Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
OUR OPERATIONS
AND FINANCIAL
RESULTS
ARE SUBJECT
TO VARIOUS
RISKS AND
UNCERTAINTIES,
INCLUDING
THOSE
DESCRIBED
BELOW,
THAT
COULD
ADVERSELY
AFFECT
OUR
BUSINESS,
FINANCIAL
CONDITION, RESULTS
OF OPERATIONS,
CASH FLOWS, AND THE TRADING PRICE OF OUR COMMON STOCK
Risks Relating to Our Business
To achieve our mission, our
strategy is to
build and operate
the leading South
African full service
fintech
platform offering cash management, payment
and financial services.
Our future success, and our ability
to
return
to
profitability
and
positive
cash
flow
is
substantially
dependent
on
our
ability
to
complete
the
implementation of this strategy successfully.
Our board conducted an extensive
review of our business strategy
and operations in July 2020,
and decided to focus on
our South
African
operations
and
other
business
opportunities
in
South
Africa
and,
to
a
lesser
extent,
the
rest
of
the
African
continent.
The
restructuring
of
the
consumer
business
and
acquisition
of
Connect
were
integral
parts
of
the
strategy
to
return
the
business
to
profitability and positive cash flow. We have made significant progress on both of these initiatives however we cannot assure you that
we will be able to complete our strategy successfully and return to profitability and
positive cash flow.
Even if we do return to profitability, achieving net income does not necessarily
ensure positive cash flows. Future periods of net
losses
from
operations
could
result
in
negative
cash
flow
and
may
hamper
ongoing
operations
or
prevent
us
from
sustaining
or
expanding our business. We cannot assure you that we will achieve, sustain or increase profitability in the future and if we do not, our
business will be materially and adversely affected.
In 2017
and 2018 we
suffered significant
reputational damage
as a result
of irregularities in
the awarding of
the South African
Social Security Agency (“SASSA”)
grant distribution contract in
2012 and allegations of abuse
of group companies’ access to social
grant recipients.
An entirely new
board and management
team were appointed
to develop and
execute the new
strategy however we
cannot provide assurance that issues related to those events will not resurface
and adversely affect the business.
We
have a
significant amount
of indebtedness that
requires us
to comply with
restrictive and financial
covenants. If we are unable to comply with these
covenants, we could default on this debt, which would have
a material adverse effect on our business and financial condition.
As
of
June
30,
2023,
we
had
aggregate
long-term
borrowing
outstanding
of
ZAR
2.5
billion
($133.1
million
translated
at
exchange rates
as of June
30, 2023). We
financed our acquisition
of Connect
in April 2022
through South
African bank borrowings
of ZAR 1.1 billion
($71.7 million, translated at
closing date exchange
rate (as defined in the
Sale Agreement) of $1:ZAR
14.65165).
The borrowings
are secured
by a
pledge of
certain of
our bank
accounts, and
the cession
of Lesaka’s
shareholding
in certain
of its
subsidiaries. These borrowings contain customary covenants that require Lesaka Technologies
(Pty) Ltd (“Lesaka SA”) to maintain a
specified total asset
cover ratio and restrict
the ability of
Lesaka, Lesaka SA,
and certain of its
subsidiaries to make
certain distributions
with respect
to their
capital stock,
prepay other
debt, encumber
their assets,
incur additional
indebtedness,
make investment
above
specified levels, engage in certain business combinations and engage in
other corporate activities.
The loan agreements also include a credit enhancement mechanism of ZAR
350 million ($23.9 million, translated at closing date
exchange rate), which has been provided by investment
funds managed by Lesaka’s
largest shareholder, Value
Capital Partners (Pty)
Ltd (“VCP”)
which includes
a contingent
subscription for
new shares.
There can
be no
assurance that
VCP will
perform under
the
commercially agreed
terms and failure
by it to
fulfil its obligation
under the credit
enhancement mechanism
may put our
funding or
future repayments at risk.
We also
have borrowings through
Connect. Connect’s
credit facilities include (i)
an overdraft facility (general
banking facility)
of ZAR 205.0
million (of which
ZAR 170.0 million
has been utilized);
(ii) Facility A
of ZAR 700.0
million; (iii) Facility
B of ZAR
550.0
million
(both fully
utilized);
and
(iv)
an asset-backed
facility of
ZAR
200.0
million
(of which
ZAR
149.1
million
has been
utilized).
These borrowings are
secured by a
pledge of,
among other things,
Cash Connect Management
Solutions’(“CCMS”) entire
equity interests
in its
subsidiaries and
investments and
any claims
outstanding. These
borrowings contain
customary covenants
that
require CCMS to maintain specified debt service, interest cover and leverage ratios.
Within our merchant lending
operations, we have
borrowing arrangements through
Cash Connect Capital
(Pty) Limited (“CCC”).
CCC has a
ZAR 300
million revolving
credit facility agreement.
We
have utilized
approximately ZAR
222.3 million
as of June
30,
2023.
This
facility
contains
customary
covenants
that
require
the
borrowing
parties
to
collectively
maintain
a
specified
capital
adequacy ratio, restrict the ability of the entities to make certain distributions with respect to their capital stock,
encumber their assets,
incur additional indebtedness, make investments, engage in certain
business combinations and engage in other corporate activities.
10
These security arrangements and covenants may
reduce our operating flexibility or
our ability to engage in
other transactions that
may
be
beneficial
to
us.
If
we
are
unable
to
comply
with
the
covenants,
we
could
be
in
default
and
the
indebtedness
could
be
accelerated. If this were to occur, we might not be able to obtain waivers of default or to refinance the debt with another lender and as
a result, our business, financial condition and stock price would suffer.
We
need to
significantly grow
our consumer
operations in
order to
ensure their
profitability and
long-
term sustainability.
Following the conclusion of our contract with SASSA, we
refocused our resources and technology on the
provision of financial
inclusion
services
to
our
target
market
and
currently
have
an
established
base
of
approximately
1.3
million
customers
of
which
approximately
1.1 million
are permanent
grant recipients.
Our strategy
involves significantly
expanding this
base over
the coming
years. While we believe that our financial services offerings are convenient and cost-effective, the success of our strategy will depend
on the extent to which we successfully market our offering to
grow the customer base.
Factors that may prevent us from successfully operating and expanding our
Consumer Division include, but are not limited to:
•
insufficient adoption and utilization of our products and
services;
•
inability to access sufficient funding for our ATM
infrastructure;
•
increased
competition
in
the
marketplace
and
restrictions
imposed
by
SASSA
or
the
South
African
government
on
the
manner in which grant recipients may transact;
•
political interference and changes in the regulatory environment;
•
failure to comply with laws and regulations related to our Consumer lending
business;
•
failure to comply with anti-money laundering and anti-corruption laws and
regulations;
•
cyber-attacks, data breaches and data leaks;
•
further civil unrest similar to that experienced in July 2021;
•
loss of key technical and operations staff;
•
expired property leases disrupting business operations; and
•
logistical and communications challenges, including scheduled and unscheduled
power supply disruptions.
We may undertake acquisitions
that could
increase our
costs or
liabilities or
be disruptive
to our
business.
Acquisitions are
an integral part
of our new
growth strategy
as we seek
to expand our
business and deploy
our technologies
in
new markets
in Southern
Africa. However,
we may
not be
able to
locate suitable
acquisition
candidates at
prices that
we consider
appropriate.
If
we
do
identify an
appropriate
acquisition
candidate,
we
may
not be
able to
successfully
negotiate
the
terms
of
the
transaction, finance it
or, if the
transaction occurs, integrate the
new business into
our existing business.
These transactions may
require
debt financing or additional equity financing, resulting in additional leverage
or dilution of ownership.
Acquisitions of businesses
or other material
operations and the
integration of these
acquisitions or their
businesses will require
significant attention
from members
of our senior
management team,
which may
divert their
attention from
our day-to-day
business.
The difficulties
of integration
may be
increased by
the necessity
of integrating
personnel with
disparate business
backgrounds
and
combining
different
corporate cultures.
We
also may
not be
able to
retain key
employees or
customers
of an
acquired business
or
realize
cost
efficiencies
or
synergies
or
other
benefits
that
we
anticipated
when
selecting
our
acquisition
candidates.
Acquisition
candidates may have liabilities or adverse operating issues that we fail to
discover through due diligence prior to the acquisition.
We
may
need
to record
write-downs
from future
impairments of
goodwill or
other intangible
assets, which
could reduce
our
future reported earnings.
Geopolitical
conflicts,
including
the
conflict
between
Russia
and
Ukraine,
may
adversely
affect
our
business and results of operations.
The
current
conflict
between
Russia
and
Ukraine
is
creating
substantial
uncertainty
about
the
future
of
the
global
economy.
Countries across the globe are instituting sanctions and other
penalties against Russia. The retaliatory measures that
have been taken,
and could
be taken
in the
future, by
the U.S.,
NATO,
and other
countries have
created global
security concerns
that could
result in
broader European military and political conflicts and otherwise have a substantial impact on regional and
global economies, any or all
of which could adversely affect our business.
11
While the broader consequences are
uncertain at this time,
the continuation and/or escalation of
the Russian and Ukraine
conflict,
along
with
any
expansion
of the
conflict
to
surrounding
areas, create
a
number
of risks
that
could
adversely
impact
our
business,
including:
•
increased inflation and significant volatility in the macroeconomic
environment;
•
disruptions to our technology infrastructure, including through cyberattacks,
ransom attacks or cyber-intrusion;
•
adverse changes in international trade policies and relations;
•
disruptions in global supply chains; and
•
constraints, volatility or disruption in the credit and capital markets.
All of these risks could
materially and adversely affect
our business and results of operations.
We are
continuing to monitor the
situation in Ukraine and globally and assessing the potential impact on our business.
A prolonged economic
slowdown or lengthy
or severe recession
in South Africa
or elsewhere could
harm
our operations.
A prolonged economic
downturn or recession
in South Africa
could materially
impact our results
from operations, particularly
in light of
on-going electricity disruptions
during calendar 2022
and 2023, a
significantly weak USD/
ZAR exchange rate
compared
with previous periods, and our strategic decision to focus on our South African operations. Economic confidence in South Africa, our
main operating
environment, is
currently low
and, as
a result, the
risk of
a prolonged
economic downturn
is increased, which
could
have a negative impact on merchants and retailers; mobile phone operators; our account holders; the
level of transactions we process;
the take-up of
the financial services
we offer and
the ability of our
customers to repay
our loans or to
pay their insurance
premiums.
If
financial
institutions
and
retailers experience
decreased
demand
for
their products
and services,
our
hardware,
software,
related
technology sales and processing revenue could decrease.
Our investment in MobiKwik
subjects us to certain
risks, including the possibility
of fluctuations in the
carrying value based on readily determinable fair values. In addition, our ability to dispose of our interest in
MobiKwik on acceptable terms, or at all, may be limited under certain circumstances.
We
have elected to
account for our
investment in MobiKwik
at cost minus impairment,
if any,
plus or minus changes
resulting
from observable
price changes
in orderly
transactions for
the identical
or similar
instrument of
the same
issuer because
it does
not
have a readily determinable fair value. The determination of the fair value of an investment requires us to make significant judgments
and estimates and we are required to
base our estimates on assumptions which
we believe to be reasonable, but
these assumptions may
be unpredictable and inherently uncertain. The value of our investment in MobiKwik as of
June 30, 2023 and 2022, was $76.3 million
and was determined
based on a
share issuance concluded
by MobiKwik in
June 2021, implying
a fair
value per equity
share of $12.275.
We
did not identify
any observable price
changes during either
of fiscal 2023
and 2022 and therefore
did not adjust
the value of
our
investment during the years ended June 30, 2023 and 2022. We recorded
a non-cash fair value adjustment of $49.3 million during the
year ended June 30, 2021, which increased the fair value to $76.3
million.
MobiKwik filed its draft
red herring prospectus in July
2021, with the original intention
of completing its initial public
offering
in November 2021. However, MobiKwik decided to delay its initial public offering given
prevailing market conditions at the time and
has indicated its intention to pursue an initial public listing in calendar 2024.
We
may
need to
record a
write-down of
the carrying
value of
our investment
in MobiKwik
in the
future (i)
if it
is unable
to
successfully complete its contemplated initial public offering, (ii) due to fluctuations in its market price upon listing, including during
the lock up
period after its
initial public
offering, or
(iii) if it
has not listed,
there is an
observable transaction
indicating a
fair value
per share
which is
lower than
our
June 30,
2023 price
per share.
Furthermore,
it may
be difficult
to dispose
of some
or all
of our
investment on acceptable terms, if at all, if MobiKwik fails to list.
Our
ability
to
fund
our
ATM
network
requires
that
we
continue
to
have
access
to
sufficient
lending
facilities, which requires compliance with restrictive and financial covenants.
The operational
maintenance
of our
ATM
network,
along with
an increase
in our
consumer
banking
client base,
necessitates
access to large
amounts of cash
to stock the
ATMs
and maintain uninterrupted
service levels. We
have credit facilities
from a South
African
bank
which
includes
security
arrangements
as
well
as
restrictive
and
financial
covenants.
The
security
arrangements
and
covenants included in our lending facilities may reduce our operating flexibility or our ability to engage in other transactions that may
be beneficial to us. If we are unable to comply
with the covenants in South Africa, we could be in default
and the indebtedness could
be accelerated. If this were to occur, we might not be able to obtain waivers of default or to refinance the debt with another lender and
as a result, our business and financial condition would suffer.
12
We may not be able to extend the terms
of these debt facilities or
refinance them, in each case, on
commercially reasonable terms
or at all. Our
ability to continue the
uninterrupted operation of
our ATM
network will be adversely
impacted by our failure
to renew
our debt facilities, any adverse change to the terms
of our credit facilities, or a
significant reduction in the amounts available under our
credit facilities,
or our
failure to
increase our
facilities if
required. We
may also
suffer reputational
damage if
our service
levels are
negatively impacted due to the unavailability of cash.
We
have
purchased
a
significant
amount
of
prepaid
airtime
voucher
inventory
which
exposes
us
to
market risk for this inventory as well as losses if the mobile network operators are unable to perform.
Historically,
we
have
purchased
a
significant
amount
of
prepaid
airtime
inventory
vouchers
in
order
to
take
advantage
of
discounted
pricing for
this inventory.
As of
June 30,
2023, the
carrying
value of
this inventory
is $4.0
million (ZAR
74.7
million
translated at exchange rates applicable as of
June 30, 2023). We expect to sell this inventory
over the next three months which
exposes
us to market risk for this inventory. The underlying service related to these
airtime vouchers is provided by South Africa’s four largest
mobile network
operators operating
in South
Africa and
therefore we
are also
exposed to
performance
risk by
these operators.
We
would be unable
to sell these prepaid
airtime vouchers if
the mobile network
operators were unable
to provide their
services and we
would need to
write this inventory
off. Failure
to recover the
carrying value of
this inventory
may have a
material adverse effect
on
our results of operations or financial condition.
We may be unable to recover the carrying value of certain Cell C
airtime that we own.
We
own a
substantial amount
of Cell
C airtime
inventory ($8.6
million translated
at exchange
rates applicable
as of
June 30,
2023). In support of
Cell C’s liquidity
position and pursuant to Cell
C’s recapitalization
process, we limited the resale
of this airtime
through
our
distribution
channels.
On
September
30,
2022,
Cell
C
concluded
its
recapitalization
process
and
we
entered
into
an
agreement with Cell C under which
Cell C agreed to repurchase, from
October 2023, up to ZAR 10 million
of Cell C inventory from
us per month. The amount to be
repurchased by Cell C will be calculated
as ZAR 10 million less the face
value of any sales made by
the Company during that month. The Company continued to sell a minimum amount of Cell C airtime through its internal channels in
late
fiscal
2022/
early
fiscal 2023
in support
of
Cell C’s
liquidity
position.
However,
our
ability
to
sell this
airtime
has
improved
significantly since
the acquisition
of Connect because
Connect is a
significant reseller
of Cell C
airtime. As
a result, we
sold higher
volumes of airtime through this channel than we did prior to the
Cell C recapitalization, however, continued
sales at these volumes is
dependent on
prevailing conditions continuing
in the airtime
market. If
we are able
to sell at
least ZAR 10
million a month
through
this channel
from October 1,
2023, then
Cell C would
not be required
to repurchase any
airtime from us
during any specific
month.
We
have agreed
to notify
Cell C
prior to
selling any
of this
airtime, however,
there is
no restriction
placed on
us on
the sale
of the
airtime.
Historical and current limitations
on our ability to freely dispose
of this Cell C airtime time
inventory exposes us to market
risk
for this inventory. Due to wholesale discounts in the distribution market for this airtime, it is not readily saleable in the current market
without realising a loss. In light of this, we recorded
a loss of $1.3 million during fiscal 2020, related
to this airtime inventory.
While
no further
losses were
recorded
in fiscal
2023,
2022 and
2021, we
may be
required to
record further
losses in
the future
if we
are
unable to recover the carrying
value of this airtime inventory
or if Cell C is unable
to repurchase the inventory
as per our agreement.
Failure to
recover the
carrying value
of this
inventory may
have a
material adverse
effect
on our
results of
operations or
financial
condition.
Our
consumer
microlending
loan
book
and
merchant
lending
book
expose
us
to
credit
risk
and
our
allowance for doubtful finance loans receivable may not be sufficient to absorb future write-offs.
All of our microfinance loans made are for a period of six months or less and all of our merchant lending through Connect is for
a period
of less
than 12
months. We
have created
an allowance
for doubtful
finance loans
receivable related
to these
books. When
creating the allowance,
management considered
factors including the
period of the
finance loan outstanding,
creditworthiness of
the
customers and the past payment history of the borrower. We consider this policy to be appropriate as it takes into account factors such
as historical bad debts, current
economic trends and changes in our
customer payment patterns. However,
additional allowances may
be required should the ability
of our customers to
make payments when due
deteriorate in the future.
A significant amount of judgment
is required to assess the ultimate recoverability of these microfinance
loan receivables.
We may face competition from other
companies that offer innovative
payment technologies and payment
processing,
which
could
result
in
the
loss
of
our
existing
business
and
adversely
impact
our
ability
to
successfully market additional products and services.
Our primary competitors in
the payment processing
market include other independent
processors, as well
as financial institutions,
independent
sales
organizations,
new
digital
and
fintech
entrants
and,
potentially
card
networks.
Many
of
our
competitors
are
companies who
are larger
than we
are and
have greater
financial and
operational resources
than we
have. These
factors may
allow
them to offer better pricing
terms or incentives to customers, which
could result in a loss of our potential
or current customers and/or
force us to lower our prices. Either of these actions could have a significant effect
on our revenues and earnings.
13
Our
future
success
will
depend
in
part
on
our
ability
to
attract,
integrate,
retain
and
incentivize
key
personnel
and
a
sufficient
number
of
skilled
employees,
particularly
in
the
technical,
sales
and
senior
management areas.
We believe our management team has the right experience
and skills to execute on our strategy. However,
in order to succeed in
our product
development and
marketing efforts,
we may
need to identify
and attract new
qualified technical
and sales personne
l, as
well as motivate and retain our
existing employees. As a result, an
inability to hire and retain such
employees would adversely affect
our ability to
achieve our strategic
goals and maintain
our technological relevance.
We may face difficulty in
assimilating, transitioning
and integrating
newly-hired
personnel or
management of
any future
acquisitions into
our existing
management team,
and this
may
adversely affect
our business. Competitors
may attempt
to recruit
our top
management and
employees. In
order to attract
and retain
personnel in
a competitive
marketplace, we
must provide
competitive pay
packages, including
cash and equity
-based compensation
and
the
volatility
in
our
stock
price
may
from
time
to
time
adversely
affect
our
ability
to
recruit
or retain
employees.
We
do
not
maintain
any
“key
person”
life
insurance
policies.
If
we
fail
to
attract,
integrate,
retain
and
incentivize
key
personnel
and
skilled
employees, our ability to manage and grow our
business could be harmed and our product
development and marketing activities could
be negatively affected.
System failures, including breaches in the security of our system, could harm our business.
We
may experience
system failures
from time
to time,
and any
lengthy interruption
in the availability
of our
back-end system
computers could harm our business and severely affect our customer relationships. Frequent or persistent interruptions in our services
could cause current or potential
customers and users to
believe that our systems are
unreliable, leading them to
avoid our technology
altogether, and could permanently harm our reputation and brands. These interruptions would increase the burden on our staff, which,
in turn, could delay our
introduction of new applications and
services. Finally, because our customers may use our products
for critical
transactions,
any
system
failures
could
result
in
damage
to
our
customers’
businesses.
These
customers
could
seek
significant
compensation from us for their losses. Even if unsuccessful, this type of
claim could be time-consuming and costly for us to address.
Although certain of our systems
have been designed to reduce
downtime in the event of
outages or catastrophic occurrences, they
remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication
failures, terrorist attacks,
computer viruses, computer denial-of-service attacks and similar events. Some of
our systems are not fully
redundant, and our disaster
recovery planning may not be sufficient for all eventualities.
Protection against fraud is of key
importance to the purchasers and end
users of our solutions. We
incorporate security features,
including encryption
software, biometric
identification and
secure hardware,
into our solutions
to protect
against fraud in
electronic
transactions and
to provide for
the privacy and
integrity of cardholder
data. Our solutions
may be vulnerable
to breaches in
security
due to
defects in
the security
mechanisms, the
operating system
and applications
or the
hardware platform.
Security vulnerabilities
could
jeopardize
the
security
of
information
transmitted
using
our
solutions.
If
the
security
of
our
solutions
is
compromised,
our
reputation and marketplace acceptance
of our solutions may be adversely
affected, which would cause our
business to suffer,
and we
may become subject to damage claims. We
have not yet experienced any significant security breaches affecting
our business.
Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems with our
system could
result in lengthy interruptions
to our services. Our current
business interruption insurance may
not be sufficient to
compensate us for
losses that may result from interruptions in our service as a result of system failures.
Cash
Paymaster
Services,
or
CPS,
has
been
placed
into
liquidation.
While
no
claim
has
been
made
against Lesaka for CPS’ obligations, we cannot provide assurance that no such claim will be made.
CPS has significant obligations and ongoing litigation related to its SASSA contract and has been placed into liquidation. While
no claim has been made against Lesaka to be held liable for CPS’ current
obligations or any future obligations under any future court
judgments, and while we do not believe that there would be a legitimate legal basis for any such claims, we cannot assure you that no
such claim
will be
made against
us. If
SASSA or
another
third party
were to
seek and
ultimately succeed
in obtaining
a judgment
against us in respect of CPS’ liabilities, any such judgment would have a material
adverse effect on our financial condition, results of
operations and cash flows.
14
Defending
our
intellectual
property
rights
or
defending
ourselves
in
infringement
suits
that
may
be
brought against us is expensive and time-consuming and may not be successful.
Litigation to
enforce our
patents, trademarks
or other
intellectual property
rights or
to protect
our trade
secrets could
result in
substantial costs and may not be successful. Any loss of, or inability to protect, intellectual property in our technology could diminish
our competitive advantage and also seriously harm our business. In addition, the laws of certain foreign countries may not protect our
intellectual property
rights to
the same
extent as
do the
laws in
countries where
we currently
have patent
protection. Our
means of
protecting our intellectual property rights in countries where we currently have patent or trademark protection, or any other country in
which we operate, may not be
adequate to fully protect our intellectual
property rights. Similarly, if third parties claim that we infringe
their intellectual property rights, we may be required to incur significant costs and
devote substantial resources to the defense of such
claims,
to
discontinue
using
and
selling
any
infringing
technology
and
services,
to
expend
resources
to
develop
non-infringing
technology or
to purchase
licenses or
pay royalties
for other
technology.
In addition,
if we
are unsuccessful
in defending
any such
third-party
claims, we
could
suffer
costly judgments
and
injunctions
that could
materially
adversely
affect
our business,
results of
operations or financial condition.
We
may incur
material losses
in connection
with our
movement of
cash through
our infrastructure
in
South Africa.
In our merchant
business we collect
and process large
volumes of cash
from our customers,
assuming the
risk of loss
from the
moment that cash is
deposited into our vaults.
We are then responsible for its
collection and transportation to
processing centers, which
we outsource to various cash in transit service providers. These services extend
across all areas of South Africa.
South Africa
suffers from
high levels of
crime and in
particular cash in
transit heists. We
cannot insure
against certain risks
of
loss or
theft of
cash from
our delivery
and collection
vehicles and
we will
therefore bear
the full
cost of
certain uninsured
losses or
theft in connection with the cash handling process, and such losses could materially and adversely affect our financial condition, cash
flows and results of operations. We
have not incurred any material losses
resulting from cash distribution in
recent years, but there is
no assurance that we will not incur any such material losses in the future.
We depend upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations,
which could harm our business.
We obtain
our smart cards, ATMs,
POS devices, components for our
safe assets, and the other hardware
we use in our business
from a limited number of
suppliers, and do not
manufacture this equipment ourselves. We generally do not have long-term
agreements
with our manufacturers
or component suppliers.
If our suppliers become
unwilling or unable to
provide us with adequate
supplies of
parts or products when we need
them, or if they increase their
prices, we may not be
able to find alternative sources in
a timely manner
and could be faced
with a critical shortage.
This could harm our
ability to meet customer
demand and cause our
revenues to decline.
Even
if we
are able
to secure
alternative
sources in
a timely
manner,
our costs
could increase
as a
result of
supply or
geopolitical
shocks, which may lead to an increase in the prices of goods and services from third
parties. A supply interruption, such as the current
global shortage of semiconductors, or an increase in
demand beyond current suppliers’ capabilities could harm our ability
to distribute
our equipment and thus
to acquire new customers
who use our technology.
Any interruption in the supply
of the hardware necessary
to operate
our technology,
or our
inability to
obtain substitute
equipment at
acceptable prices
in a
timely manner,
could impair
our
ability to meet the demand of our customers, which would have an adverse
effect on our business.
Our Smart Life business exposes us to risks typically experienced by life assurance companies.
Smart Life is a life insurance company and exposes us to risks typically experienced by life assurance companies. Some of these
risks
include
the
extent
to
which
we
are
able
to
continue
to
reinsure
our
risks
at
acceptable
costs,
reinsurer
counterparty
risk,
maintaining regulatory capital adequacy, solvency and
liquidity requirements, our ability
to price our
insurance products appropriately,
the risk
that actual
claims experience
may exceed
our estimates, the
ability to
recover policy
premiums from
our customers
and the
competitiveness of the South African insurance market. If we are unable to maintain our desired level of reinsurance
at prices that we
consider acceptable, we would have to either
accept an increase in our risk exposure
or reduce our insurance writings. If our reinsurers
are unable
to meet
their commitments
to us
in a
timely manner,
or at
all, we may
be unable
to discharge
our obligations
under our
insurance contracts. As such, we are exposed to counterparty risk, including
credit risk, of these reinsurers.
Our
product
pricing
includes
long-term
assumptions
regarding
investment
returns,
mortality,
morbidity,
persistency
and
operating
costs
and
expenses
of
the
business.
Using
the
wrong
assumptions
to
price
our
insurance
products
could
materially
and
adversely affect our financial
position, results of
operations and cash flows.
If our actual
claims experience is
higher than our
estimates,
as we have seen
during the recent COVID-19 pandemic, our
financial position, results of operations and
cash flows could be
adversely
affected. Finally, the South African
insurance industry is
highly competitive. Many
of our competitors
are well-established, represented
nationally and market similar products and we therefore may not be able to
effectively penetrate the South African insurance market.
15
Risks Relating to Operating in South Africa and Other Foreign Markets
Operating in Southern Africa,
an emerging market, subjects
us to greater risks
than those we would
face
if we operated in more developed markets.
Emerging markets such as
Southern Africa are subject
to greater risks
than more developed markets.
While we focus
our business
primarily
on
emerging
markets
because
that
is
where
we
perceive
the
greatest
opportunities
to
market
our
products
and
services
successfully, the political, economic and market conditions these markets present risks that could make it more difficult to operate our
business successfully.
Some of these risks include:
•
political, legal and economic instability,
including higher rates of inflation and currency fluctuations;
•
high levels of corruption, including bribery of public officials;
•
loss due to civil strife, acts of war or terrorism, guerrilla activities and insurrection;
•
a
lack
of
well-developed
legal
systems
which
could
make
it
difficult
for
us
to
enforce
our
intellectual
property
and
contractual rights;
•
logistical, utilities (including electricity and water supply) and communications
challenges;
•
potential
adverse
changes
in
laws
and
regulatory
practices,
including
import
and
export
license
requirements
and
restrictions, tariffs, legal structures and tax laws;
•
difficulties in staffing and managing operations
and ensuring the safety of our employees;
•
restrictions on the right to convert or repatriate currency or export assets;
•
greater risk of uncollectible accounts and longer collection cycles;
•
indigenization and empowerment programs;
•
exposure to liability under the UK Bribery Act; and
•
exposure to
liability under
U.S. securities
and foreign
trade laws,
including the
Foreign Corrupt
Practices Act,
or FCPA,
and regulations established by the U.S. Department of Treasury’s
Office of Foreign Assets Control, or OFAC.
If
we
do
not
achieve
applicable
Broad-Based
Black
Economic
Empowerment
objectives in
our
South
African businesses, we
may be subject
to fines and
we risk losing
our government and/or
private contracts.
In addition,
it is
possible that
we may
be required
to increase
the Black
shareholding of
our company
in a
manner that
could dilute
your ownership
and/or change
the companies
from which
we purchase
goods or
procure services (to companies with a better BEE Status Level).
The legislative framework for the promotion of Broad-Based Black Economic Empowerment (“BEE”), in South Africa
has been
established through
the Broad-Based
Black Economic
Empowerment
Act, No.
53 of
2003, as
amended from
time to
time, and
the
Amended
BEE
Codes
of
Good
Practice,
2013,
or
BEE
Codes,
and
any
sector-specific
codes
of
good
practice,
or
Sector
Codes,
published pursuant
thereto. Sector
Codes are
fully binding
between and
among businesses
operating in
a sector
for which
a Sector
Code has been
published. Achievement
of BEE objectives
is measured by
a scorecard which
establishes a weighting
for the various
elements. Scorecards
are independently
reviewed by
accredited BEE
verification agencies
which issue
a verification
certificate that
presents an
entity’s
BEE Status
Level. This
BEE verification
process must
be conducted
on an
annual basis,
and the
resultant BEE
verification certificate is only
valid for a period
of 12 months from the
date of issue of the verification
certificate.
We currently
have
a level 5 BEE rating for our South African business.
Certain of our South African
businesses are subject to either
the Amended Information and
Communication Technology
Sector
Code, or ICT Sector Code, or the
Amended Financial Services Sector Code,
or the FS Sector Code. The ICT
Sector Code and the FS
Sector Code have been amended and aligned with the new
BEE Codes and were promulgated in November 2016 and December
2017,
respectively.
Licensing
and/
or
regulation
authorities
overseeing
these
South
African
businesses
may
set
minimum
adherence
requirements to BEE standards as a condition for an operating license to trade
.
The BEE scorecard includes
a component relating to management
control, which serves to determine
the participation of Black
people
within
the
board,
as
well
as
at
various
levels
of
management
within
a
measured
entity
(including,
inter
alia
,
Executive
Management, Senior
Management, Middle
Management and
Junior Management).
The BEE
Codes and/or
Sector Codes
define the
terms
"
Senior
Management
",
"
Middle
Management
"
and
"
Junior
Management
"
as
those
occupational
categories
as
determined
in
accordance
with
the
Employment
Equity
Regulations,
with
specific
emphasis
on
improving
participation
in
proportion
to
the
demographics
of the
Economically Active
Population
of South
Africa,
as published
by Statistics
South
Africa,
from time
to time.
Employment Equity legislation
seeks to drive the
alignment of the workforce
with the racial composition
of the economically active
population
of
South
Africa
and
accelerate
the
achievement
of
employment
equity
targets,
introducing
monetary
fines
for
non-
compliance
with
the Employment
Equity
legislation
and misrepresented
submissions.
Annexure
EEA9
to the
Employment
Equity
Regulations sets out the various occupational levels which are determined in accordance with the relevant grading systems applied by
the measured entity and referred to in said Annexure.
16
We
have taken a
number of actions
as a company
to increase empowerment
of Black (as
defined under applicable
regulations)
South Africans.
For instance,
the South
African competition
authorities approved
the Connect
transaction subject
to certain
public
interest conditions
relating to
employment, increasing
the spread
of ownership
by historically
disadvantaged people
(“HDPs”), and
investing
in both
enterprise and
supplier development.
Further to
increasing the
spread of
ownership
by HDPs,
we are
required
to
establish
an
Employee
Share
Ownership
Plan
scheme
(“ESOP”)
within
36
months
of
the
implementation
of
the
transaction
that
complies with certain design principles. This will benefit the workers of the merged entity and result in them receiving a shareholding
in our
company equal
in value
to at
least 3%
of the
issued shares
in our
company as
of April
14, 2022.
If within
24 months
of the
implementation date of the transaction, we generate a positive net profit for three consecutive quarters, the ESOP shall increase to 5%
of the issued
shares in our company
as of April 14,
2022. The final structure
of the ESOP is
contingent on shareholder
approval and
relevant regulatory and
governance approvals. The
ESOP had not been
established as of the
date of this Annual
Report on Form
10-
K.
During fiscal 2023, we
made a donation to
The Association for Savings
and Investment South Africa (“ASISA”),
an organization
which serves as a unifying force for the South
Africa's asset managers, collective investment scheme
management companies, linked
investment service providers, multi-managers, and life insurance companies. We
provided donations to eight of our suppliers in order
to enable
them to
promote growth
and strengthen
their capacity
to provide
valuable products
and services
to the
market they
serve.
We
also contributed
to a
non-profit organization
that focuses
on education,
health services,
and sports
development in
underserved
communities, and we
believe our contribution
creates a positive impact
on society and promoting
holistic development among
those
who face
challenges in accessing
essential resources.
However,
it is possible
that these actions
may not
be sufficient
to enable us
to
achieve the applicable BEE objectives set out for specific
financial years. In that event, in order to
maintain competitiveness with both
government
and
private
sector
clients,
we
may
have
to
seek
to
increase
compliance
through
other
means,
including
by
selling
or
placing additional
shares of Lesaka
or of our
South African subsidiaries
to Black
South Africans
(either directly
or indirectly),
over
and above what
has already been
approved. Such sales
or placements of
shares could have
a dilutive impact
on your ownership
interest,
which could cause the market price of our stock to decline.
We
expect that our
BEE Status Level
will be important
in order for
us to remain
competitive in the
South African marketplace
and we continually
seek ways to
improve our BEE
Status Level, especially
the ownership element
(so-called “equity element”)
thereof.
We
may not be
able to effectively
and efficiently
manage the disruption
to our operations
as a result
of
erratic electricity supply in
South Africa, which could
adversely affect our, financial position, cash flows
and
future growth.
Our businesses in
South Africa are
dependent on electricity
generated and supplied
by the state-owned
utility,
Eskom, in order
to operate, and Eskom has been unable to generate and
supply the amount of electricity required by the South African economy which
has resulted in significant and
often unpredictable electricity supply disruptions. Eskom has
implemented a number of short- and
long-
term mitigation plans
to correct these issues
but supply disruptions
continue to occur
regularly and with
no predictability.
As part of
our
business continuity
programs, we
have
installed back-up
diesel generators
in order
for
us to
continue
to operate
our
core data
processing
facilities
in
the
event
of
intermittent
disruptions
to
our
electricity
supply.
We
have
to
perform
regular
monitoring
and
maintenance of these
generators and also
source and manage
diesel fuel levels.
We
may also be
required to replace
these generators
on a more frequent basis due to the additional burden placed on them.
Our results of operations, financial position, cash flows
and future growth could be adversely affected if Eskom is
unable to raise
sufficient funding to operate
and/or commission new electricity-generating
power stations in accordance with its
plans, or at all, or if
we are unable to effectively and efficiently test, maintain,
source fuel for, and replace, our generators.
Fluctuations in
the value
of the
South African
rand have
had, and
will continue
to have,
a significant
impact
on
our
reported
results
of
operations,
which
may
make
it
difficult
to
evaluate
our
business
performance between reporting periods and may also adversely affect our stock price.
The South
African rand,
or ZAR,
is the
primary operating
currency for
our business
operations while
our financial
results are
reported in U.S. dollars. Therefore, any depreciation in
the ZAR against the U.S. dollar, would negatively impact
our reported revenue
and net
income. The
U.S. dollar/ZAR
exchange rate
has historically
been volatile
and we
expect this
volatility to
continue (refer
to
Item
7—“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations—Currency
Exchange
Rate
Information.”).
Due
to
the
significant
fluctuation
in
the
value
of
the
ZAR
and
its
impact
on
our
reported
results,
you
may
find
it
difficult to
compare our results
of operations between
financial reporting periods
even though we
provide supplemental information
about our
results of
operations determined
on a
ZAR basis.
Similarly,
depreciation in
the ZAR
may negatively
impact the
prices at
which our stock trades.
We generally do not engage in any currency hedging
transactions intended to reduce the
effect of fluctuations in foreign currency
exchange rates on our results of
operations, other than economic hedging
using forward contracts relating to
our inventory purchases
which are settled in U.S.
dollars or euros. We
cannot guarantee that we will
enter into hedging transactions
in the future or,
if we do,
that these transactions will successfully protect us against currency fluctuations.
17
South Africa’s
high levels of
poverty, unemployment
and crime may
increase our costs
and impair our
ability to maintain a qualified workforce
While South Africa has a highly developed financial and legal infrastructure, it also has high levels of crime and unemployment,
relative to peer
countries in Africa
and other emerging
economies, and there
are significant differences
in the level
of economic and
social development among its people,
with large parts of the population,
particularly in rural areas, having limited
access to adequate
education, healthcare, housing and other
basic services, including water
and electricity. In addition, South Africa has
a high prevalence
of HIV/AIDS and tuberculosis. Government policies aimed at alleviating and redressing the disadvantages suffered by the majority of
citizens
under
previous
governments
may
increase
our
costs and
reduce
our
profitability,
all of
which
could
negatively
affect
our
business.
These
problems
may
prompt
emigration
of
skilled
workers,
hinder
investment
into
South
Africa
and
impede
economic
growth. As a result, we may have difficulties attracting and retaining
qualified employees.
The
economy
of
South
Africa
is
exposed
to
high
rates
of
inflation,
interest
and
corporate
tax,
which
could
increase
our
operating
costs
and
thereby
reduce
our
profitability.
Furthermore,
the
South
African
government requires additional
income to fund
future government
expenditures and may
be required,
among
other things, to
increase existing income
tax rates, including
the corporate income tax
rate, amend existing
tax legislation or introduce additional taxes.
The economy of
South Africa in the
past has been, and
in the future may
continue to be, characterized
by rates of inflation
and
interest that
are substantially
higher than
those prevailing
in the United
States and
other highly-developed
economies. High
rates of
inflation could increase our South African-based costs and decrease our operating margins. High interest rates increase the cost of our
debt financing, though conversely, they also
increase the amount
of income we
earn on any
cash balances. The
South African corporate
income tax rate, of 27%, is higher than the
U.S. federal income tax rate, of 21%. Any increase
in the effective South African corporate
income tax rate would adversely impact our profitability and cash flow generation.
Risks Relating to Government Regulation
We
are required to
comply with
certain laws
and regulations, including
economic and trade
sanctions,
which could adversely impact our future growth.
We
are
subject
to U.S.
and
other
trade
controls,
economic sanctions
and
similar
laws and
regulations,
including
those in
the
jurisdictions
where
we
operate.
Our
failure
to
comply
with
these
laws
and
regulations
could
subject
us
to
civil,
criminal
and
administrative
penalties
and
harm
our
reputation.
These
laws and
regulations
place
restrictions
on
our
operations,
trade
practices,
partners
and
investment
decisions.
In particular,
our operations
are subject
to U.S.
and
foreign
trade
control laws
and
regulations,
including various export controls and economic sanctions programs, such as those administered by OFAC. We monitor compliance in
accordance with
the 10
principles as
set out
in the
United Nations
Global Compact
Principles, the
Organisation
for Economic
Co-
operation and
Development recommendations
relating to
corruption, and
the International
Labor Organization
Protocol in
terms of
certain of the items to be
monitored. As a result of doing business
in foreign countries and with foreign
partners, we are exposed to a
heightened risk of violating trade control laws as well as sanctions regulations.
Violations
of
trade
control
laws and
sanctions
regulations
are
punishable
by civil
penalties,
including
fines,
denial
of export
privileges,
injunctions,
asset seizures,
debarment
from
government
contracts
and revocations
or restrictions
of licenses,
as
well
as
criminal fines and imprisonment.
We have
developed policies and procedures as
part of a company-wide compliance
program that is
designed to
assist our compliance
with applicable
U.S. and international
trade control laws
and regulations,
including trade controls
and sanctions programs administered
by OFAC,
and provide regular training
to our employees to create awareness
about the risks of
violations of trade
control laws and
sanctions regulations and
to ensure compliance
with these laws
and regulations.
However, there
can be no assurance that all of our employees, consultants,
partners, agents or other associated persons will not act in violation
of our
policies and these laws and regulations, or that our policies and
procedures will effectively prevent us from violating these regulations
in every transaction
in which we
may engage, or
provide a defense
to any alleged
violation. In particular,
we may be
held liable for
the actions that our
local, strategic or joint venture
partners take inside or outside
of the United States, even
though our partners may
not be
subject to
these laws.
Such a
violation, even
if our
policies prohibit
it, could
materially and
adversely affect
our reputation,
business,
results
of
operations
and
financial
condition.
Any
expansion
into
developing
countries,
and
our
development
of
new
partnerships and joint venture relationships, could increase the risk
of OFAC violations in the
future.
In addition,
our payment
processing and
financial services
activities are
subject to
extensive
regulation.
Compliance with
the
requirements under the various
regulatory regimes may cause
us to incur significant
additional costs and failure
to comply with such
requirements could result in the shutdown of
the non-complying facility, the imposition of liens, fines and/or civil or
criminal liability.
18
We
are
required
to
comply
with
anti-corruption
laws
and
regulations,
including
the
FCPA
and
UK
Bribery Act, in the
jurisdictions in which we
operate our business, which could
adversely impact our future
growth.
The FCPA prohibits
us from providing anything of value to foreign
officials for the purposes of obtaining or retaining business,
or
securing
any
improper
business
advantage,
and
requires
us
to
keep
books
and
records
that
accurately
and
fairly
reflect
our
transactions.
As part
of
our
business,
we
may
deal
with
state-owned
business
enterprises,
the
employees
of
which
are
considered
foreign
officials
for
purposes of
the FCPA.
The UK
Bribery
Act includes
provisions
that extend
beyond bribery
of foreign
public
officials and also apply to
transactions with individuals not employed
by a government and
the act is also
more onerous than the FCPA
in a number of other respects, including
jurisdiction, non-exemption of facilitation
payments and penalties. Some of the international
locations in which we operate or have investments lack a developed
legal system and have higher than normal levels of corruption.
Any
failure
by
us
to
adopt
appropriate
compliance
procedures
and
ensure
that
our
employees,
agents
and
business
partners
comply with
the anti-corruption
laws and
regulations could
subject us
to substantial
penalties, and
the requirement
that we
comply
with these laws could
put us at a
competitive disadvantage against
companies that are not
required to comply.
For example, in many
emerging
markets,
there
may be
significant
levels
of official
corruption,
and
thus, bribery
of public
officials
may
be
a comm
only
accepted cost
of doing
business. Our
refusal to
engage in
illegal behavior,
such as
paying bribes,
may result
in us not
being able
to
obtain business that we
might otherwise have been able
to secure or possibly
even result in unlawful,
selective or arbitrary action being
taken against us.
Violations of anti-corruption laws and regulations are punishable by civil penalties, including fines, as well as criminal fines and
imprisonment. We
have developed policies
and procedures as part
of a company-wide
compliance program that
is designed to assist
our compliance with applicable U.S.,
South African and other international
anti-corruption laws and regulations,
and provide regular
training to our
employees to comply
with these laws
and regulations. However,
there can be
no assurance that
all of our
employees,
consultants, partners, agents or other associated persons will not take actions in violation of our policies or
these laws and regulations,
or that our
policies and procedures
will effectively prevent
us from violating
these regulations in every
transaction in which
we may
engage, or
provide a defense
to any alleged
violation. In
particular,
we may be
held liable for
the actions
that our
local, strategic
or
joint venture
partners take inside
or outside
of the United
States, even though
our partners may
not be subject
to these
laws. Such a
violation,
even
if
our
policies
prohibit
it,
could
materially
and
adversely
affect
our
reputation,
business,
results
of
operations
and
financial condition.
We
do not
have a South
African banking license
and, therefore, we
provide our EPE
solution through
an arrangement with
a third-party bank,
which limits our
control over this
business and the
economic benefit
we derive from it.
If this arrangement were
to terminate, we would
not be able to operate
our EPE business
without alternate means of access to a banking license.
The
South
African
retail
banking
market
is
highly
regulated.
Under
current
law
and
regulations,
our
EasyPay
Everywhere
(“EPE”) business activities require
us to be registered as
a bank in South Africa
or to have access to an
existing banking license.
We
are not currently so registered,
but we have an agreement
with Grindrod Bank, a subsidiary
of African Bank Limited, that
enables us
to implement
our EPE
program in
compliance
with the
relevant laws
and regulations.
If this
agreement
were to
be terminated,
we
would
not
be
able
to
operate
these
services
unless
we
were
able
to
obtain
access
to
a
banking
license
through
alternate
means.
Furthermore, we
have to
comply with
the strict
anti-money laundering
and customer
identification regulations
of the South
African
Reserve Bank (“SARB”),
when we open
new bank accounts
for our customers
and when they
transact. Failure to
effectively implement
and monitor responses to these regulations may result in significant fines or prosecution
of Grindrod Bank and ourselves.
In
addition,
the
South
African
Financial
Advisory
and
Intermediary
Services
Act,
2002,
requires
persons
who
act
as
intermediaries between financial product suppliers and consumers
in South Africa to register
as financial service providers. Smart
Life
was granted an Authorized Financial Service Provider, or FSP,
license on June 9, 2015, and EasyPay Financial Services (Pty) Ltd and
Net1
Mobile
Solutions
(Pty) Ltd
were
each granted
FSP licenses
on
July
11,
2017.
If
our
FSP licenses
are
cancelled,
we
may
be
stopped from continuing our financial
services businesses in South Africa
unless we are able
to enter into a
representative arrangement
with a third party FSP.
Furthermore, the proposed
Conduct of Financial
Institutions Bill will make
significant changes to
the current licensing
regime.
The second
draft of
the Conduct
of Financial
Institutions Bill
was published
for public
comment on
29 September
2020. While
the
proposals currently
indicate that
existing licenses
will be converted,
if we are
not successful in
our efforts
to obtain
a conversion
of
the existing
licenses or
cannot comply
with the
new conduct
standards to
be published
at the
same time
under the
Financial Sector
Regulation Act, No. 9 of 2017, we may be stopped from continuing
our financial services businesses in South Africa.
19
We
may
be
subject
to
regulations
regarding
privacy,
data
use
and/or
security,
which
could
adversely
affect our business.
We are
subject to regulations in
a number of the countries
in which we operate
relating to the processing
(which includes,
inter
alia
, the collection, use, retention, security and transfer) of
personal information about the people (whether natural or juristic)
who use
our products
and services.
The interpretation
and application
of user
data protection
laws are
in a
state of
flux. These
laws may
be
interpreted
and
applied
inconsistently
from
country
to
country
and
our
current
data
protection
policies
and
practices
may
not
be
consistent with those interpretations and applications. Complying
with these varying requirements could cause us to incur
substantial
costs or
require us
to change
our business
practices in
a manner
adverse to
our business.
Any failure,
or perceived
failure, by
us to
comply with any regulatory requirements or international
privacy or consumer protection-related laws and regulations could
result in
proceedings
or
actions
against
us
by
governmental
entities
or
others,
subject
us
to
significant
penalties
and
negative
publicity.
In
addition, as
noted above,
we are
subject to
the possibility
of security
breaches, which
themselves may
result in
a violation
of these
laws.
Amendments to
the NCA
were signed into
law in
South Africa
in August 2019.
Compliance with
these
amendments may adversely impact our micro-lending operations in South Africa.
In August 2019, the National Credit Amendment Bill, or debt-relief bill, was signed into law in South Africa.
The effective date
of the debt-relief
bill has not
yet been announced
and has been
significantly delayed.
We
believe that the
debt-relief bill will
restrict
the ability of financial services providers to provide lending
products to certain low-income earners and will increase the
cost of credit
to
these
consumers.
As a
result,
compliance
with
the debt
-relief
bill
may
adversely
impact
our
micro-lending
operations
in
South
Africa. Furthermore, we expect that it will take us, and other financial services providers, some time to fully understand, interpret and
implement this new legislation in
our lending processes and practices.
Non-compliance with the provisions of this
new legislation may
result in financial loss and penalties, reputational loss or other administrative
punishment.
Risks Relating to our Common Stock
If we were
deemed an “investment
company” under the
Investment Company Act,
applicable restrictions
could make it impractical for
us to conduct our business as
an operating company and could
have a material
adverse effect on our business.
We
are an operating
company whose business is
focused on developing
and offering payment
solutions, transaction processing
services and financial technologies across
multiple industries directly and through
our wholly-owned subsidiaries. Our conduct,
public
filings and
announcements
hold us
out as
such an
operating
company
and
do not
hold
us out
as being
engaged
in the
business of
investing, reinvesting or trading
in securities. We own, and
in the
past have owned,
certain assets that
may be deemed
to be
“investment
securities” within
the meaning
of Section
3(a)(2) of
the Investment
Company
Act. The
fluctuating
value of
our assets
that may
be
deemed to be investment securities, could cause us to be deemed to be an
“investment company” under the Investment Company Act
if the value of such investment securities exceeds certain defined thresholds.
If we are deemed
an investment company
and not entitled to
an exception or
exemption from registration
under the Investment
Company Act, we would have to register as
an investment company, modify our asset profile or otherwise change our business so that
it falls outside
the definition
of an investment
company under the
Investment Company
Act. Registering as
an investment
company
pursuant to
the Investment
Company Act
could, among
other things,
materially limit
our ability
to borrow
funds or
engage in
other
transactions and
otherwise would
subject us
to substantial
and costly
regulation. Failure
to register,
if required,
would significantly
impair our ability to continue to engage in our business and would have a material
adverse impact on our business and operations.
Our stock price has been and may continue to be volatile.
Our stock price has periodically experienced significant volatility. During the 2023 fiscal year, our stock
price ranged from a low
of $3.02 to a high of $5.97. We
expect that the trading price of our common stock may
continue to be volatile as a result of a number
of factors, including, but not limited to the following:
•
any adverse developments in litigation or regulatory actions in which we are
involved;
•
fluctuations in currency exchange rates, particularly the U.S. dollar/ZAR exchange
rate;
•
announcement
of
additional
BEE
transactions,
especially
one
involving
the
issuance
or
potential
issuance
of
equity
securities or dilution or sale of our existing business in South Africa;
•
quarterly variations in our operating results;
•
significant fair value adjustments or impairment in respect of investments or
intangible assets;
•
announcements of acquisitions or disposals;
•
the timing of, or delays in the commencement, implementation or completion
of major projects;
•
large purchases or sales of our common stock; and
•
general conditions in the markets in which we operate.
20
Additionally,
shares of
our common
stock can
be expected
to be
subject to
volatility resulting
from purely
market forces
over
which we have no control.
The put
right we granted
to the IFC
Investors on the
occurrence of certain
triggering events may
have
adverse impacts on us.
In May
2016, we
issued an
aggregate of
9,984,311
shares of
our common
stock to
the IFC Investors,
of which,
as of
June 30,
2023,
the
IFC
Investors
held
7,366,866
shares.
We
granted
the
IFC
Investors
certain
rights,
including
the
right
to
require
us
to
repurchase
any
share held
by the
IFC Investors
pursuant
to
the
May
2016 transaction
upon
the occurrence
of specified
triggering
events,
which
we refer
to as
a
“put
right.”
The put
price
per share
will be
the higher
of the
price
per share
paid
to us
by
the IFC
Investors and
the volume-weighted
average price
per share prevailing
for the 60
trading days preceding
the triggering
event, except
that with respect
to a put right
triggered by rejection
of a bona
fide offer,
the put price
per share will
be the highest
price offered
by
the offeror.
If a put triggering event occurs, it could adversely impact
our liquidity and capital resources. In addition, the
existence of
the put right could also affect whether or on what terms a third party might in the future offer to purchase our company.
Our response
to any such offer could also be complicated, delayed or otherwise influenced
by the existence of the put right.
Approximately
37%
of
our
outstanding
common
stock
is
owned by
two shareholders.
The
interests of
these shareholders may conflict with those of our other shareholders.
There is a concentration of ownership
of our outstanding common stock because
approximately 37% of our outstanding common
stock is owned by two
shareholders. Based on their most
recent SEC filings disclosing
ownership of our shares, Value Capital Partners
(Pty) Ltd, or VCP,
and IFC Investors, beneficially own approximately 25% and 12% of our outstanding common
stock as of June 30,
2023, respectively.
The interests of
VCP and the
IFC Investors may
be different
from or conflict
with the interests
of our other
shareholders. As a
result of
the significant
combined ownership
by VCP
and the
IFC Investors,
they may
be able,
if they
act together,
to significantly
influence the
voting outcome
of all
matters requiring
shareholder approval.
This concentration
of ownership
may have
the effect
of
delaying or preventing
a change of control of
our company,
thus depriving shareholders
of a premium for
their shares, or facilitating
a change of control that other shareholders may oppose.
We may seek to raise
additional financing by
issuing new securities
with terms or
rights superior to
those
of shares of our common stock, which could adversely affect the market price of such shares.
We
may require
additional financing
to fund future
operations, including
expansion in
current and new
markets, programming
development and acquisition,
capital costs and
the costs of any
necessary implementation of
technological innovations or
alternative
technologies, or to fund acquisitions. We may also wish to raise additional equity funding to
reduce the amount of debt funding on our
balance sheet. Because of the exposure to market risks associated
with economies in emerging markets, we may not
be able to obtain
financing on favorable terms or at all.
If we raise additional funds by
issuing equity securities, the percentage ownership of our
current
shareholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of
common stock,
which could
adversely affect
the market
price and
voting power
of shares
of common
stock. If
we raise
additional
funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior
to those of the holders of
shares of common stock, and the terms of these debt securities could impose restrictions on operations and
create a significant interest
expense for us.
Issuances
of significant
amounts of
stock in
the future
could potentially
dilute
your equity
ownership
and adversely affect the price of our common stock.
We
believe that
it is necessary
to maintain
a sufficient
number of
available authorized
shares of our
common stock
in order
to
provide
us
with
the flexibility
to
issue shares
for
business
purposes
that
may
arise
from time
to
time.
For example,
we
could
sell
additional shares to raise
capital to fund our
operations, to reduce debt
or to acquire other
businesses, issue shares in
a BEE transaction,
issue additional shares under our stock incentive plan or declare a stock dividend. Our board may authorize
the issuance of additional
shares of common stock without notice to, or further
action by, our shareholders, unless shareholder approval is required by law or the
rules of the NASDAQ Stock
Market. The issuance of additional
shares could dilute the equity
ownership of our current shareholders
and any such additional shares would likely be freely tradable, which could
adversely affect the trading price of our common
stock.
21
Failure to maintain effective internal control over financial
reporting in accordance with Section 404
of the
Sarbanes-Oxley
Act, especially
over companies
that we
may acquire,
could have
a material
adverse
effect on our business and stock price.
Under Section 404
of the Sarbanes-Oxley
Act of 2002,
or Sarbanes, we
are required to
furnish a management
certification and
auditor attestation regarding the
effectiveness of our internal
control over financial reporting.
We are
required to report, among other
things, control deficiencies that constitute a “material weakness”
or changes in internal control that
materially affect, or are reasonably
likely
to
materially
affect,
internal
control
over
financial
reporting.
A
“material
weakness”
is
a
deficiency,
or
a
combination
of
deficiencies, in internal
control over financial
reporting such that
there is a
reasonable possibility that
a material misstatement
of annual
or interim financial statements will not be prevented or detected on
a timely basis.
The
requirement
to
evaluate
and
report
on
our
internal
controls
also
applies
to
companies
that
we
acquire.
Some
of
these
companies may not
be required
to comply with
Sarbanes prior
to the
time we
acquire them.
The integration of
these acquired
companies
into our internal
control over financial
reporting could require
significant time and
resources from our
management and other
personnel
and may increase our compliance costs.
If we fail to successfully
integrate the operations of these
acquired companies into our internal
control over financial reporting, our internal control over financial reporting
may not be effective.
While
we
continue
to
dedicate
resources
and
management
time
to
ensuring
that
we
have
effective
controls
over
financial
reporting, failure to
achieve and maintain
an effective internal
control environment could
have a material
adverse effect on
the market’s
perception of our business and our stock price.
You
may
experience
difficulties
in
effecting
service
of
legal
process,
enforcing
foreign
judgments
or
bringing
original
actions
based
upon
U.S.
laws,
including
federal
securities
laws
or
other
foreign
laws,
against us or certain of our directors and officers and experts.
While Lesaka is incorporated in the state of Florida, United States, the company is headquartered in Johannesburg, South Africa
and substantially all of the company’s
assets are located outside the United
States. In addition, the majority of
Lesaka’s directors
and
all
its
officers
reside
outside
of
the
United
States
and
the
majority
of
our
experts,
including
our
independent
registered
public
accountants, are based in South Africa.
As a
result, even
though you
could effect
service of
legal process
upon Lesaka,
as a
Florida corporation,
in the
United States,
you may not be able
to collect any judgment obtained
against Lesaka in the United
States, including any judgment based
on the civil
liability
provisions
of
U.S.
federal
securities
laws,
because
substantially
all
of
our
assets
are
located
outside
the
United
States.
Moreover, it may not be possible for
you to effect service of legal process upon the majority of
our directors and officers or upon our
experts within
the United
States or
elsewhere outside
South Africa
and any
judgment obtained
against any
of our
foreign directors,
officers and experts in
the United States, including
one based on the
civil liability provisions of the
U.S. federal securities laws,
may
not be collectible in the United States and may not be enforced by a South
African court.
South Africa
is not
a party
to any
treaties regarding
the enforcement
of foreign
commercial judgments,
as opposed
to foreign
arbitral awards. Accordingly, a foreign judgment that
is not recognized in
South Africa has
no extra territorial effect, and
is not directly
enforceable in South Africa, but
constitutes a cause of action
which may be recognized and enforced
by South African courts provided
that:
•
the court which
pronounced the judgment
had international jurisdiction
and competence to entertain
the case according to
the principles recognized by South African law with reference to the jurisdiction
of foreign courts;
•
the judgment is final and conclusive (that is, it cannot be altered by the court which
pronounced it);
•
the judgment has not lapsed;
•
the recognition and
enforcement of the
judgment by South African
courts would not
be contrary to public
policy in South
Africa, including observance of the rules of natural justice which require
that no award is enforceable unless the defendant
was duly served with documents
initiating proceedings, that he
or she was given a
fair opportunity to be
heard and that he
or she enjoyed the right to be legally represented in a free and fair trial before an impartial
tribunal;
•
the judgment was not obtained by improper or fraudulent means;
•
the
judgment
does
not involve
the
enforcement
of a
penal
or
foreign
revenue
law or
any
award
of multiple
or punitive
damages; and
•
the enforcement of the judgment is not otherwise precluded by the provisions of
the Protection of Business Act 99 of 1978
(as amended), of the Republic of South Africa.
It has been the policy
of South African courts to award
compensation for the loss or damage
actually sustained by the person
to
whom the compensation is awarded. South African courts have awarded compensation to shareholders who have suffered damages as
a result
of a
diminution in
the value
of their
shares based
on various
actions by
the corporation
and its
management. Although
the
award
of punitive
damages
is generally
unenforceable
in the
South
African legal
system, that
does not
mean
that such
awards are
necessarily
contrary
to
public
policy.
The
award
of
punitive
damages
is
governed
by
the
relevant
South
African
legislation,
the
Conventional Penalties Act 15 of 1962 (as amended).
22
Whether a judgment
was contrary to
public policy
depends on the
facts of each
case. Exorbitant,
unconscionable, or
excessive
awards will generally be contrary to public policy. South African courts cannot enter into the merits of a foreign judgment and cannot
act as a court of appeal or review over the foreign court. Further, if a foreign judgment is enforced by a South African court,
it will be
payable in South African currency unless approval is obtained from SARB or an Authorised Dealer of SARB, to settle the judgement
in another
currency.
Also, under
South Africa’s
exchange control
laws, the
approval of
SARB or
an Authorised
Dealer is
required
before a defendant
resident in South Africa
may pay money to
a non-resident plaintiff
in satisfaction of a
foreign judgment enforced
by a court in South Africa.
It is
doubtful
whether an
original action
based on
United States
federal
securities laws
may
be brought
before South
African
courts. A plaintiff who
is not resident in South Africa may
be required to provide security for
costs in the event of proceedings being
initiated in
South Africa.
Furthermore, the
Rules of
the High
Court of
South Africa
require that
documents executed
outside South
Africa must be authenticated for the purpose of use in South African courts. In reaching the foregoing conclusions in respect of South
Africa, we consulted with our South African legal counsel, Werksmans
Inc.
23
ITEM 1B.
UNRESOLVED
STAFF COMMENTS
None.