LESAKA TECHNOLOGIES INC annual report, FY2023

Lesaka Technologies, Inc. — FY2023 Form 10-K Summary

Reporting period: Fiscal year ended June 30, 2023, compared primarily with the year ended June 30, 2022. This is an annual filing, not a report for calendar 2022 Q4. Lesaka provides payment, cash-management and financial services mainly to underserved consumers and merchants in South Africa. FY2023 includes Connect for the full year; FY2022 includes it only from April 14, 2022.

Financial and operating results

Metric	FY2023	FY2022
Revenue	$528.0 million	$222.6 million
Operating loss	$15.3 million	$40.2 million
Net loss attributable to Lesaka	$35.1 million	$43.9 million
Basic and diluted loss per share	$0.56	$0.75
Group Adjusted EBITDA, non-GAAP	Profit of $27.7 million	Loss of $17.6 million
Net cash from operating activities	$0.4 million	Cash used of $37.2 million
Capital expenditures	$16.2 million	$4.6 million

• Revenue rose 137% in U.S. dollars (180% in rand), mainly reflecting Connect’s full-year contribution and higher Consumer account fees and insurance revenue. Connect’s prepaid airtime activity adds substantial revenue but relatively little margin.
• Operating loss margin improved to 2.9% negative from 18.1% negative. FY2023 includes a $7.0 million goodwill impairment; FY2022 included $5.9 million of reorganization costs and $6.0 million of Connect transaction costs.
• Interest expense increased to $18.6 million from $5.8 million, primarily due to acquisition-related and Connect debt, higher facility usage and higher interest rates.
• Merchant revenue was $463.7 million and Segment Adjusted EBITDA was $33.5 million. Consumer revenue was $62.8 million and Segment Adjusted EBITDA was $3.3 million, versus a $21.7 million loss in FY2022. Segment Adjusted EBITDA is a non-GAAP measure.
• Unrestricted cash was $35.5 million at June 30, 2023; restricted cash was a further $23.1 million, principally for ATM funding. Current assets were $163.6 million and current liabilities $101.9 million, including settlement balances.
• Long-term borrowings were $133.1 million and short-term credit facilities were $32.0 million at year-end. Debt is largely South African rand-denominated, secured and subject to financial and operating covenants. The filing reports no off-balance-sheet arrangements.

Material changes and business progress

• Merchant growth included a 47% year-over-year increase in Kazang devices deployed to approximately 75,000, and a 98% increase in card-enabled POS devices to approximately 44,900.
• Merchant lending disbursements exceeded ZAR 1.0 billion, up 62% from approximately ZAR 0.6 billion. The merchant cash-management service operated in approximately 4,390 stores.
• Consumer active transactional accounts were approximately 1.3 million, including about 1.1 million permanent grant recipients. The net permanent-grant account base grew 2%; total grant accounts grew 10%.
• Consumer originated approximately 850,000 loans; its net loan book increased 19% to ZAR 415 million. Management reported an annualized portfolio loss ratio of approximately 6%. Active insurance policies rose 36% to approximately 335,000, and permanent-customer quarterly ARPU increased to approximately ZAR 80 from ZAR 74.
• Operating cash flow turned slightly positive, but remained modest relative to the reported non-GAAP EBITDA improvement. Finance-loan growth and working-capital movements affected cash generation.

Outlook, commentary, risks and unusual items

• Management described progress in its turnaround: Consumer recorded three consecutive quarters of positive Segment Adjusted EBITDA, while Merchant remained profitable on that measure. The filing provides no formal revenue, earnings or cash-flow guidance.
• Management expects FY2024 capital spending on POS devices, safe assets, vehicles, equipment, ATMs and branches, funded through internally generated funds and asset-backed borrowing. It aims to improve its South African B-BBEE rating from level 5 to level 4 by fiscal year-end 2024.
• A worker share ownership plan required in connection with the Connect acquisition had not been established by the filing date. The plan is expected to represent at least 3% of shares, potentially rising to 5% subject to specified profit conditions and approvals; this could dilute shareholders.
• Key operating risks include South African power outages, high inflation and interest rates, unemployment and weak economic conditions, rand/U.S. dollar volatility, credit losses, cyber and service interruptions, cash-in-transit losses, and regulatory or banking-partner dependence. Lesaka does not hold a South African banking license for its EPE offering and relies on a third-party bank arrangement.
• Debt covenants and secured facilities may constrain flexibility. The filing describes a ZAR 350 million credit-enhancement mechanism involving funds managed by major shareholder VCP; failure to perform could put funding or repayment at risk. Management warns that covenant breaches could lead to default or accelerated debt.
• Lesaka held a $76.3 million MobiKwik investment at cost adjusted for observable prior transactions, with no revaluation in FY2023; impairment remains a risk, and MobiKwik had indicated an intention to pursue a 2024 listing. Its Cell C equity investment was valued at zero. A $1.1 million Finbond impairment was recorded; after year-end, Lesaka agreed to sell its remaining Finbond holding, subject to approvals.
• Cash Paymaster Services (CPS), connected to the former SASSA grant contract, is in liquidation and has related litigation and obligations. No claim had been made against Lesaka, but the company says it cannot assure that none will be made. Other routine claims were described as not expected to be material.
• Other notable items include the $7.0 million goodwill impairment in the hardware/software support business, $7.3 million of stock-based compensation, and a $1.2 million once-off loss from employee misappropriation of company funds.

Important facts for investors to verify

• Whether the turnaround is generating durable operating cash flow, not only positive adjusted EBITDA, and how much cash is required to grow lending and fund ATM operations.
• Debt balances, maturities, interest-rate exposure, covenant headroom, collateral and the availability and enforceability of VCP’s credit support.
• Connect’s underlying margins and cash conversion, given the low-margin airtime revenue included in reported sales.
• Growth, utilization, customer retention and credit performance in Consumer; confirm loan-book quality, actual write-offs and insurance claims experience.
• Progress on the B-BBEE targets and ESOP structure, approvals, timing and potential dilution.
• Recoverability of the MobiKwik carrying value, completion and proceeds of the Finbond sale, and any developments in the CPS liquidation or claims.
• Exposure to load-shedding, rand movements and dependence on third-party banking, telecom and cash-in-transit providers.

Audit and controls: Deloitte & Touche issued unqualified opinions on the FY2023 financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.