Filing and reporting period
The supplied filing is Net 1 UEPS Technologies, Inc.’s Form 10-K for the fiscal year ended June 30, 2019, filed October 25, 2019. This does not match the request metadata naming Lesaka Technologies Inc. and “2018 Q4”; the filing itself reports fiscal 2019, with quarterly data including Q4 ended June 30, 2019.
Net1 provides payment processing, financial-inclusion services, lending, insurance and payment technology, primarily in South Africa and South Korea, with international payment operations. It reported approximately 1.1 million active EasyPay Everywhere (EPE) customers at June 30, 2019, and processed more than three billion transactions during the year.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Revenue | $361.0 million | $612.9 million |
| Operating income (loss) | $(113.5) million | $58.9 million |
| Operating margin | (31.4%) | 9.6% |
| Net income (loss) attributable to Net1 | $(307.6) million | $64.2 million |
| Diluted earnings (loss) per share | $(5.42) | $1.13 |
| Cash from operating activities | $(4.5) million | $132.3 million |
Revenue fell 41% in U.S. dollars and 34% in South African rand. South African revenue was $212.7 million, down from $433.4 million; South Korean revenue was $138.4 million, down from $153.3 million. Fiscal 2019’s operating loss included the SASSA-related revenue reversal and accrual, impairment charges and restructuring costs. Management reported a 14% operating loss margin excluding the specified SASSA ruling effects, impairments and retrenchment costs.
At June 30, 2019, cash and cash equivalents were $46.1 million; a further $75.4 million was restricted for ATM funding. Short-term borrowings were $85.0 million, including $75.4 million restricted to ATM funding; long-term borrowings were zero. Total current assets before settlement assets were $232.2 million and current liabilities before settlement obligations were $174.7 million. Total assets were $672.9 million, total liabilities $245.8 million, and equity $319.4 million. The $64.5 million investing cash inflow included movements in settlement assets and should not be read as cash freely available to the company.
Net1 recorded a $167.5 million non-cash fair-value loss on its Cell C investment, which was valued at zero at year-end, and a $12.8 million impairment of Cedar Cellular notes, also carried at zero. Goodwill and other impairment losses totaled $19.7 million. The allowance for doubtful microlending loans increased by $28.8 million following EPE customer migration and related repayment defaults.
Material changes versus prior period
- The SASSA grant-payment contract ended September 30, 2018. SASSA’s migration of EPE grant recipients to South African Post Office accounts reduced customers, transaction activity and related fees, while creating loan losses and leaving Net1 with fixed infrastructure costs.
- Net1 reduced its DNI ownership and deconsolidated the business in March 2019, then sold another 8% interest in May, ending the year with 30%. DNI contributed $56.3 million of discontinued-operation revenue for the first nine months of fiscal 2019.
- Net1 recorded a $34.0 million liability after the Supreme Court of Appeal dismissed its appeal on September 30, 2019, concerning reimbursement of SASSA implementation costs. The amount includes a $19.7 million revenue reversal, interest, indirect taxes and estimated costs.
- Cash from operations moved from $132.3 million provided to $4.5 million used. The U.S. dollar strengthened against the rand during fiscal 2019, reducing reported results.
- Fiscal 2018 comparative figures were restated for an error in Finbond’s reported results; the filing says the impact on Net1’s reported net income was comparatively small.
Outlook, commentary and risks
Management said restructuring had reduced headcount by more than 2,500 and lowered physical infrastructure. Net1 reported monthly EBITDA breakeven in July 2019, one month later than planned; this is a management-reported monthly result, not a forecast of sustained profitability or positive cash flow. The company expected to launch a Finbond card initiative commercially in fiscal Q2 2020 and anticipated a commercial launch of ZappGroup’s Ghana product in that quarter. It expected to roll out its crypto-asset storage product with Bank Frick in the first half of fiscal 2020. Management said further improvement in KSNET could take 6–12 months.
The auditor issued an unqualified opinion on the financial statements but included an explanatory paragraph raising substantial doubt about Net1’s ability to continue as a going concern. Management cited dependence on fiscal 2020 performance, retaining or replacing facilities, resolving SASSA disputes, realizing assets and disposing of some or all of its remaining DNI interest. Management’s mitigation plans include cost cuts, asset sales, limiting loan-book growth and alternative financing; execution is not assured.
Other material risks include further migration of EPE customers, the unresolved dispute over SASSA extension fees, the National Credit Regulator’s application to cancel Moneyline’s credit-provider registration, credit losses, short-term ATM funding needs, restrictive debt covenants, Cell C’s financial distress, foreign-exchange exposure and regulatory and competitive pressures. Net1 also reported a material weakness in controls over accounting for complex, non-routine transactions and concluded that disclosure controls were ineffective as of June 30, 2019.
After year-end, Net1 agreed to provide up to ZAR 300 million of support to Cell C through prepaid airtime purchases. It also exercised an option to acquire a further 35% of Bank Frick; the minimum stated consideration was CHF 46.4 million, subject to the agreement’s pricing and regulatory conditions.
Important facts for investors to verify
- Confirm the issuer and period: this is Net 1 UEPS fiscal 2019, not a Lesaka 2018 Q4 filing.
- Review the going-concern plans, cash available for general use, ATM facility terms and near-term liquidity needs.
- Track the timing and outcome of SASSA litigation, payment of disputed extension fees and any further appeal regarding the $34.0 million refund liability.
- Assess whether EPE customers and South African financial-services activity stabilize, and whether reported July monthly EBITDA breakeven is sustained.
- Verify the DNI option’s exercise and proceeds, the Bank Frick acquisition price and funding, and the extent of further support required by Cell C.
- Monitor Moneyline’s regulatory case, loan recoveries and remediation of the material weakness in financial reporting controls.