LESAKA TECHNOLOGIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2022, and the unaudited condensed consolidated financial statements and the accompanying notes included in this Form 10-Q. 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, 2022. 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 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; and  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. 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 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; and 39  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 o 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 ○ 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 EasyPay loans (previously referred to as Moneyline) o 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) o 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. 40 Strengthening our relationships with key stakeholders We continue to build our relationship with the South African Social Security Agency (“SASSA”) through proactive engagement at a local, provincial and national level. We have also made good progress on building relationships with our various key stakeholders, be it shareholders, regulators, suppliers and other participants in our sectors. 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 June 30, 2022. 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 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, including the ongoing uncertainty in the current economic environment due to the outbreak of COVID-19. 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, 2022:  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; 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 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. 41 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 Six months ended Year ended December 31, December 31, June 30, 2022 2021 2022 2021 2022 ZAR : $ average exchange rate 17.6279 15.4320 17.3240 15.0283 15.2154 Highest ZAR : $ rate during period 18.3617 16.2968 18.3617 16.2968 16.2968 Lowest ZAR : $ rate during period 16.9840 14.4684 16.2035 14.1630 14.1630 Rate at end of period 17.0212 15.9306 17.0212 15.9306 16.2903 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 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 Six months ended Year ended Table 2 December 31, December 31, June 30, 2022 2021 2022 2021 2022 Income and expense items: $1 = ZAR 17.5160 15.3800 17.2482 14.9748 15.1978 Balance sheet items: $1 = ZAR 17.0212 15.9306 17.0212 15.9306 16.2903 42 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 revenue and is the currency in which the majority of our transactions are initially incurred and measured. Due to the significant impact of currency fluctuations between the U.S. dollar and the 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 presented in our unaudited condensed consolidated financial statements is included 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”). 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. 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 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 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 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; and  Foreign exchange movements: The U.S. dollar was 14% stronger against the ZAR during the second quarter of fiscal 2023 compared to the prior period, which impacted our reported results. 43 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 December 31, 2022 2021 $ ’000 $ ’000 change Revenue 136,068 31,114 337% Cost of goods sold, IT processing, servicing and support 108,824 20,580 429% Selling, general and administration 23,517 17,746 33% Depreciation and amortization 5,919 726 715% Transaction costs related to Connect Group acquisition - 1,489 nm Operating loss (2,192) (9,427) (77%) Unrealized loss related to fair value adjustment to currency options - 2,429 nm Net loss on disposal of equity-accounted investments 112 - nm Interest income 389 313 24% Interest expense 4,388 765 474% Loss before income tax expense (6,303) (12,308) (49%) Income tax expense 364 98 271% Net loss before earnings from equity-accounted investments (6,667) (12,406) (46%) Earnings from equity-accounted investments 18 - nm Net loss attributable to us (6,649) (12,406) (46%) Table 4 In South African Rand Three months ended December 31, 2022 2021 ZAR ’000 ZAR ’000 change Revenue 2,383,367 478,533 398% Cost of goods sold, IT processing, servicing and support 1,906,161 316,520 502% Selling, general and administration 411,923 272,933 51% Depreciation and amortization 103,677 11,165 829% Transaction costs related to Connect Group acquisition - 22,901 nm Operating loss (38,394) (144,986) (74%) Unrealized loss related to fair value adjustment to currency options - 37,358 nm Net loss on disposal of equity-accounted investments 1,962 - nm Interest income 6,814 4,814 42% Interest expense 76,860 11,766 553% Loss before income tax expense (110,402) (189,296) (42%) Income tax expense 6,376 1,508 323% Net loss before earnings from equity-accounted investments (116,778) (190,804) (39%) Earnings from equity-accounted investments 315 - nm Net loss attributable to us (116,463) (190,804) (39%) 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. 44 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: Table 5 Three months ended December 31, 2022 2021 $ % $ ’000 $ ’000 change Other 18 - nm Total loss from equity-accounted investments 18 - nm 45 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 December 31, 2022 % of 2021 % of % change Operating Segment $ ’000 total $ ’000 total Consolidated revenue: Consumer 15,434 11% 16,639 53% (7%) Merchant 120,634 89% 14,475 47% 733% Subtotal: Operating segments 136,068 100% 31,114 100% 337% Corporate/Eliminations - - - - nm Total consolidated revenue 136,068 100% 31,114 100% 337% Segment Adjusted EBITDA: Consumer 578 8% (4,366) 80% nm Merchant 9,120 123% 1,004 (18%) 808% Total Segment Adjusted EBITDA 9,698 131% (3,362) 62% nm Group costs (2,256) (30%) (2,076) 38% 9% Group Adjusted EBITDA 7,442 100% (5,438) 100% nm Once-off items (119) (1,642) (93%) Stock-based compensation (2,849) (788) 262% Lease adjustments (747) (833) (10%) Depreciation and amortization (5,919) (726) 715% Total consolidated operating loss (2,192) (9,427) (77%) Table 7 In South African Rand Three months ended December 31, 2022 % of 2021 % of % change Operating Segment ZAR ’000 total ZAR ’000 total Consolidated revenue: Consumer 270,342 11% 255,908 53% 6% Merchant 2,113,025 89% 222,625 47% 849% Subtotal: Operating segments 2,383,367 100% 478,533 100% 398% Corporate/Eliminations - - - - nm Total consolidated revenue 2,383,367 100% 478,533 100% 398% Segment Adjusted EBITDA: Consumer 10,124 8% (67,160) 80% nm Merchant 159,746 123% 15,453 (18%) 934% Total Segment Adjusted EBITDA 169,870 131% (51,707) 62% nm Group costs (39,516) (30%) (31,929) 38% 24% Group Adjusted EBITDA 130,354 100% (83,636) 100% nm Once-off items (2,084) (25,254) (92%) Stock-based compensation (49,903) (12,119) 312% Lease adjustments (13,084) (12,812) 2% Depreciation and amortization (103,677) (11,165) 829% Total consolidated operating loss (38,394) (144,986) (74%) Consumer Segment revenue increased primarily due to higher insurance revenues and higher account holder fees, though this was partially offset by lower ATM transaction fees. 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. 46 Merchant 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. Group costs 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; legal 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; and  Foreign exchange movements: The U.S. dollar was 15% stronger against the ZAR during the first half of fiscal 2023 compared to the prior period, which impacted our reported results. 47 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 8 In United States Dollars Six months ended December 31, 2022 2021 $ ’000 $ ’000 change Revenue 260,854 65,618 298% Cost of goods sold, IT processing, servicing and support 209,352 44,787 367% Selling, general and administration 46,448 38,188 22% Depreciation and amortization 11,917 1,621 635% Transaction costs related to Connect Group acquisition - 1,674 nm Operating loss (6,863) (20,652) (67%) Unrealized loss related to fair value adjustment to currency options - 2,429 nm Net gain on disposal of equity-accounted investments 136 - nm Interest income 800 702 14% Interest expense 8,424 1,581 433% Loss before income tax expense (14,351) (23,960) (40%) Income tax expense 395 284 39% Net loss before loss from equity-accounted investments (14,746) (24,244) (39%) Loss from equity-accounted investments (2,599) (1,156) 125% Net loss attributable to us (17,345) (25,400) (32%) Table 9 In South African Rand Six months ended December 31, 2022 2021 ZAR ’000 ZAR ’000 change Revenue 4,499,262 982,616 358% Cost of goods sold, IT processing, servicing and support 3,610,946 670,676 438% Selling, general and administration 801,144 571,858 40% Depreciation and amortization 205,547 24,274 747% Transaction costs related to Connect Group acquisition - 25,068 nm Operating loss (118,375) (309,260) (62%) Unrealized loss related to fair value adjustment to currency options - 36,374 nm Net gain on disposal of equity-accounted investments 2,346 - nm Interest income 13,799 10,512 31% Interest expense 145,298 23,675 514% Loss before income tax expense (247,528) (358,797) (31%) Income tax expense 6,813 4,253 60% Net loss before loss from equity-accounted investments (254,341) (363,050) (30%) Loss from equity-accounted investments (44,828) (17,311) 159% Net loss attributable to us (299,169) (380,361) (21%) 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 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. 48 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 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 half 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 $0.8 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 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: Table 10 Six months ended December 31, 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 32 - nm (2,599) (1,156) 125% 49 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 11 In United States Dollars Six months ended December 31, 2022 % of 2021 % of % change Operating Segment $ ’000 total $ ’000 total Consolidated revenue: Consumer 30,438 12% 33,803 52% (10%) Merchant 230,416 88% 31,815 48% 624% Subtotal: Operating segments 260,854 100% 65,618 100% 298% Total consolidated revenue 260,854 100% 65,618 100% 298% Segment Adjusted EBITDA: Consumer (816) (7%) (13,722) 96% (94%) Merchant 17,013 146% 3,079 (22%) 453% Total Segment Adjusted EBITDA 16,197 139% (10,643) 74% nm Group costs (4,556) (39%) (3,649) 26% 25% Group Adjusted EBITDA 11,641 100% (14,292) 100% nm Once-off items (717) (1,885) (62%) Stock-based compensation (4,311) (1,097) 293% Lease adjustments (1,559) (1,757) (11%) Depreciation and amortization (11,917) (1,621) 635% Total consolidated operating loss (6,863) (20,652) (67%) Table 12 In South African Rand Six months ended December 31, 2022 % of 2021 % of % change Operating Segment ZAR ’000 total ZAR ’000 total Consolidated revenue: Consumer 525,001 12% 506,193 52% 4% Merchant 3,974,261 88% 476,423 48% 734% Subtotal: Operating segments 4,499,262 100% 982,616 100% 358% Total consolidated revenue 4,499,262 100% 982,616 100% 358% Segment Adjusted EBITDA: Consumer (14,075) (7%) (205,484) 96% (93%) Merchant 293,444 146% 46,107 (22%) 536% Total Segment Adjusted EBITDA 279,369 139% (159,377) 74% nm Group costs (78,583) (39%) (54,644) 26% 44% Group Adjusted EBITDA 200,786 100% (214,021) 100% nm Once-off items (12,367) (28,227) (56%) Stock-based compensation (74,357) (16,427) 353% Lease adjustments (26,890) (26,311) 2% Depreciation and amortization (205,547) (24,274) 747% Total consolidated operating loss (118,375) (309,260) (62%) Consumer Segment revenue increased primarily due to higher insurance revenues and higher account holder fees, though this was partially offset by lower ATM transaction fees. 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 half of fiscal 2023 and 2022 was (2.7%) and (40.6%), respectively. 50 Merchant 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. Group costs 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. Liquidity and Capital Resources 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. 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, 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 June 30, 2022, for additional information related to our borrowings. 51 Available short-term borrowings Summarized below are our short-term facilities available and utilized as of December 31, 2022: Table 13 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 - - - - 12,044 205,000 - - Overdraft restricted as to use (1) 82,251 1,400,000 - - - - - - Total overdraft 82,251 1,400,000 - - 12,044 205,000 - - Indirect and derivative facilities (2) - - 7,931 135,000 - - 9,198 156,556 Total short-term facilities available 82,251 1,400,000 7,931 135,000 12,044 205,000 9,198 156,556 Utilized short-term facilities: Overdraft - - - - 10,575 180,000 - - Overdraft restricted as to use (1) 54,250 923,395 - - - - - - Indirect and derivative facilities (2) - - 1,945 33,100 - - 124 2,110 Total short-term facilities available 54,250 923,395 1,945 33,100 10,575 180,000 124 2,110 Interest rate, based on South African prime rate 10.50% 10.40% (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 2.4 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, 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. 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 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. 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 December 31, 2022, includes restricted cash of approximately $0.2 million that has been ceded and pledged. 52 Cash flows from operating activities 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: Table 14 Three months ended December 31, 2022 2021 2022 2021 $ $ ZAR ZAR ‘000 ‘000 ‘000 ‘000 First provisional payments 2,463 437 42,582 6,933 Taxation paid related to prior years 10 - 180 - Tax refund received (141) (192) (2,570) (2,851) Total South African taxes paid (received) 2,332 245 40,192 4,082 Foreign taxes paid 50 34 889 540 Total tax paid 2,382 279 41,081 4,622 First half 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: Table 15 Six months ended December 31, 2022 2021 2022 2021 $ $ ZAR ZAR ‘000 ‘000 ‘000 ‘000 First provisional payments 2,955 437 50,798 6,933 Second provisional payments 191 - 3,371 - Taxation paid related to prior years 10 - 180 - Tax refund received (198) (217) (3,540) (3,227) Total South African taxes paid 2,958 220 50,809 3,706 Foreign taxes paid 101 70 1,775 1,065 Total tax paid 3,059 290 52,584 4,771 53 Cash flows from investing activities 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. First half 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 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 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. First half 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 We have no off-balance sheet arrangements. Capital Expenditures 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. 54