Item 2. Management’s Discussion and Analysis
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, 2023,
and the unaudited condensed consolidated financial statements and
the accompanying notes included in this Form 10-Q.
U.S. securities laws
require that when
we publish any
non-GAAP measures, we
disclose the reason
for using these
non-GAAP
measures
and
provide
reconciliations
to
the
most
directly
comparable
GAAP
measures.
We
discuss
why
we
consider
it
useful
to
present these non
-GAAP measures and
the material risks
and limitations of
these measures, as
well as a
reconciliation of these
non-
GAAP measures
to the
most directly
comparable GAAP
financial measure
below at
“—Results of
Operations—Use of
Non-GAAP
Measures” below.
Forward-looking statements
Some of the statements in this Form 10-Q constitute forward-looking
statements. These statements relate to future events or our
future financial performance
and involve known
and unknown
risks, uncertainties and
other factors that
may cause
our or our
industry’s
actual results,
levels of
activity,
performance
or achievements
to be
materially
different
from
any future
results, levels
of
activity,
performance or achievements expressed,
implied or inferred by these
forward-looking statements. Such factors
include, among other
things, those
listed under Item
1A.—“Risk Factors” in
our Annual
Report on Form
10-K for
the year ended
June 30, 2023.
In some
cases,
you
can
identify forward-looking
statements
by terminology
such as
“may,”
“will,” “should,”
“could,”
“would,”
“expects,”
“plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms
and other
comparable terminology.
Although we believe
that the expectations
reflected in the
forward-looking statements are
reasonable, we do
not know whether
we can
achieve positive
future results,
levels of
activity,
performance, or
goals. Actual
events or
results may
differ
materially.
We
undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform those statements
to reflect the occurrence of unanticipated events, except as required by applicable
law.
You
should read this Form 10-Q and the documents that we reference herein and the documents we have filed as exhibits hereto
and
thereto
and
which
we
have
filed
with
the
United
States
Securities
and
Exchange
Commission
completely
and
with
the
understanding that our
actual future results,
levels of activity,
performance and achievements
may be materially
different from
what
we expect. We
qualify all of our forward-looking statements by these cautionary
statements.
Recent Developments
We
experienced
continued improvement
in our
financial performance
in the
first quarter
of fiscal
2024 as
a result
of positive
operational momentum in both of our Merchant and Consumer divisions.
Revenue
of
$136.1
million
(ZAR
2.5
billion)
was
at
the
upper
end
of
our
revenue
guidance
despite
prevailing
negative
macroeconomic and socio-political conditions in South Africa.
We
reached
an
important
milestone
this
quarter,
with
operating
income
turning
positive
to
$0.2
million
(ZAR
4.2
million),
compared
with
an
operating
loss
of
$4.7
million
(ZAR
80.0
million)
during
the
first
quarter
of
fiscal
2023.
We
delivered
Group
Adjusted EBITDA,
a non-GAAP measure,
of ZAR 162.5
million ($8.7 million)
this quarter,
compared to Group
Adjusted EBITDA
of ZAR 71.9
million ($4.2
million) in
fiscal 2023.
The continued
resilience of
our business model
in a challenging
environment for
our merchant and consumer customers demonstrates the value they place
on our services.
Our mission at Lesaka is
to enable merchants to compete and
grow, and to improve the lives of
South Africa’s grant beneficiaries
by providing access
to innovative financial
technology and value
creating solutions. We
achieve this through our
vision to build
and
operate the
leading full-service
fintech platform
in Southern
Africa, offering
cash management,
payment processing,
Value
Added
Services (“VAS”),
capital and financial services to merchants and underserved consumers.
Merchant Division
The year-on-year
growth achieved
by our
Merchant Division
is supported
by the
robust secular
trends underpinning
financial
inclusion, cash management
and digitalization for
micro, small
and medium enterprises
(“MSMEs”), especially in
the informal markets
of South Africa, where we have a leading market position.
38
Performance in our Merchant division has been driven by:
●
Kazang, our VAS
and supplier payments business,
continues to see adoption
by MSMEs in the informal
sector, with a
34%
year-on-year growth in the number of devices
deployed. We had approximately 77,000 devices deployed as of September
30,
2023,
compared
to
approximately
57,000
devices
one
year ago.
We
experienced
a
slight slowdown
in
net
device
growth
during our current quarter, growing by
just over 2,000 devices.
o
The reason
for the
slight slowdown
in net
growth is
attributed to
a more
selective device
placement strategy
that
followed
the
six
month
period
to
March
31,
2023,
during
which
we
installed
a
significant
number
of
devices
at
informal merchants to support their supplier payments to three major FMCG companies in South Africa. Following
that accelerated roll out program we have prioritised deployment at merchants where we can sell more products and
services through
the channel
and earn
higher margins.
Therefore, during
the fourth
quarter of
fiscal 2023
and the
first quarter of fiscal 2024 we focused on optimising this new fleet and removing sub-optimal
devices.
o
As communicated in the fourth quarter of fiscal 2023, our product mix for VAS
sales has changed with low-margin
money
transfers
reducing
significantly,
currently
approximately
5%
of
VAS
throughput
is
money
transfers,
compared to approximately 30% a year ago. The impact on overall profitability
has not been material.
●
We
provide card acquiring
solutions in the informal
sector via Kazang
Pay and in
the formal sector we
provide this service
through Card
Connect. Card-enabled
POS devices increased
to approximately
46,600 as of
September 30,
2023, compared
to approximately 27,700 a year ago, a growth of 68% in deployed devices;
●
Our Merchant Credit
offering includes Capital Connect
in the
formal market and
Kazang Pay Advance
in the informal
market.
We
disbursed ZAR
196 million during
this quarter,
compared to approximately
ZAR 226 million
in the comparable
period
last year, representing a 13% decrease.
In the formal market we continue to see demand for our
merchant credit offering but
as previously disclosed,
we experienced a
slight pullback in
credit extension in
this business
since March 2023
as we
tightened
our
credit
criteria
in
response
to
the
higher
interest
rate
and
inflationary
pressures
in
the
South
African
economy.
In
the
informal
market, as
we innovate
and
execute quickly
in the
Merchant
Division, we
have decided
the current
Kazang Pay
Advance credit product is not suitable to continue with, especially in the high interest rate environment,
and have suspended
it,
while
we
explore
other
options
with
respect
to
our
Kazang
Pay
Advance
offering.
Overall,
Kazang
Pay
Advance
has
generated positive returns despite recent losses incurred being greater
than expected. A reduction in origination of
new loans,
loan book and disbursements is primarily a result of the decision to
suspend Kazang Pay Advance during the period but was
also partially impacted by the slight pull back in credit
extension in Capital Connect.
●
Our
automated
cash management
offering,
Cash Connect,
effectively
puts
the “bank”
in approximately
4,400
merchants’
stores, compared
to approximately
4,200 merchants’
stores a year
ago. Cash
Connect is
a provider
of robust
cash vaults
in
the formal
sector and
is building
a presence
in the
informal sector.
Cash Connect
enables our
merchant
customer base
to
significantly mitigate their
operational risks pertaining
to cash
management and security. Our
new ATM recycler is generating
strong interest,
and this business
has been
transferred to
our Merchant
Division, where
it has been
fully integrated
into our
Cash Connect proposition as an alternative to vaults for our merchant
customers.
Consumer Division
Over the past five quarters we have consistently referenced the three levers underpinning our strategy of returning the Consumer
Division to profitability – (i) growing active EasyPay Everywhere (“EPE”) account numbers, (ii) increasing average revenue per
user
(“ARPU”) through cross-selling and (iii) cost optimization.
The progress on our three key initiatives is as follows:
●
Driving customer acquisition
o
Our total
active EPE
transactional
account base
stood at
more than
1.3 million
at the
end of
September 2023,
of
which more than
1.1 million (or
more than 85%)
are permanent grant
recipients. The balance
comprises Social Relief
of Distress (“SRD”) grant
recipients, which was introduced
during the COVID pandemic and
extended in calendar
2023.
o
Our priority
is to grow
our permanent
grant recipient
customers base,
where we
can build
deeper relationships
by
offering other products such as insurance and lending. We do not offer the same breadth of service to the SRD grant
base due
to the
temporary nature
of the
grant. Gross
EPE account
activations, for
the permanent
base, during
our
current
quarter
showed
significant
improvement
due
to
various
strategic
initiatives.
We
achieved
approximately
76,000 gross account activations in
the first quarter, compared
to approximately 45,000 in the first
quarter of fiscal
2023.
After
adjusting
for
account
churn,
net
active
account
growth
for
the
quarter
was
approximately
42,000
accounts, compared to approximately 2,700 in first quarter of fiscal 2023
39
●
Progress on cross
selling
EasyPay Loans
o
We
originated
approximately 222,000
loans during
the quarter
with our
consumer loan
book, before
allowances,
increasing 20% to
ZAR 423 million
as at September
30, 2023, compared
to ZAR 351
million as of
September 30,
2022.
o
We have not
amended our credit scoring or other lending criteria to grow our Consumer lending book.
o
The
loan
conversion
rate
continues
to
improve
following
the
implementation
of
a
number
of
targeted
consumer
lending campaigns during the current quarter.
o
The portfolio loss ratio,
calculated as the loans
written off during the
period as a percentage
of the total loan book,
remains flat at approximately 6% on an annualized basis, compared to the fourth
quarter of fiscal 2023.
EasyPay Insurance
o
Our insurance product sales continue to grow and
is a material contributor to the
improvement in our overall ARPU.
We
have been able
to improve customer penetration
to more than 30%
of our active permanent
grant account base
as of September
30, 2023, compared
to below 25% as
of September 30, 2022.
Approximately 37,500 new
policies
were written
in the
quarter,
compared to
approximately 25,000
in the
comparable period
in fiscal
2023. The
total
number of active policies has
grown by 34% to approximately
359,000 policies as of September
30, 2023, compared
to September 30, 2022.
ARPU
o
ARPU
for
our
permanent
client
base
has
increased
to
above
ZAR
83
for
the
first
quarter
of
fiscal
2024,
from
approximately ZAR 74 in the first quarter of fiscal 2023.
Economic Environment and Impact of loadshedding
Overall, we have
seen no significant change
in the operating environment
during the quarter.
The trading environment
remains
challenging
in
South
Africa
with
interest
rates,
inflation
and
unemployment
remaining
at
elevated
levels.
These
factors
are
compounded by daily power cuts (known as load-shedding
in South Africa), although we did see a reduction in load shedding
during
this quarter. Power disruptions adversely impact our customers, especially in our Merchant Division, where they lose valuable trading
hours if they
do not have
access to alternative power
supplies and back-up
facilities to process electronic
payments and value-added
services.
The
negative
impact
is,
however,
to
some
extent
mitigated
as
our
customer
base
is
geographically
diversified,
and
the
rotational nature
of load-shedding
results in
localized power
cuts over
shorter time
periods, allowing
merchants to
make up
for lost
trading hours.
Notwithstanding
the
challenging
operating
environment,
our
Merchant
and
Consumer
Divisions
continue
to
demonstrate
the
resilience of our business model, which is firmly underpinned by the relevance
and value of our offering to our target
market.
Critical Accounting Policies
Our unaudited condensed consolidated
financial statements have been
prepared in accordance with U.S.
GAAP,
which requires
management
to
make
estimates
and
assumptions
about
future
events
that
affect
the
reported
amount
of
assets
and
liabilities
and
disclosure
of
contingent
assets and
liabilities.
As future
events
and
their
effects
cannot be
determined
with
absolute
certainty,
the
determination
of
estimates
requires
management’s
judgment
based
on
a
variety
of
assumptions
and
other
determinants
such
as
historical experience, current and expected market conditions and certain scientific evaluation techniques. Critical accounting policies
are those
that reflect
significant judgments
or uncertainties
and may
potentially result
in materially
different
results under
different
assumptions
and
conditions.
We
have
identified
the
following
critical
accounting
policies that
are
described
in
more
detail
in
our
Annual Report on Form 10-K for the year ended June 30, 2023:
●
Business Combinations and the Recoverability of Goodwill;
●
Intangible Assets Acquired Through Acquisitions;
●
Revenue recognition – principal versus agent considerations;
●
Valuation
of investment in Cell C;
●
Recoverability of equity securities and equity-accounted investments;
●
Deferred Taxation;
●
Stock-based Compensation;
●
Accounts Receivable and Allowance for Doubtful Accounts Receivable;
and
●
Lending.
40
Recent accounting pronouncements adopted
Refer to Note
1 to
our unaudited condensed
consolidated financial statements
for a full
description of accounting
pronouncements
adopted, including the dates of adoption and the effects on
our unaudited condensed consolidated financial statements.
Recent accounting pronouncements not yet adopted
as of September 30, 2023
Refer
to
Note
1
to
our
unaudited
condensed
consolidated
financial
statements
for
a
full
description
of
recent
accounting
pronouncements
not
yet
adopted
as
of
September
30,
2023,
including
the
expected
dates
of
adoption
and
effects
on
our
financial
condition, results of operations and cash flows.
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and at the end of the periods presented were
as follows:
Table 1
Three months ended
Year
ended
September 30,
June 30,
2023
2022
2023
ZAR : $ average exchange rate
18.6457
17.0201
17.7641
Highest ZAR : $ rate during period
19.2202
18.0545
19.7558
Lowest ZAR : $ rate during period
17.6278
16.2035
16.2034
Rate at end of period
18.9236
18.0126
18.8376
Translation exchange
rates for financial reporting purposes
We are required
to translate our results of operations from ZAR to U.S. dollars on a monthly basis.
Thus, the average rates used
to translate
this data
for the
three months
ended September
30, 2023
and 2022,
vary slightly
from the
averages shown
in the
table
above.
Except
as
described
below,
the
translation
rates
we
use
in
presenting
our
results
of
operations
are
the
rates
shown
in
the
following table:
Three months ended
Year
ended
Table 2
September 30,
June 30,
2023
2022
2023
Income and expense items: $1 = ZAR
18.7088
17.1307
17.9400
Balance sheet items: $1 = ZAR
18.9236
18.0126
18.8376
41
We have translated the results of operations
and operating segment information for the three months ended September 30, 2023,
provided in the
tables below using
the actual average
exchange rates per
month (i.e. for
each of July
2023, August 2023,
and September
2023) between the USD and ZAR in order to
reduce the reconciliation of information presented to our chief
operating decision maker.
The impact
of using
this method
compared with
the average
rate for
the quarter
is not
significant, however,
it does
result in
minor
differences.
We
believe that
presentation using
the average exchange
rates per
month compared
with the
average exchange
rate per
quarter improves the accuracy of the information presented
in our external financial reporting and leads to fewer differences
between
our external reporting measures which are supplementally presented in ZAR, and our internal management information, which is also
presented in ZAR.
Results of Operations
The discussion
of our
consolidated overall
results of
operations is
based on
amounts as
reflected
in our
unaudited condensed
consolidated financial
statements which
are prepared
in accordance
with U.S.
GAAP.
We
analyze our
results of
operations both
in
U.S. dollars, as presented in the unaudited condensed consolidated
financial statements, and supplementally in ZAR, because ZAR is
the functional
currency of
the entities
which contribute
the majority
of our
results and
is the
currency in
which the
majority of
our
transactions
are
initially
incurred
and
measured.
Presentation
of our
reported
results
in ZAR
is a
non-GAAP
measure.
Due
to
the
significant impact of currency
fluctuations between the U.S.
dollar and ZAR on
our reported results and because
we use the U.S.
dollar
as our reporting
currency,
we believe that
the supplemental presentation
of our results
of operations in
ZAR is useful
to investors to
understand the changes in the underlying trends of our business.
Our
operating
segment
revenue
presented
in
“—Results
of
operations
by
operating
segment”
represents
total
revenue
per
operating segment before intercompany
eliminations. A reconciliation between
total operating segment revenue and
revenue, as well
as
the
reconciliation
between
our
segment
performance
measure
and
net
loss
before
tax
(benefits)
expense,
is
presented
in
our
unaudited condensed consolidated financial
statements in Note
17 to those
statements. Our chief
operating decision maker
is our
Group
Chief
Executive
Officer
and
he
evaluates
segment
performance
based
on
segment
earnings
before
interest,
tax,
depreciation
and
amortization
(“EBITDA”),
adjusted
for
items
mentioned
in
the
next
sentence
(“Segment
Adjusted
EBITDA”)
for
each
operating
segment.
We
do not
allocate once
-off
items (as
defined below),
stock-based
compensation charges,
depreciation
and amortization,
impairment of goodwill or
other intangible assets, certain
lease charges (“Lease
adjustments”), other items (including
gains or losses
on disposal
of investments,
fair value
adjustments to
equity securities,
fair value
adjustments to
currency options),
interest income,
interest expense, income tax expense or loss
from equity-accounted investments to our reportable segments. Once-off items
represents
non-recurring
expense
items,
including
costs related
to
acquisitions
and
transactions
consummated
or ultimately
not pursued.
The
Lease adjustments reflect lease charges and the Stock-based compensation adjustments reflect stock-based compensation expense and
are both excluded from the calculation of Segment Adjusted EBITDA and
are therefore reported as reconciling items to reconcile the
reportable segments’ Segment Adjusted EBITDA to our loss before income
tax expense.
Group
Adjusted
EBITDA
represents
Segment
Adjusted
EBITDA
after
deducting
group
costs.
Refer
also
“Results
of
Operations—Use of Non-GAAP Measures” below.
Fiscal 2024
and 2023 includes Connect for the entire quarter.
We analyze our business and operations in terms of two
inter-related but independent operating segments: (1) Merchant Division
and (2)
Consumer Division.
In addition,
corporate activities
that are
impracticable to
allocate directly
to the
operating segments,
as
well as any inter-segment eliminations, are included in Group costs. Inter-segment revenue eliminations are included
in Eliminations.
First quarter of fiscal 2024 compared to first quarter
of fiscal 2023
The following factors had a significant impact on
our results of operations during the first
quarter of fiscal 2024 as compared with
the same period in the prior year:
●
Higher revenue:
Our revenues increased 19% in
ZAR, primarily due to an increase in
low margin prepaid airtime sales and
other value added services, as well as
higher transaction, insurance and lending revenues, which was partially offset by lower
hardware sales revenue in our POS hardware distribution business given the
lumpy nature of bulk sales;
●
Operating income generated:
Operating income was
achieved following years
of operating losses as
a result of the
various
cost reduction initiatives in Consumer implemented in prior periods
as well as the contribution from Connect;
●
Higher net
interest charge:
The net
interest charge
increased to
$4.5 million
(ZAR 83.1
million) from
$3.6 million
(ZAR
62.1 million) primarily due to higher interest rates; and
●
Foreign
exchange
movements:
The
U.S.
dollar
was 9%
stronger
against the
ZAR during
the
first
quarter
of
fiscal
2024
compared to the prior period, which adversely impacted our U.S. dollar
reported results.
42
Consolidated overall results of operations
This discussion is based on the amounts prepared in accordance with U.S. GAAP.
The following tables show the changes in the items comprising our statements of operations,
both in U.S. dollars and in ZAR:
Table 3
In United States Dollars
Three months ended September 30,
2023
2022
%
$ ’000
$ ’000
change
Revenue
136,089
124,786
9%
Cost of goods sold, IT processing, servicing and support
107,490
100,528
7%
Selling, general and administration
22,515
22,931
(2%)
Depreciation and amortization
5,856
5,998
(2%)
Operating income (loss)
228
(4,671)
nm
Reversal of allowance of EMI doubtful debt receivable
250
-
nm
Net gain on disposal of equity-accounted investments
-
248
nm
Interest income
449
411
9%
Interest expense
4,909
4,036
22%
Loss before income tax expense
(3,982)
(8,048)
(51%)
Income tax expense
264
31
752%
Net loss before loss from equity-accounted investments
(4,246)
(8,079)
(47%)
Loss from equity-accounted investments
1,405
2,617
(46%)
Net loss attributable to us
(5,651)
(10,696)
(47%)
Table 4
In South African Rand
Three months ended September 30,
2023
2022
%
ZAR ’000
ZAR ’000
change
Revenue
2,537,659
2,137,671
19%
Cost of goods sold, IT processing, servicing and support
2,004,465
1,722,115
16%
Selling, general and administration
419,861
392,824
7%
Depreciation and amortization
109,166
102,749
6%
Operating income (loss)
4,167
(80,017)
nm
Reversal of allowance of EMI doubtful debt receivable
4,741
-
nm
Net gain on disposal of equity-accounted investments
-
4,248
nm
Interest income
8,368
7,041
19%
Interest expense
91,429
69,140
32%
Loss before income tax expense
(74,153)
(137,868)
(46%)
Income tax expense
4,825
532
807%
Net loss before loss from equity-accounted investments
(78,978)
(138,400)
(43%)
Loss from equity-accounted investments
26,657
44,831
(41%)
Net loss attributable to us
(105,635)
(183,231)
(42%)
Revenue increased
by $11.3
million (ZAR
0.4 billion),
or 9.1%
(in ZAR,
18.7%), primarily
due to
the increase
in low
margin
prepaid airtime sales
and other value-added
services, as well
as higher transaction, insurance
and lending revenues, which
was partially
offset by lower hardware sales revenue in our POS hardware distribution
business given the lumpy nature of bulk sales.
Cost of goods sold, IT processing, servicing and support increased by $7.0 million
(ZAR 0.3 billion), or 6.9% (in ZAR, 16.4%),
primarily due to the increase in low margin prepaid airtime sales, which were partially offset by
the benefits of various cost reduction
initiatives in Consumer and lower insurance-related claims.
Selling, general and administration expenses decreased by $0.4 million, or 1.8%,
and in ZAR increased by ZAR 27.0 million, or
6.9%.
In ZAR, the increase was primarily due
to higher employee-related expenses related to the expansion
of our senior management
team,
the
year-over-year
impact
of
inflationary
increases
on
employee-related
expenses
and
the
inclusion
of
expenses
related
to
Connect’s operations, which were
partially offset by the benefits of various cost reduction initiatives in
Consumer.
Depreciation and amortization expense
decreased by $0.1 million, or 2.4%
,
and in ZAR increased by
ZAR 6.4 million or 6.2%.
In the ZAR, the increase was due to an increase in depreciation expense related
to additional POS devices deployed.
Our operating income (loss) margin for the first quarter of fiscal 2024 and 2023 was
0.2% and (3.7%), respectively. We
discuss
the components of operating loss margin under “—Results of operations
by operating segment.”
43
We did not record any changes in the fair value of equity interests in MobiKwik and Cell C
during the first quarter of fiscal 2024
or 2023, respectively. We
continue to carry our investment in Cell
C at $0 (zero). Refer to Note
4 for the methodology and inputs used
in the fair value calculation for Cell C.
We recorded
a gain of $0.3 million related to
the disposal of our entire interest
in Carbon during the first
quarter of fiscal 2023.
Refer to Note 5 to our unaudited condensed consolidated financial statements for
additional information regarding this disposal.
Interest on surplus cash increased
to $0.4 million (ZAR 8.4
million) from $0.4 million (ZAR
7.0 million), primarily due to
higher
interest rates.
Interest
expense increased
to $4.9
million (ZAR
91.4 million)
from $4.0
million (ZAR
69.1 million),
primarily
as a
result of
higher overall interest rates and higher overall borrowings
during the first quarter of fiscal 2024 compared with comparable
period in
the prior quarter, which was partially offset
by lower interest expense incurred on certain of our borrowing for which we were able to
negotiate lower rates of interest during the latter half of fiscal 2023.
Fiscal 2024 tax expense was $(0.3) million (ZAR (4.8) million) compared to $0.0
million (ZAR 0.5 million) in fiscal 2023. Our
effective tax rate for fiscal 2024 was impacted
by the tax expense recorded by our profitable South
African operations, a deferred tax
benefit related
to acquisition-related
intangible asset
amortization, non-deductible
expenses, the
on-going losses
incurred by
certain
of our South African businesses
and the associated valuation allowances
created related to the deferred
tax assets recognized regarding
net operating losses incurred by these entities.
Our effective
tax rate
for fiscal
2023 was
impacted by
the tax
expense recorded
by our
profitable South
African operations,
a
deferred tax benefit related to acquisition-related intangible asset amortization, non-deductible expenses, the on-going losses incurred
by certain of our
South African businesses and
the associated valuation allowances
created related to the
deferred tax assets recognized
regarding net operating losses incurred by these entities.
Finbond is
listed on
the Johannesburg
Stock Exchange
and reports
its six-month
results during
our first
quarter and
its annual
results during our fourth quarter.
The table below presents the relative (loss) earnings from our equity-accounted
investments:
Table 5
Three months ended September 30,
2023
2022
$ %
$ ’000
$ ’000
change
Finbond
(1,445)
(2,631)
(45%)
Share of net loss
(278)
(1,521)
(82%)
Impairment
(1,167)
(1,110)
5%
Other
40
14
186%
Total
loss from equity-accounted investments
(1,405)
(2,617)
(46%)
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating
loss are illustrated below:
Table 6
In United States Dollars
Three months ended September 30,
2023
% of
2022
% of
% change
Operating Segment
$ ’000
total
$ ’000
total
Consolidated revenue:
Merchant
121,361
89%
109,782
88%
11%
Consumer
15,580
11%
15,004
12%
4%
Subtotal: Operating segments
136,941
100%
124,786
100%
10%
Eliminations
(852)
-
-
-
nm
Total
consolidated revenue
136,089
100%
124,786
100%
9%
Segment Adjusted EBITDA:
Merchant
(1)
8,061
92%
7,893
188%
2%
Consumer
(1)
2,480
28%
(1,394)
(33%)
nm
Group costs
(1,822)
(21%)
(2,300)
(55%)
(21%)
Group Adjusted EBITDA (non-GAAP)
(2)
8,719
100%
4,199
100%
108%
(1) Segment Adjusted EBITDA for Merchant includes retrenchments costs of $0.2 million and Consumer includes retrenchment
costs of $0.1 million for the three months ended September 30, 2023.
(2) Group Adjusted EBITDA
is a non-GAAP measure, refer
to reconciliation below at
“—Results of Operations—Use of
Non-
GAAP Measures”.
44
Table 7
In South African Rand
Three months ended September 30,
2023
% of
2022
% of
% change
Operating Segment
ZAR ’000
total
ZAR ’000
total
Consolidated revenue:
Merchant
2,263,001
89%
1,880,642
88%
20%
Consumer
290,629
11%
257,029
12%
13%
Subtotal: Operating segments
2,553,630
100%
2,137,671
100%
19%
Eliminations
(15,971)
-
-
-
nm
Total
consolidated revenue
2,537,659
100%
2,137,671
100%
19%
Segment Adjusted EBITDA:
Merchant
(1)
150,181
92%
135,212
188%
11%
Consumer
(1)
46,302
28%
(23,880)
(33%)
nm
Group costs
(33,980)
(21%)
(39,400)
(55%)
(14%)
Group Adjusted EBITDA (non-GAAP)
(2)
162,503
100%
71,932
100%
126%
(1)
Segment
Adjusted
EBITDA
for
Merchant
includes
retrenchments
costs
of
ZAR
4.6
million
and
Consumer
includes
retrenchment costs of ZAR 1.5 million for the three months ended September 30,
2023.
(2) Group Adjusted EBITDA
is a non-GAAP measure, refer
to reconciliation below at
“—Results of Operations—Use of
Non-
GAAP Measures”.
Merchant
Segment revenue
increased due
to the increase
in low margin
prepaid airtime
sales and other
value-added services,
which was
partially offset by lower
hardware sales revenue given
the lumpy nature of bulk sales.
The increase in Segment Adjusted
EBITDA is
primarily due to the higher sales activity, which was partially offset by lower hardware sales. Connect records a significant proportion
of its airtime sales in revenue and cost of sales, while only earning a relatively small
margin. This significantly depresses the Segment
Adjusted EBITDA margins shown by the business.
Our Segment
Adjusted EBITDA margin
(calculated as Segment
Adjusted EBITDA
divided by revenue)
for the first
quarter of
fiscal 2024 and 2023 was
6.6% and
7.2%, respectively.
Consumer
Segment revenue increased
primarily due to
more transaction fees
generated from the
higher EPE account
holders base, higher
insurance revenues, and an increase
in lending revenue as
a result of an
increase in loan originations.
This increase in revenue,
together
with the cost reduction
initiatives initiated in fiscal
2022 and through
fiscal 2023, have
translated into a turnaround
in the Consumer
Division and the realization of sustained positive Segment Adjusted EBITDA
for four consecutive quarters.
Our Segment Adjusted EBITDA (loss) margin for the first quarter of fiscal 2024 and 2023
was
15.9% and
(9.3%),
respectively.
Group costs
Our group
costs primarily
include employee
related costs
in relation
to employees
specifically hired
for group
roles and
costs
related
directly
to
managing
the
US-listed
entity;
expenditures
related
to
compliance
with
the
Sarbanes-Oxley
Act
of
2002;
non-
employee directors’ fees; legal fees; group and US-listed related audit
fees; and directors’ and officers’ insurance premiums.
Our group costs for
fiscal 2024 decreased compared
with the prior period
due to lower external
audit, legal and consulting
fees
and lower provision for executive bonuses, which was partially offset
by higher employee costs.
Use of Non-GAAP Measures
U.S. securities laws
require that when
we publish any
non-GAAP measures, we
disclose the reason
for using these
non-GAAP
measures and provide reconciliations to the most directly comparable GAAP measures. The presentation of Group Adjusted EBITDA
is
a
non-GAAP
measure.
We
provide
this
non-GAAP
measure
to
enhance
our
evaluation
and
understanding
of
our
financial
performance.
45
Non-GAAP Measures
Group
Adjusted
EBITDA
is
earnings
before
interest,
tax,
depreciation
and
amortization
(“EBITDA”),
adjusted
for
non-
operational transactions (including loss on disposal
of equity-accounted investments, gain related to
fair value adjustments to currency
options), (earnings) loss from
equity-accounted investments, stock-based compensation charges, lease
adjustments and once-off items.
Lease
adjustments
reflect
lease
charges
and
once-off
items
represents
non-recurring
expense
items,
including
costs
related
to
acquisitions and transactions consummated or ultimately not pursued.
The table below presents the reconciliation between GAAP net loss attributable
to Lesaka to Group Adjusted EBITDA:
Table 8
Three months ended
September 30,
2023
2022
$ ’000
$ ’000
Loss attributable to Lesaka - GAAP
(5,651)
(10,696)
(Earnings) loss from equity accounted investments
1,405
2,617
Net loss before (earnings) loss from equity-accounted investments
(4,246)
(8,079)
Income tax (benefit) expense
264
31
Loss before income tax expense
(3,982)
(8,048)
Interest expense
4,909
4,036
Interest income
(449)
(411)
Reversal of allowance for doubtful EMI loan receivable
(250)
-
Net gain on disposal of equity-accounted investment
-
(248)
Operating income (loss)
228
(4,671)
PPA amortization
(amortization of acquired intangible assets)
3,608
3,928
Depreciation and amortization
2,248
2,070
Stock-based compensation charges
1,759
1,462
Lease adjustments
696
812
Once-off items
(1)
78
598
Unrealized Loss FV for currency adjustments
102
-
Group Adjusted EBITDA - Non-GAAP
8,719
4,199
(1) The table below presents the components of once-off
items for the periods presented:
Table 9
Three months ended
September 30,
2023
2022
$ ’000
$ ’000
Transaction costs
78
203
Expenses incurred related to closure of legacy businesses
-
395
Total once-off
items
78
598
Once-off items are non-recurring in nature, however, certain
items may be reported in
multiple quarters. For instance, transaction
costs include costs incurred related to acquisitions and
transactions consummated or ultimately not pursued. The transactions can span
multiple
quarters,
for
instance in
fiscal
2022 we
incurred
significant
transaction
costs related
to
the acquisition
of Connect
over
a
number of quarters, and the transactions are generally non-recurring.
Expenses
incurred
related
to close
of
legacy
businesses
represents
costs
incurred
related
to
subsidiaries
which
we
are
in
the
process of deregistering/ liquidation and therefore we consider these costs non
-operational and ad hoc in nature.
Liquidity and Capital Resources
As of September 30, 2023, our
cash and cash equivalents were $35.1
million and comprised of U.S. dollar-denominated balances
of $2.2 million,
ZAR-denominated balances of
ZAR 586.7 million
($31.0 million), and
other currency deposits,
primarily Botswana
pula, of $1.9
million, all amounts
translated at exchange
rates applicable as
of September 30,
2023. The increase
in our unrestricted
cash balances from
June 30, 2023,
was primarily due
to a positive contribution
from our Merchant
and Consumer operations,
which
was partially offset
by the utilization
of cash reserves
to fund certain
scheduled repayments of
our borrowings,
purchase ATMs
and
safe assets, and to make an investment in working capital.
46
We generally
invest any surplus cash held by our
South African operations in overnight
call accounts that we maintain at
South
African banking institutions,
and any surplus
cash held by
our non-South African
companies in
U.S. dollar-denominated money market
accounts.
Historically,
we have financed
most of our
operations, research and
development, working capital,
and capital expenditures,
as
well
as
acquisitions
and
strategic
investments,
through
internally
generated
cash
and
our
financing
facilities.
When
considering
whether to borrow under our financing
facilities, we consider the cost
of capital, cost of financing, opportunity cost
of utilizing surplus
cash and
availability of
tax efficient
structures to
moderate financing
costs. For
instance, in
fiscal 2022,
we obtained
loan facilities
from RMB
to fund
a portion
of our
acquisition of
Connect. Following
the acquisition
of Connect,
we now
utilize a
combination of
short
and
long-term
facilities to
fund our
operating
activities and
a long-term
asset-backed
facility to
fund
the acquisition
of POS
devices and
safe assets.
Refer to
Note 12
to our
consolidated financial
statements for
the year
ended June
30, 2023,
for additional
information related to our borrowings.
Available short-term
borrowings
Summarized below are our short-term facilities available and utilized as of
September 30, 2023:
Table 10
RMB Facility E
RMB Indirect
RMB Connect
Nedbank
$ ’000
ZAR ’000
$ ’000
ZAR ’000
$ ’000
ZAR ’000
$ ’000
ZAR ’000
Total
short-term facilities
available, comprising:
Overdraft
-
-
-
-
10,833
205,008
-
-
Overdraft restricted as to
use
(1)
73,982
1,400,014
-
-
-
-
-
-
Total overdraft
73,982
1,400,014
-
-
10,833
205,008
-
-
Indirect and derivative
facilities
(2)
-
-
7,134
134,992
-
-
8,273
156,552
Total
short-term
facilities available
73,982
1,400,014
7,134
134,992
10,833
205,008
8,273
156,552
Utilized short-term
facilities:
Overdraft
-
-
-
-
8,983
169,981
-
-
Overdraft restricted as to
use
(1)
19,754
373,811
-
-
-
-
-
-
Indirect and derivative
facilities
(2)
-
-
1,749
33,100
-
-
112
2,119
Total
short-term
facilities available
19,754
373,811
1,749
33,100
8,983
169,981
112
2,119
Interest
rate,
based
on
South African prime rate
11.75%
11.65%
(1) Overdraft may only be used to fund ATMs
and upon utilization is considered restricted cash.
(2) Indirect and derivative facilities may only be used for guarantees, letters of credit and forward
exchange contracts to support
guarantees issued by RMB and Nedbank to various third parties on our behalf.
Long-term borrowings
We
have
aggregate
long-term
borrowing
outstanding
of
ZAR
2.5
billion
($134.2
million
translated
at
exchange
rates
as
of
September 30, 2023)
as described in Note
8. These borrowings
include outstanding long-term
borrowings obtained by Lesaka
SA of
ZAR 1.0 billion,
including accrued
interest, which
was used to
partially fund
the acquisition of
Connect. The Lesaka
SA borrowing
arrangements
were amended
in March
2023 to
include
a ZAR
200
million
revolving
credit facility.
We
used this
revolving
credit
facility during
the three
months ended
September 30,
2023, and
ZAR 10.0
million was
drawn
as of
September 30,
2023, with
the
remaining balance available for utilization in the future. In contemplation of the Connect transaction, Connect obtained
total facilities
of approximately
ZAR 1.3 billion,
which were
utilized to repay
its existing borrowings,
to fund a
portion of
its capital expenditures
and to settle
obligations under the
transaction documents,
and which has
subsequently been
upsized for its
operational requirements
and has an outstanding balance as of September 30,
2023, of ZAR 1.2 billion, We
also have a revolving credit facility,
of ZAR 300.0
million which is utilized to fund a portion of our merchant finance loans receivable
book.
47
Restricted cash
We
have credit
facilities with RMB
in order
to access cash
to fund
our ATMs
in South Africa.
Our cash, cash
equivalents and
restricted
cash
presented
in
our
consolidated
statement
of
cash
flows
as
of
September
30,
2023,
includes
restricted
cash
of
approximately
$19.8
million
related to
cash withdrawn
from our
debt facility
to fund
ATMs.
This cash
may
only
be used
to fund
ATMs
and is considered restricted as to use and therefore is classified as restricted cash on
our consolidated balance sheet.
We have
also entered into cession and pledge
agreements with Nedbank related to
our Nedbank indirect credit facilities
and we
have ceded and pledged
certain bank accounts to
Nedbank. The funds included
in these bank accounts
are restricted as they
may not
be withdrawn without the express
permission of Nedbank. Our cash,
cash equivalents and restricted
cash presented in our consolidated
statement of
cash flows
as of
September 30,
2023, includes
restricted
cash of
approximately
$0.1 million
that has
been ceded
and
pledged.
Cash flows from operating activities
First quarter
Net cash provided
by operating activities
during the first
quarter of fiscal
2024 was $3.4
million (ZAR 63.1
million) compared
to net cash used
in operating activities of
$7.7 million (ZAR 131.2
million) during the first
quarter of fiscal 2023.
Excluding the impact
of
income
taxes,
our
cash
provided
by
operating
activities
during
the
first
quarter
of
fiscal
2024
was
positively
impacted
by
the
contribution
from
Merchant
and
Consumer,
which
was
partially
offset
by
growth
in
our
consumer
and
merchant
finance
loans
receivable
books
and
temporary
working
capital
movements
within
our
merchant
business
as
a
result
of
quarter-end
transaction
processing activities closing on a Saturday and settled in the following week.
During the first quarter of fiscal
2024, we paid first provisional South
African tax payments of $0.6 million
(ZAR 10.9 million)
related
to our
2023
tax year.
During
the first
quarter of
fiscal
2023,
we
paid
first provisional
South
African
tax payments
of
$0.5
million (ZAR 8.2 million) related to our 2023 tax year, and additional
second provisional South African tax payments of $0.2 million
(ZAR 3.4 million) related to our 2022 tax year.
Taxes paid during
the first quarter of fiscal 2024 and 2023 were as follows:
Table 11
Three months ended September 30,
2023
2022
2023
2022
$
$
ZAR
ZAR
‘000
‘000
‘000
‘000
First provisional payments
-
492
-
8,216
Second provisional payments
-
191
-
3,371
Taxation paid related
to prior years
572
-
10,859
-
Tax refund received
(31)
(57)
(640)
(970)
Total South African
taxes paid
541
626
10,219
10,617
Foreign taxes paid
63
51
1,196
886
Total
tax paid
604
677
11,415
11,503
Cash flows from investing activities
First quarter
Cash used
in
investing
activities
for
the
first
quarter
of
fiscal
2024
included
capital
expenditures
of
$2.8
million
(ZAR 52.6
million), primarily due to the acquisition of safe assets and POS devices.
Cash
used
in
investing
activities
for
the
first
quarter
of
fiscal
2023
included
capital
expenditures
of
$4.5
million
(ZAR 77.1
million), primarily due to the acquisition of safe assets, POS devices and computer equipment.
During the first quarter of fiscal 2023,
we received proceeds $0.25 million related
to the first tranche (of two) from
the disposal of our entire interest
in Carbon. The second
tranche, of $0.25 million, was received in October 2023.
48
Cash flows from financing activities
First quarter
During the
first quarter
of fiscal
2024,
we utilized
approximately $59.6
million from
our South
African overdraft
facilities to
fund
our
ATMs
and
our
cash
management
business
through
Connect,
and
repaid
$62.8
million
of
those
facilities.
We
utilized
approximately $2.5 million of our long-term borrowings to fund
the acquisition of certain capital expenditures and for working
capital
requirements.
We
repaid approximately
$2.6 million of
long-term borrowings in
accordance with our
repayment schedule as
well as
to settle a portion of our revolving credit facility utilized.
During the
first quarter
of fiscal 2023,
we utilized approximately
$146.1 million
from our South
African overdraft
facilities to
fund
our
ATMs
and
our
cash
management
business
through
Connect,
and
repaid
$136.9
million
of
those
facilities.
We
utilized
approximately
$1.1
million
of
our
long-term
borrowings
to
fund
our
merchant
finance
loans
receivable
business
and
to
fund
the
acquisition
of certain
capital expenditures.
We
repaid approximately
$1.6 million
of long-term
borrowings
in accordance
with our
repayment schedule. We paid $0.2 million to repurchase shares from an employee in order for the employee to settle taxes due related
to the vesting of shares of restricted stock.
Off-Balance Sheet Arrangements
We have no off
-balance sheet arrangements.
Capital Expenditures
We
expect capital
spending for the
second quarter of
fiscal 2024
to primarily include
spending for acquisition
of POS devices,
safe assets,
computer software,
computer and
office equipment,
as well as
for our ATM
infrastructure and
branch network
in South
Africa. Our capital expenditures
for the first
quarter of fiscal 2024
and 2023 are
discussed under “—Liquidity and
Capital Resources—
Cash flows
from investing
activities.” All
of our
capital expenditures
for the
past three
fiscal years
were funded
through internally
generated
funds,
or,
following
the
Connect
acquisition,
our
asset-backed
borrowing
arrangement.
We
had
outstanding
capital
commitments as of September 30, 2023, of $0.7 million. We expect to fund these expenditures through internally generated funds and
available facilities.
49
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.