanged sentences

Recent Developments

Lesaka has continued on its journey of renewal in the quarter, building further on the process that commenced in earnest in Q2 of fiscal 2022.

The progress that has been made over this period has been transformational and is clear in the significant improvement in financial performance over this period.

The progress is particularly clear if this quarter’s performance is compared against the same quarter in fiscal 2022.

Lesaka’s core purpose is to improve people’s lives by bringing financial inclusion to South Africa’s underserved consumers, and by helping small businesses access the financial services they need to prosper.

This is achieved through Lesaka’s ability to efficiently digitize the last mile of financial inclusion, and by providing a full-service fintech platform across cash and digital, serving the needs of both, while also facilitating the secular shift to digital that is currently taking place.

The Lesaka platform serves micro and small merchants together with the consumers who typically shop in their stores.

Both the Merchant and the Consumer business have large addressable markets and significant growth opportunities in their own right.

Taken together, Lesaka has the opportunity to develop a self-reinforcing ecosystem which creates synergies and further opportunities to accelerate growth and expand Lesaka’s value proposition.

Rapid growth of our Merchant business

This quarter represents a significant milestone for Lesaka.

We made significant progress in our turnaround strategy, a process that commenced in earnest at the beginning of fiscal 2022.

This quarter demonstrates successful execution against a carefully considered transformation strategy.

Key highlights in the second quarter of fiscal 2023 include:

outperformance of the Merchant business ahead of our expectations and guidance reported, delivering a segment adjusted EBITDA of ZAR 160 million for the period;

turn around in the Consumer business, returning it to profitability with segment adjusted EBITDA of ZAR10 million in the second quarter of fiscal 2023, compared to a ZAR 67 million loss in the second quarter of fiscal 2022;

the group achieving adjusted EBITDA of ZAR 130 million, exceeding the upper end of our guidance of ZAR 123 million for the second quarter of fiscal 2023, compared with an adjusted EBITDA loss of ZAR 84 million in the second quarter of fiscal 2022.

Merchant business outperformance

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 South Africa.

These are two complementary and mutually reinforcing businesses that combined represent an exciting growth story rather than a cost optimization opportunity.

Connect fills the gaps in Lesaka’s MSME offering and completes the end-to-end financial ecosystem.

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;

The Activation of cash-out for customers which allows consumers to withdraw grants at Kazang Merchants.

Lesaka’s Merchant offering continues to grow:

In the Value-Added-Service (“VAS”) and bill and supplier payments business Lesaka had approximately 57,000 devices in field as of September 30, 2022, compared to approximately 51,000 as of June 30, 2022, and approximately 41,000 devices a year ago;

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.

The Merchant business has shown strong growth across all the products but particularly in its card acquiring and credit businesses, in particular Capital Connect and Kazang Pay advance.

The integration of the Connect Group continues to create new opportunities within our micro small and medium enterprises (“MSME”) offering and is a business that is supported by growth drivers and secular trends underpinning financial inclusion, cash management and digitization for MSME’s.

Our Merchant offering continues to grow:

In the Value-Added-Service (“VAS”) and supplier payments business, Kazang and EasyPay have seen strong adoption by MSME’s in the informal sector, with a 47% year-on-year growth in the number of devices deployed.

We had approximately 64,400 POS devices in field as of December 31, 2022, compared to approximately 57,000 as of September 30, 2022, and approximately 44,000 POS devices a year ago;

Our automated cash management and payments business, Cash Connect, effectively puts the “bank” in approximately 4,300 merchants’ stores (compared to approximately 3,900 merchants’ stores a year ago).

Cash Connect is a provider of robust cash vaults in the formal sector, and is expanding rapidly in 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 September 30, 2022, compared to approximately 12,600 a year ago, and approximately 22,600 as of June 30, 2022;

We provide merchants quick access to working capital and grew our book to record levels during the first quarter of fiscal 2023, disbursing over ZAR 190 million during this quarter, compared to ZAR 108 million in the comparable period.

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 Lesaka remains on track to achieve a Consumer monthly Segment Adjusted EBITDA break-even point during the second quarter of fiscal 2023.

Our progress on our three key initiatives to drive the turnaround is as follows:

In the card acquiring business, card-enabled POS devices increased to approximately 34,500 as of December 31, 2022, compared to approximately 17,100 a year ago, and approximately 27,800 as of September 30, 2022.

Kazang Pay, which is our card acquiring offering to the informal sector, has been the primary driver of this growth in devices deployed, where we are seeing rapid adoption of card payments in the informal sector.

As a result, our card acquiring business has recorded in excess of 100% growth in devices deployed compared to a year ago;

We provide merchants quick access to credit through Capital Connect.

We continue to see strong demand for this credit offering, disbursed over ZAR 262 million during the quarter, compared to ZAR 154 million in the comparable period ended December 2021.

Consumer business achieves profitability and is well positioned for growth

We have achieved our goal of returning our Consumer segment to profitability at a segment adjusted EBITDA level.

Over the past four quarters, we have consistently referenced the three levers underpinning our strategy of returning the consumer business to profitability – cost optimization, increasing average revenue per user (“ARPU”) through cross-selling and growing active EPE account numbers.

This result achieved was primarily through the first two levers.

The first is cost savings through the optimization of our distribution network, including the rationalization of infrastructure, rebalancing and investing in our staff complement, as well as improving processes around client onboarding and service.

The progress on our three key initiatives to drive the turnaround is as follows:

Progress on cost optimization

Improved profitability in the Consumer business was predominantly driven by realized cost savings following the implementation of our Project Spring initiative just less than a year ago.

Under this initiative we decommissioned approximately 800 underperforming ATMs and sold 400 mobile ATMs, leaving us with approximately 800 operating ATMs.

Our ATM optimization program has been assisted by the retailer partnership strategy we implemented, which has resulted in a placement of more ATMs out of our branches infrastructure and into retailers.

This has produced greater foot traffic, reduced security costs and extended operating hours of our ATMs.

We've also deployed almost 40 through-the-wall ATMs.

These ATMs are optimally positioned within the retailer stores or shopping malls resulting in longer operating hours and higher consumer utilization.

Despite the reduction in overall number of ATMs within our estate, we have experienced an increase in the number of transactions per ATM.

Additionally, we have also closed over 100 unprofitable retail branches and sold 200 vehicles.

Driving customer acquisition

Lesaka 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.

Lesaka 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.

Notably churn is at the higher end of Lesaka’s expected churn rate range partly attributable to volatility in the SRD grant base

Lesaka 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.

Our total active EasyPay Everywhere (“EPE”) transactional account base stood at approximately 1.3 million at the end of December 31, 2022, of which just over 1.1 million (or approximately 85%) are permanent grant recipients.

For the first time we are separately reporting the temporary SRD customer base.

This is because we offer a more limited service to our SRD grant recipient customer base.

As at the end of December 2022, we increased our permanent grant account base by 4% on a net basis compared to a year ago.

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 customer 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 more temporary nature of the grant.

We continue to focus our efforts in the Consumer business on implementing initiatives to improve account activation and utilization.

Progress on cross selling

We 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% to ZAR 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.

The 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.

Our 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.

Our 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.

Average 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

We 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.

EasyPay loans (previously referred to as Moneyline)

We issued approximately 225,000 loans in the quarter compared to approximately 198,000 in the previous quarter (first quarter of fiscal 2023) evidencing improved loan conversion rates following the implementation of more targeted loan campaigns during the 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 around 1.00% for the quarter (i.e., approximately 4% per annum).

EasyPay insurance (previously referred to as SmartLife)

Our insurance product sales continue to grow and provides an important growth opportunity for our cross-selling strategy, with penetration higher, now around 27%, of the active permanent grant account base as of December 31, 2022.

Over 29,000 new standalone policies were initiated during the second quarter of fiscal 2023, growing the total number of active policies to approximately 294,000.

ARPU for our permanent client base has increased to ZAR 75 for the second quarter of fiscal 2023 from ZAR 71 in the first quarter of fiscal 2023.

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, to gain a better understanding of their needs and how we can help and improve the delivery of social grants to over 12 million grant recipients.

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 on building relationships with our various key stakeholders, be it shareholders, regulators, suppliers and other participants in our sectors.

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.

The recapitalization of Cell C became effective on September 30, 2022, following a very lengthy process aimed at right-sizing the debt on the balance sheet to create a sustainable business that can achieve long term success for the benefit of all its stakeholders.

This conclusion was a major milestone in the recovery of Cell C and over time we expect to see some recovery in the value of our remaining equity stake.

Our equity stake in Cell C reduced from 15% to a little over 5% as a result of the recapitalization as we did not actively participate in the process.

We continue to hold our investment at $0 (zero) carrying value as at September 30, 2022, and we will continue to monitor Cell C’s post recapitalization performance for indications of an increase in its value.

During the first quarter of fiscal 2023 we sold our 25% stake in Carbon to the founders for $0.5 million on deferred payment terms.

Refer to Note 5 to the unaudited condensed consolidated financial statements for additional information.

Impact of COVID-19

3 unchanged sentences

We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition.

Impact of loadshedding

The trading environment remains challenging with increased loadshedding in the past few months.

This adversely impacts our customers on a daily basis, especially in our Merchant business, 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.

Our teams have delivered excellent growth in the merchant business despite these challenges.

Critical Accounting Policies

14 unchanged sentences

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, 2022

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, 2022, including the expected dates of adoption and effects on our financial condition, results of operations and cash flows.

Recent accounting pronouncements not yet adopted as of December 31, 2022

Refer to Note 1 to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of December 31, 2022, including the expected dates of adoption and effects on our financial condition, results of operations and cash flows.

Currency Exchange Rate Information

2 unchanged sentences

Three months ended

September 30,

Six months ended

$ average exchange rate

6 unchanged sentences

dollars on a monthly basis.

Thus, the average rates used to translate this data for the three months ended September 30, 2022 and 2021, vary slightly from the averages shown in the table above.

Thus, the average rates used to translate this data for the three and six months ended December 31, 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:

Three months ended

September 30,

Six months ended

Income and expense items:

9 unchanged sentences

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:

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”).

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.

Group Adjusted EBITDA represents Segment Adjusted EBITDA after deducting group costs.

Unless otherwise stated, reference to EBITDA in the discussion below refers to Segment Adjusted EBITDA.

Fiscal 2023 includes Connect for the entire quarter and first half of fiscal 2023, and this business is not included in the results for fiscal 2022.

We analyze our business and operations in terms of two inter-related but independent operating segments:

(1) Consumer and (2) Merchant.

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.

Second quarter of fiscal 2023 compared to second quarter of fiscal 2022

The following factors had a significant impact on our results of operations during the second 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;

Our revenues increased 398% in ZAR, primarily due to the contribution from Connect, higher ad hoc hardware sales revenue, and an increase in account fees and insurance revenues;

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;

Operating losses decreased, delivering an improvement of 74% 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 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 to ZAR 62.0 million from ZAR 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;

The net interest charge increased to ZAR 70.0 million from ZAR 7.0 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;

Foreign exchange movements:

dollar was 17% stronger against the ZAR during the first quarter of fiscal 2023, which impacted our reported results.

dollar was 14% stronger against the ZAR during the second quarter of fiscal 2023 compared to the prior period, which impacted our reported results.

Consolidated overall results of operations

3 unchanged sentences

In United States Dollars

Three months ended September 30,

Three months ended December 31,

Cost of goods sold, IT processing, servicing and support

3 unchanged sentences

Operating loss

Unrealized loss related to fair value adjustment to currency options

Net loss on disposal of equity-accounted investments

Interest income

Interest expense

Loss before income tax expense

Income tax expense

Net loss before earnings from equity-accounted investments

Earnings from equity-accounted investments

Net loss attributable to us

In South African Rand

Three months ended December 31,

Cost of goods sold, IT processing, servicing and support

Selling, general and administration

Depreciation and amortization

Transaction costs related to Connect Group acquisition

Operating loss

Unrealized loss related to fair value adjustment to currency options

Net loss on disposal of equity-accounted investments

Interest income

Interest expense

Loss before income tax expense

Income tax expense

Net loss before earnings from equity-accounted investments

Earnings from equity-accounted investments

Net loss attributable to us

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, higher hardware sales revenue, and an increase in account fees and insurance revenues.

The increase in cost of goods sold, IT processing, servicing and support was primarily due to the inclusion of Connect, 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 second quarter of fiscal 2023 compared with the second 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 Connect Group acquisition include fees paid to external service providers for various advisory services procured during the second quarter of fiscal 2022.

Our operating loss margin for the second quarter of fiscal 2023 and 2022 was (1.6%) and (30.3%), 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 second quarter of fiscal 2023 and 2022, 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.

Interest on surplus cash increased to $0.4 million (ZAR 6.8 million) from $0.3 million (ZAR 4.8 million), primarily due to the inclusion of Connect.

Interest expense increased to $4.4 million (ZAR 76.9 million) from $0.8 million (ZAR 11.8 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 the interest rate on those ATM facilities.

Fiscal 2023 tax expense was $0.36 million (ZAR 6.4 million) compared to the tax expense of $0.1 million (ZAR 1.5 million) in fiscal 2022.

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.

Our effective tax rate for fiscal 2022 was impacted by the tax effect of the tax expense recorded by 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 (including the unrealized loss on the foreign currency options).

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:

Three months ended December 31,

Total loss from equity-accounted investments

Results of operations by operating segment

The composition of revenue and the contributions of our business activities to operating (loss) income are illustrated below:

In United States Dollars

Three months ended December 31,

Operating Segment

Consolidated revenue:

Operating segments

Corporate/Eliminations

Total consolidated revenue

Segment Adjusted EBITDA:

Total Segment Adjusted EBITDA

Group Adjusted EBITDA

Once-off items

Stock-based compensation

Lease adjustments

Depreciation and amortization

Total consolidated operating loss

In South African Rand

Three months ended December 31,

Operating Segment

Consolidated revenue:

Operating segments

Corporate/Eliminations

Total consolidated revenue

Segment Adjusted EBITDA:

Total Segment Adjusted EBITDA

Group Adjusted EBITDA

Once-off items

Stock-based compensation

Lease adjustments

Depreciation and amortization

Total consolidated operating loss

Segment revenue increased primarily due to higher insurance revenues and higher account holder fees, though this was partially offset by lower ATM transaction fees.

This revenue growth was achieved notwithstanding the significant downsizing of our branch network and sales team.

The cost reduction initiatives we initiated in fiscal 2022 delivered a significant reduction in our Consumer segment’s operating expenses which resulted in a positive EBITDA result compared with an EBITDA loss in 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 second quarter of fiscal 2023 and 2022 was 3.7% and (26.2%), respectively.

Segment revenue increased due to the contribution from Connect as well as strong ad hoc hardware sales.

The increase in EBITDA is primarily due to the inclusion of Connect, as well as the higher hardware sales, 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 second quarter of fiscal 2023 and 2022 was 7.6% and 6.9%, respectively.

Our group costs generally include employee related costs in relation to employees specifically hired for group roles and related directly to managing the US-listed entity;

expenditures related to compliance with the Sarbanes-Oxley Act of 2002;

non-employee directors’ fees;

group and US-listed related audit fees;

and directors and officer’s insurance premiums.

Our group costs for fiscal 2023 increased compared with the prior period due to higher employee costs and an increase in director and officer’s insurance premiums, which was partially offset by lower consulting fees.

First half of fiscal 2023 compared to first half of fiscal 2022

The following factors had a significant impact on our results of operations during the first half of fiscal 2023 as compared with the same period in the prior year:

Higher revenue:

Our revenues increased 358% in ZAR, primarily due to the contribution from Connect, higher ad hoc hardware sales revenue, and an increase in account fees and insurance revenues;

Lower operating losses:

Operating losses decreased, delivering an improvement of 62% 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 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 to ZAR 131.5 million from ZAR 13.2 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;

Foreign exchange movements:

dollar was 15% stronger against the ZAR during the first half of fiscal 2023 compared to the prior period, which impacted our reported results.

Consolidated overall results of operations

This discussion is based on the amounts prepared in accordance with U.S.

The following tables show the changes in the items comprising our statements of operations, both in U.S.

dollars and in ZAR:

In United States Dollars

Six months ended December 31,

Cost of goods sold, IT processing, servicing and support

Selling, general and administration

Depreciation and amortization

Transaction costs related to Connect Group acquisition

Operating loss

Unrealized loss related to fair value adjustment to currency options

Net gain on disposal of equity-accounted investments

7 unchanged sentences

In South African Rand

Three months ended September 30,

Six months ended December 31,

Cost of goods sold, IT processing, servicing and support

3 unchanged sentences

Operating loss

Unrealized loss related to fair value adjustment to currency options

Net gain on disposal of equity-accounted investments

6 unchanged sentences

Net loss attributable to us

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.

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.

Depreciation and amortization expense increased in the first half of fiscal 2023 compared with the first half 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 Connect Group acquisition include fees paid to external service providers for various advisory services procured during fiscal 2022.

Our operating loss margin for the first quarter of fiscal 2023 and 2022 was (3.7%) and (32.5%), respectively.

Our operating loss margin for the first half of fiscal 2023 and 2022 was (1.6%) and (30.3%), 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 did not record any changes in the fair value of equity interests in MobiKwik and Cell C during the first half of fiscal 2023 and 2022, 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.

We recorded a gain of $0.3 million related to the disposal of our entire interest in Carbon during the first half of fiscal 2023.

Refer to Note 5 to our unaudited condensed consolidated financial statements for additional information regarding this disposal.

In ZAR, interest on surplus cash increased to $0.4 million (ZAR 7.0 million) from $0.4 million (ZAR 5.7 million), primarily due to the inclusion of Connect.

Interest expense increased to $4.0 million (ZAR 69.1 million) from $0.8 million (ZAR 11.9 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.

Interest on surplus cash increased to $0.8 million (ZAR 13.8 million) from $0.7 million (ZAR 10.5 million), primarily due to the inclusion of Connect.

Interest expense increased to $8.4 million (ZAR 145.3 million) from $1.6 million (ZAR 23.7 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 the interest rate on these ATM facilities.

Fiscal 2023 tax expense was $0.4 million (ZAR 6.8 million) compared to the tax expense of $0.3 million (ZAR 4.3 million) in fiscal 2022.

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 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:

Three months ended September 30,

Six months ended December 31,

Share of net loss

Total loss from equity-accounted investments

Results of operations by operating segment

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In United States Dollars

Three months ended September 30,

Six months ended December 31,

Operating Segment

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Operating segments

Corporate/Eliminations

Total consolidated revenue

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Total Segment Adjusted EBITDA

Corporate/eliminations

Lease adjustments

Group Adjusted EBITDA

Once-off items

Stock-based compensation

Lease adjustments

Depreciation and amortization

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In South African Rand

Three months ended September 30,

Six months ended December 31,

Operating Segment

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Operating segments

Corporate/Eliminations

Total consolidated revenue

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Total Segment Adjusted EBITDA

Corporate/eliminations

Lease adjustments

Group Adjusted EBITDA

Once-off items

Stock-based compensation

Lease adjustments

Depreciation and amortization

Total consolidated operating loss

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.

Segment revenue increased primarily due to higher 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.

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.

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.

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;

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.

Our EBITDA loss margin (calculated as EBITDA loss divided by revenue) for the first half of fiscal 2023 and 2022 was (2.7%) and (40.6%), respectively.

Segment revenue increased due to the contribution from Connect as well as strong ad hoc hardware sales.

The increase in EBITDA is primarily due to the inclusion of Connect, as well as the higher hardware sales, which was partially offset by higher employee-related expenses.

Our EBITDA margin for the first half of fiscal 2023 and 2022 was 7.4% and 9.7%, respectively.

Liquidity and Capital Resources

As of September 30, 2022, our cash and cash equivalents were $30.1 million and comprised of U.S.

dollar-denominated balances of $9.2 million, ZAR-denominated balances of ZAR 346.8 million ($19.3 million), and other currency deposits, primarily Botswana pula, of $1.7 million, all amounts translated at exchange rates applicable as of September 30, 2022.

The decrease in our unrestricted cash balances from June 30, 2022, was primarily due to utilization of cash reserves to fund our Consumer operations and an investment in working capital in our Merchant operations, which was partially offset by the contribution from Connect.

As of December 31, 2022, our cash and cash equivalents were $42.4 million and comprised of U.S.

dollar-denominated balances of $7.5 million, ZAR-denominated balances of ZAR 561.6 million ($33.0 million), and other currency deposits, primarily Botswana pula, of $1.9 million, all amounts translated at exchange rates applicable as of December 31, 2022.

The decrease in our unrestricted cash balances from June 30, 2022, was primarily due to the utilization of cash reserves to fund our Consumer operations, make certain scheduled repayments of our borrowings, purchase ATMs and safe assets, and to make an investment in working capital in our Consumer and Merchant operations, which was partially offset by the utilization of our available borrowings and a positive contribution from Connect.

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.

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Available short-term borrowings

Summarized below are our short-term facilities available and utilized as of September 30, 2022:

Summarized below are our short-term facilities available and utilized as of December 31, 2022:

RMB Facility E

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Long-term borrowings

We have aggregate long-term borrowing outstanding of ZAR 2.3 billion ($127.8 million translated at exchange rates as of September 30, 2022) as described in Note 8.

We have aggregate long-term borrowing outstanding of ZAR 2.4 billion ($142.9 million translated at exchange rates as of December 31, 2022) as described in Note 8.

These borrowings include outstanding long-term borrowings obtained by Lesaka SA of ZAR 1.0 billion to partially fund the acquisition of Connect.

In contemplation of the Connect transaction, Connect obtained total facilities of approximately ZAR 1.3 billion which were utilized to repay its existing borrowings and to fund a portion of its capital expenditures and to settle obligations under the transaction documents.

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.

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.

Our credit agreement with RMB requires that we achieve certain milestones by September 30, 2022, failing which we would be required to place ZAR 250 million into bank accounts with RMB.

We were unable to achieve the required milestones by September 30, 2022.

However, RMB did not require us to place cash into the RMB bank accounts nor did RMB declare an event of default as a result of our failure to do so.

We are currently renegotiating the terms of these lending arrangements with RMB.

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, 2022, includes restricted cash of approximately $58.0 million related to cash withdrawn from our debt facility to fund ATMs.

Our cash, cash equivalents and restricted cash presented in our consolidated statement of cash flows as of December 31, 2022, includes restricted cash of approximately $54.2 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.

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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, 2022, includes restricted cash of approximately $5.3 million that has been ceded and pledged.

Our cash, cash equivalents and restricted cash presented in our consolidated statement of cash flows as of December 31, 2022, includes restricted cash of approximately $0.2 million that has been ceded and pledged.

Cash flows from operating activities

First quarter

Net cash used in operating activities during the first quarter of fiscal 2023 was $7.7 million (ZAR 131.2 million) compared to $7.9 million (ZAR 116.1 million) during the first quarter of fiscal 2022 .

Excluding the impact of income taxes, our cash used in operating activities during the first quarter of fiscal 2023 was impacted by month-end working capital movements (primarily an increase in receivable balances) within our merchant business which general unwind in the following month, growth in our merchant finance loans receivable book, and the utilization of cash reserves to fund our Consumer operations, which was partially offset by the contribution from Connect.

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 2023 and 2022 were as follows:

Three months ended September 30,

Second quarter

Net cash provided by operating activities during the second quarter of fiscal 2023 was $3.4 million (ZAR 59.9 million) compared to net cash used in operating activities of $13.8 million (ZAR 212.0 million) during the second quarter of fiscal 2022 .

Excluding the impact of income taxes, our cash used in operating activities during the second quarter of fiscal 2023 was impacted by month-end working capital movements (primarily an increase in accounts payable balances) within our merchant business which generally unwind in the following month, and growth in our consumer and merchant finance loans receivable books , which was partially offset by the positive contribution from Connect.

During the second quarter of fiscal 2023, we paid first provisional South African tax payments of $2.5 million (ZAR 42.6 million) related to our 2023 tax year.

During the second quarter of fiscal 2022, we paid first provisional South African tax payments of $0.4 million (ZAR 6.9 million) related to our 2023 tax year.

Taxes paid during the second quarter of fiscal 2023 and 2022 were as follows:

Three months ended December 31,

First provisional payments

Second provisional payments

Taxation paid related to prior years

Tax refund received

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Total tax paid

Net cash used in operating activities during the first half of fiscal 2023 was $4.2 million (ZAR 73.1 million) compared to $21.7 million (ZAR 325.4 million) during the first half of fiscal 2022 .

Excluding the impact of income taxes, our cash used in operating activities during the first half of fiscal 2023 was impacted by month-end working capital movements (primarily an increase in accounts payable balances) within our merchant business which generally unwind in the following month, and growth in our consumer and merchant finance loans receivable books, and the utilization of cash reserves to fund our Consumer operations, which was partially offset by the positive contribution from Connect.

During the first half of fiscal 2023, we paid first provisional South African tax payments of $3.0 million (ZAR 50.8 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.

During the first half of fiscal 2022, we paid first provisional South African tax payments of $0.4 million (ZAR 6.9 million) related to our 2022 tax year.

Taxes paid during the first half of fiscal 2023 and 2022 were as follows:

Six months ended December 31,

First provisional payments

Second provisional payments

Taxation paid related to prior years

Tax refund received

Total South African taxes paid

Foreign taxes paid

Total tax paid

Cash flows from investing activities

First quarter

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.

Cash used in investing activities for the first quarter of fiscal 2022 included capital expenditures of $0.7 million (ZAR 10.2 million), primarily due to the roll out of our new express branches.

Second quarter

Cash used in investing activities for the second quarter of fiscal 2023 included capital expenditures of $4.0 million (ZAR 69.9 million), primarily due to the acquisition of safe assets and POS devices.

Cash used in investing activities for the second quarter of fiscal 2022 included capital expenditures of $0.2 million (ZAR 2.9 million), primarily due to the acquisition of computer equipment.

During the second quarter of fiscal 2022, we received a scheduled payment of $7.5 million related to the sale of Bank Frick in fiscal 2021.

Cash used in investing activities for the first half of fiscal 2023 included capital expenditures of $8.5 million (ZAR 146.5 million), primarily due to the acquisition of safe assets, POS devices and computer equipment.

During the first half of 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.

Cash used in investing activities for the first half of fiscal 2022 included capital expenditures of $0.9 million (ZAR 13.3 million), primarily due to the roll out of our new express branches and the acquisition of computer equipment.

During the first half of fiscal 2022 we received a scheduled payment of $7.5 million related to the sale of Bank Frick in fiscal 2021.

Cash flows from financing activities

First quarter

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 these facilities.

Second quarter

During the second quarter of fiscal 2023 , we utilized approximately $167.2 million from our South African overdraft facilities to fund our ATMs and our cash management business through Connect, and repaid $175.4 million of those facilities.

We utilized approximately $9.1 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 $1.7 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.

During the first quarter of fiscal 2022, we utilized approximately $138.9 million from our South African overdraft facilities to fund our ATMs and repaid $98.9 million of these facilities.

We received $0.3 million from the exercise of stock options.

We also paid $0.1 million to repurchase shares from employees in order for the employees to settle taxes due related to the vesting of shares of restricted stock.

During the second quarter of fiscal 2022, we received $0.7 million from the exercise of stock options, and utilized approximately $172.4 million from our South African overdraft facilities to fund our ATMs and repaid $172.8 million of those facilities.

During the first half of fiscal 2023 , we utilized approximately $313.3 million from our South African overdraft facilities to fund our ATMs and our cash management business through Connect, and repaid $312.3 million of those facilities.

We utilized approximately $10.1 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 $3.3 million of long-term borrowings in accordance with our repayment schedule.

We received $0.3 million from the exercise of stock options.

We also paid $0.3 million to repurchase shares from employees in order for the employees to settle taxes due related to the vesting of shares of restricted stock.

During the first half of fiscal 2022, we received $0.7 million from the exercise of stock options, and utilized approximately $311.4 million from our South African overdraft facilities to fund our ATMs and repaid $271.7 million of these facilities.

Off-Balance Sheet Arrangements

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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 South Africa as well as IT equipment, and through Connect, spending for POS devices, safe assets, vehicles, computer and office equipment.

Our capital expenditures for the first quarter of fiscal 2023 and 2022 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, 2022, of $2.4 million.

We expect capital spending for the third quarter of fiscal 2023 to primarily include investments into our ATM infrastructure and branch network in South Africa as well as IT equipment, and through Connect, spending for POS devices, safe assets, vehicles, computer and office equipment.

Our capital expenditures for the second quarter of fiscal 2023 and 2022 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 December 31, 2022, of $3.1 million.

We expect to fund these expenditures through internally generated funds and available facilities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis