Filing identity and reporting period
The supplied filing is Net 1 UEPS Technologies, Inc.’s Form 10-K for the fiscal year ended June 30, 2020, filed September 10, 2020. It does not identify the registrant as Lesaka Technologies Inc. or cover 2019 Q4; the filing does include quarterly results for fiscal 2020 and fiscal 2019. Figures below are U.S. dollars unless otherwise noted.
Business context
Net1 provides payment processing, financial inclusion, banking, lending, insurance and technology services, primarily in South Africa. Its South African offerings include EasyPay processing and EasyPay Everywhere accounts; it reported about 1 million active EPE customers at June 30, 2020. The SASSA grants contract had expired in September 2018. During fiscal 2020, the company sold its Korean operations and FIHRST, sold its remaining DNI interest, and deconsolidated CPS. Following a strategic review completed in July 2020, management said it would concentrate on South Africa and, to a lesser extent, Africa, while exiting or reducing operations elsewhere.
Financial performance and liquidity
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Continuing-operations revenue | $151.0 million | $166.2 million |
| Operating loss | $44.2 million | $134.9 million |
| Operating margin | (29.3%) | (81.2%) |
| Net loss from continuing operations | $97.2 million | $313.1 million |
| Net loss attributable to Net1, including discontinued operations and disposals | $78.4 million | $311.0 million |
| Net loss per share, attributable to Net1 | $1.37 | $5.48 |
| Cash used in operating activities | $46.0 million | $4.5 million |
| Cash provided by investing activities | $223.1 million | $64.5 million |
| Cash used in financing activities | $48.8 million | $24.7 million |
Revenue declined 9% in reported U.S. dollars, while management’s supplementary ZAR presentation showed a 12% increase; currency translation materially affected comparability. Management said underlying revenue trends reflected the SASSA contract expiration, fewer EPE accounts and related transactions, and COVID-19 restrictions, partly offset by higher terminal and prepaid-airtime sales. The 2019 comparison includes a $19.7 million SASSA revenue reversal.
At June 30, 2020, cash and cash equivalents were $217.7 million, plus $14.8 million of restricted ATM-funding cash. Total current assets were $319.3 million and total current liabilities were $71.3 million, including settlement balances. Long-term debt was zero; $14.8 million was drawn under short-term ATM funding facilities. The company reported total equity of $290.2 million and total assets of $453.7 million. Capital expenditures were $5.9 million, versus $9.4 million in fiscal 2019. No dividends were paid, and none were anticipated in the foreseeable future.
Material changes, outlook and risks
- Cash from disposals drove the rise in investing cash flow: Net1 received approximately $192.6 million net from the Korean sale, $10.9 million from FIHRST and $42.5 million in cash from the DNI sale. Management said available cash and credit facilities were expected to support operations and the ATM network for the next 12 months.
- Fiscal 2020 included $33.8 million of impairments of equity-accounted investments, $5.6 million of goodwill impairment and a $17.5 million fee to cancel the option to acquire control of Bank Frick. It also recorded a $9.7 million FIHRST disposal gain and a $7.1 million loss on CPS deconsolidation. Cell C was carried at zero value.
- COVID-19 restrictions suspended branch-based lending and other financial services and limited certain banking fees through May 31, 2020. Net1 said it forgone approximately ZAR 35.2 million in cash-withdrawal fees during the restrictions and received ZAR 20.0 million in South African government wage support. Loan originations resumed; June 2020 originations exceeded ZAR 190 million. The continuing pandemic and any renewed restrictions remained uncertain risks.
- Net1 reported a $1.3 million write-down on airtime inventory subject to resale restrictions; $4.2 million of inventory could not be sold until October 1, 2020. Cell C’s financial distress could cause further losses. The RMB ATM facility was due for review in September 2020, and renewal or refinancing was not assured.
- CPS entered South African business rescue after losing its appeal concerning repayment of more than ZAR 316 million plus interest to SASSA. SASSA sought liquidation, and Freedom Under Law sought an order for repayment of CPS profits. Net1 said it no longer controlled CPS and no claim had been made against Net1 for CPS liabilities, but warned a successful claim against it could materially affect results and liquidity. Other legal matters include the NCR’s application to cancel Moneyline’s credit-provider registration.
- Management identified an unremediated material weakness in controls over accounting for non-routine complex transactions; management concluded disclosure controls were ineffective, and the auditor issued an adverse opinion on internal control. The financial-statement audit opinion was unqualified. Prior-year financial statements were restated for DNI and Finbond-related errors.
- CEO Herman Kotzé was expected to leave September 30, 2020; CFO Alex Smith was to serve as interim CEO pending a permanent appointment. The company gave no quantified earnings or revenue guidance. Fiscal 2021 capital spending was expected to focus mainly on South African operations.
Important facts for investors to verify
- Confirm the intended issuer and period: this is Net1’s fiscal 2020 10-K, not a Lesaka Technologies 2019 Q4 filing.
- Track cash burn from continuing operations and whether disposal proceeds can fund a return to sustainable operating cash flow, rather than treating sale proceeds as recurring cash generation.
- Verify renewal and availability of ATM credit facilities, covenant compliance, and the amount of cash restricted for ATM operations.
- Monitor CPS business rescue, SASSA-related proceedings, and whether any party pursues Net1 for CPS obligations; also follow the Moneyline registration case.
- Assess progress toward remediating the internal-control material weakness and the reliability of future reporting, including any further restatements.
- Evaluate South African customer growth, lending collections and credit quality, the effects of COVID-19, and execution of the strategy to focus on African operations.
- Review the recoverability of restricted airtime inventory, the Finbond investment, and the company’s other impaired or zero-valued investments.