Item 1A. Risk Factors
Item 1A. Risk Factors
See “Item
1A RISK
FACTORS”
in Part
I of
our Annual
Report on
Form 10-K
for the
fiscal year
ended June
30, 2024,
for a
discussion
of
risk
factors
relating
to
(i)
our
business,
(ii)
operating
in
South
Africa
and
other
foreign
markets,
(iii) government
regulation, and (iv) our common stock. Except
as set forth below, there have been no material
changes from the risk factors previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30,
2024.
We may not be able
to successfully integrate Adumo and Recharger’s operations
with our business.
On October 1, 2024, we announced the closing of our ZAR 1.67 billion ($96.2 million) investment to acquire a 100% interest in
Adumo and
on March
5, 2024,
we announced
the closing
of our
ZAR 503.4
million ($27.0
million) investment
to acquire
a 100%
interest in
Recharger.
Integrating these
businesses into
our company
may require
significant attention
from our
senior management
which may divert their attention from our day-to-day business. The difficulties of integration may be increased by cultural differences
between
our
two
organizations
and
the
necessity
of
retaining
and
integrating
personnel,
including
Adumo
and
Recharger’s
key
employees and management team. The services of some of these individuals will be important to the continued growth and success of
Adumo and Recharger’s business and to our ability to integrate those businesses
with ours. If we were to lose the
services of these key
employees or
fail to
sufficiently integrate
them, our
ability to
operate
these businesses
successfully would
likely be
materially and
adversely impacted.
As such, if we are unable to successfully integrate Adumo and Recharger’s
operations into our business we could be required to
record material impairments, and as a result, our financial condition,
results of operations, cash flows and stock price could suffer.
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,
electronic payment
and POS devices,
components for our
safe assets, components
to repair
the ISV (independent software vendor)
division’s POS hardware, 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
recent
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.
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. We
are
also required
to comply
with the
requirements of
payment schemes,
including
VISA and
Mastercard.
Furthermore,
we provide
certain of
our services under
partnerships with South
African banks. We will
be unable to
provide our payments
and card-acquiring
businesses if we
fail to comply
with payment scheme
rules, and/or fails
to maintain certain
regulatory licenses and
registrations,
and/ or if we were unable to continue to partner with South African banks to provide
our payments and card acquiring services.
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
South African Financial
Intelligence Centre Act,
2001 and money
laundering and terrorist
financing
control
regulations,
when
we
open
new
bank
accounts
for
our
customers
and
when
they
transact.
Failure
to
effectively
implement and
monitor responses
to the
legislation and
regulations may
result in
significant fines
or prosecution
of Grindrod
Bank
and ourselves.
We
are required
to comply
with the
requirements of
payment schemes,
including VISA
and Mastercard.
We
have deployed
a
significant number of devices, and any
mandatory compliance upgrades to our deployed POS
devices would require significant capital
expenditures and/or be
disruptive to our
customer base. Failure
to comply with
the payment schemes’
rules may result
in significant
fines and/or a loss of license to participate in the scheme(s).
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We provide card acquiring services
to our customers
by partnering with
Nedbank Limited and
ABSA Bank Limited,
and payment
processing services
in partnership
with the
largest banks
in South
Africa. If
these agreements
were to
be terminated,
Adumo would
not be able to operate
its payment services unless it
were able to obtain
alternative card acquiring or
payment processing agreements
with other partners
or obtain a direct
designation license with
the scheme's and
regulatory bodies. In
addition, if we
were to lose our
PASA registrations
or fail to have them renewed, it would be unable to operate its payment services.
Compliance with the requirements under these 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.
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.
EasyPay
Insurance was
granted a Financial
Service Provider,
or FSP,
license on June
9, 2015, and
EasyPay Financial
Services (Pty) Ltd
was
granted
a FSP
license on
July 11,
2017. If
our FSP
licenses are
withdrawn or
suspended, 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
however, the current proposal is that existing licences will be converted. The second draft of the Conduct of
Financial Institutions Bill
was published for public comment on September 29, 2020.
Proposed regulatory changes to the national payments system are expected to have a substantial impact on the South African
payments industry.
It may change
the manner in
which we conduct
business and
likely lead
to increased operating
costs for our
business as we work to ensure compliance with the new legislative
and regulatory framework, which may have a material adverse
effect on our business.
On March
3, 2025,
the South
African Reserve
Bank (“SARB”)
published
certain draft
regulatory documents
for commentary
that
are
expected
to have
a substantial
impact
on how
we conduct
our
business namely:
(i)
a draft
directive
entitled
“Directive
in
respect
of specific
payment
activities within
the
national
payment
system”
(the “Directive”);
(ii) a
draft
exemption
notice
entitled
“Designation by the
Prudential Authority of
specific activities conducted
in the national
payment system which
shall be deemed
not
to constitute
‘the business
of a
bank’ under
paragraph (cc)
in section
1(1) of
the Banks
Act, 1990”
(the “Exemption
Notice”); and
(iii) the National
Payment System
Bill (“NPS
Bill”), which
seeks to
replace the
existing National
Payment System
Act, 1998.
The
proposed regulations
were made
available for
comment, and
we submitted
detailed comments
to our
industry body,
Association of
South African Payment Providers, on the proposed regulations.
The key objectives of the proposed regulations are to
clarify the mandate and objectives of the
SARB with respect to the national
payment
system
(“NPS”);
and
establish
a
robust
regulatory,
oversight,
and
supervisory
framework
for
the
NPS.
The
proposed
regulations also aim
to promote financial
inclusion, competition, the
prevention of financial
crime, and the
fair treatment and
protection
of
customers,
while introducing
an activity-based
licensing and
authorization
regime. In
this regard,
the Directive
defines
thirteen
“payment
activities”
and
provides
that
a
person,
which
can
be
a
bank
or
a
non-bank,
providing
a
“payment
activity"
must
obtain
authorisation from the
SARB to undertake
such activity.
Under the Exemption
Notice, certain payment
activities are exempted
from
the definition of ‘the business of a bank’. Prior to the
Exemption Notice, these activities could only be undertaken by a bank. Pursuant
to the
Exemption Notice,
these activities
can be
undertaken by
non-banks, subject
to certain
conditions. Certain
of our
businesses,
including EasyPay Everywhere,
Adumo and Kazang Pay,
currently undertake activities which
would qualify as “payment
activities”
under the
Directive and
the NPS Bill.
Under the
current regulatory
framework, these
activities are
undertaken in
partnership with
a
sponsoring bank and the sponsoring bank is
subject to regulation by the SARB.
In other words, the business undertaking the “payment
activity” is not subject to direct regulation with respect to such payment activities.
It is
uncertain if
and when
the proposed
regulations will
enter into
effect and
whether a
non-bank such
as the
relevant Lesaka
subsidiary
may
elect
whether
to
conduct
an exempted
payment
activity
by
partnering
with
a
bank
to
do so,
or on
its own,
if
it
is
authorised by the
SARB -
i.e. whether both
options will
be available
to a
non-bank. Should
our businesses
be subject to
direct regulation
under this new regime (i.e., if our current sponsorship model
is no longer available), we expect that we
will incur significant operating
costs to comply
with the new
requirements, and
to obtain
authorization with
respect thereto. Furthermore,
while some requirements
may already exist under
other current regulatory frameworks
for certain of our
businesses, we will likely
need to invest in additional
resources, systems and processes to
satisfy the regulatory requirements contemplated in the
proposed regulations, which may also lead
to increased operational costs, which may have a material adverse effect
on our business.
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