Lesaka Technologies Inc. (filed as Net 1 UEPS Technologies, Inc.) — Form 10-Q summary
Reporting period: Three months ended September 30, 2019 (fiscal Q1 2020), compared with the three months ended September 30, 2018. Amounts below are U.S. dollars unless noted; financial statement amounts are in millions.
Business context and financial performance
The company operates South African and international transaction-processing businesses and financial-inclusion and applied-technology activities. DNI was deconsolidated and reported as a discontinued operation in the prior-year comparison; the company retained a 30% interest.
| Metric | Q1 2020 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $80.8 | $125.9 | Down 36%; continuing revenue was down 25% from $107.1 |
| Operating income (loss) | $(2.7) | $0.9 | Operating margin was (3.4%), versus 0.7% |
| Net income (loss) | $(4.4) | $(5.1) | Prior period included $3.6 of discontinued-operation income; attributable loss was $(4.4) versus $(5.2) |
| Net loss per share, basic and diluted | $(0.08) | $(0.09) | Prior period included discontinued-operation earnings per share of $0.03 |
| Operating cash flow | $(18.3) | $16.5 | Turned negative, with weaker trading and $12.3 of restricted-sale airtime inventory purchases contributing |
| Cash used in investing activities | $(12.9) | Cash provided: $73.4 | Prior period included a large net decrease in settlement assets |
| Cash provided by financing activities | $27.0 | $4.4 | Included substantial short-term facility drawdowns and repayments |
Cost of goods sold and support expense fell 35% to $46.8 million; selling, general and administrative expense fell 24% to $31.9 million; and depreciation and amortization fell 56% to $4.8 million. Lower expenses did not prevent an operating loss as revenue contracted. Interest income was $0.7 million and interest expense was $1.4 million. Income tax expense was $2.0 million despite a pretax loss, reflecting valuation allowances, non-deductible expenses and taxes at profitable operations.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $42.0 million, versus $46.1 million at June 30. Restricted cash was $68.8 million and is limited to ATM funding; it is not freely available for general purposes. Cash, cash equivalents and restricted cash totaled $110.8 million.
- Current assets were $304.5 million and current liabilities $254.2 million. Both include settlement assets and matching settlement obligations of $73.6 million, which fluctuate with payment timing.
- Short-term facility balances included $68.8 million of ATM-restricted funding and $10.3 million of other short-term credit facilities. Current long-term borrowings were $14.5 million. These balances represent approximately $93.6 million of drawn facilities/borrowings in total; ATM funding is separately restricted.
- A new Facility F of up to ZAR 300 million was arranged to fund Cell C airtime purchases. The inventory cannot be sold before April 1, 2020 without specified bank consent; proceeds are subject to mandatory debt prepayment. The filing says unsold inventory cannot be returned.
- Total liabilities were $263.3 million; redeemable common stock was $107.7 million; and equity was $300.1 million. The company reported a $0.3 million impairment related to its retained DNI investment.
Material changes, outlook and significant matters
- Revenue decline: Management attributed the drop principally to the SASSA contract expiration, DNI deconsolidation, SASSA’s migration of accounts to SAPO and lower EPE-related customer activity, partly offset by ad hoc terminal and prepaid-airtime sales. Revenue in South African transaction processing fell 49%, international transaction processing fell 14%, and financial inclusion and applied technologies fell 43% (including DNI’s removal).
- Operating trends: South African transaction processing remained loss-making, with a (17.4%) segment operating margin. International transaction-processing margin improved to 11.1%, reflecting lower costs and improved KSNET profitability. Continuing financial-inclusion margin fell to 5.0% from 10.1% (the reported segment margin including prior-year discontinued DNI was 21.2%).
- Management outlook: The company is shifting South African financial inclusion toward a business-to-consumer model; it reported over 4,000 new accounts during the first month of a soft launch on October 1. It described the South African loan book as fairly steady and said meaningful growth depends on additional liquidity. No numerical company-wide revenue or earnings guidance is provided in the supplied filing text.
- Going concern: Management identified conditions that could raise substantial doubt about the company’s ability to continue as a going concern, including achieving its fiscal 2020 budget, retaining or replacing credit facilities, resolving SASSA matters, disposing of its remaining DNI interest and realizing cash from investments. Management cited asset sales, cost cuts, capital expenditure management, limiting loan-book growth and potential alternative capital, and concluded these measures alleviate the doubt. That conclusion depends on execution and is not assurance of success.
- SASSA disputes: On September 30, 2019, South Africa’s Supreme Court of Appeal dismissed the company’s appeal concerning additional SASSA implementation costs. The company had accrued $32.2 million for repayment-related items, including revenue refund and interest, and filed for leave to appeal to the Constitutional Court. Separately, the company is pursuing payment for the final six months of the SASSA contract; the amount and outcome remain uncertain.
- Transactions and investments: On October 2, 2019, the company exercised an option to acquire a further 35% of Bank Frick for the higher of CHF 46.4 million or a formula based on the bank’s normalized earnings; payment, transfer and any required approvals remained outstanding. Management also described a potential sale of its remaining 30% DNI interest under a call option. Cell C investment remained valued at zero.
- Controls and risks: Management concluded disclosure controls were not effective as of September 30, 2019, citing insufficient time to assess remediation of a material weakness reported in the prior annual filing. Currency translation, credit and liquidity exposure, short-term borrowing costs, Cell C’s performance and refinancing or facility availability are material risks.
- Other unusual item: The company adopted lease accounting in July 2019, recording $5.8 million of operating-lease right-of-use assets and $5.9 million of lease liabilities at quarter-end. Foreign-currency translation reduced accumulated other comprehensive equity by $15.4 million during the quarter.
Most important facts for investors to verify
- Whether SASSA repayment obligations, the appeal and the separate fee dispute lead to additional payments or recoveries beyond amounts accrued.
- Liquidity available for general operations after excluding restricted ATM cash, and the renewal, terms and covenant status of short-term facilities.
- Progress and economics of the planned DNI disposal, including the call-option price and timing, and the implications of DNI’s dependence on Cell C.
- Whether the new South African customer model and international initiatives generate sustainable revenue and cash flow, given the quarter’s negative operating cash flow and operating loss.
- Remediation and testing of the material weakness, and the filing’s reporting-status checkbox: the supplied text appears to mark “NO” for having filed all required reports during the preceding 12 months. Confirm this against the official SEC filing because the extracted checkbox text may be unreliable.