LESAKA TECHNOLOGIES INC - Annual Report: 2022 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

Commission file number: 000-31203

LESAKA TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 27-11-343-2000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of December 31, 2021 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the closing price of the common stock as reported by The NASDAQ Global Select Market on such date, was $165,756,225. This calculation does not reflect a determination that persons are affiliates for any other purposes.

As of September 6, 2022, 59,312,436 shares of the registrant’s common stock, par value $0.001 per share, net of treasury shares, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the definitive Proxy Statement for our 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

LESAKA TECHNOLOGIES, INC

INDEX TO ANNUAL REPORT ON FORM 10-K

Year Ended June 30, 2022

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PART I

Forward Looking Statements

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Item 1A—“Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Annual Report. We undertake no obligation to release publicly any revisions to the forward-looking statements after the date of this Annual Report. You should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including the Quarterly Reports on Form 10-Q to be filed by us during our 2023 fiscal year, which runs from July 1, 2022 to June 30, 2023.

All references to “the Company,” “we,” “us,” or “our” are references to Lesaka Technologies, Inc. and its consolidated subsidiaries, collectively, and all references to “Lesaka” are to Lesaka Technologies, Inc. only, except as otherwise indicated or where the context indicates otherwise.

ITEM 1.BUSINESS

Overview

At Lesaka, our mission and core purpose is to bring financial inclusion to merchants and consumers in Southern Africa by building a world-class fintech platform. Our vision is to build and operate the leading South African full service fintech platform, offering cash management, payment and financial services.

Our core purpose is to improve people’s lives by bringing financial inclusion to South Africa’s underserved and underbanked customers, and helping small businesses access the financial services they need to prosper. We achieve this through our ability to efficiently digitize the last mile of financial inclusion, and to provide a full-service fintech platform across cash and digital, serving the needs of both, while also facilitating the secular shift from cash to digital that is currently taking place.

We are building a dual-sided financial ecosystem offering banking, lending and insurance to consumers, and cash, card, capital, payment and Value Added Services (“VAS”) solutions to micro, small and medium enterprises (“MSMEs”). Our dual-sided financial ecosystem has two overlapping segments: Merchants and Consumers.

Customers— In our B2C Consumer Segment, our focus is on the lower end of the market that has traditionally been under-banked. Our products are designed for consumers within Living Standards Measures (“LSMs”) 1 to 6, which comprises approximately 26 million people. We currently have over 1.1 million active customers who are predominantly recipients of social grants offered by the South African Government.

In our B2B Merchant Segment, we recently completed the acquisition of the Connect Group during the year ended June 30, 2022, which significantly advanced our vision and is truly transformational for our company. The acquisition adds significant scale to our existing B2B offering which mainly services formal merchants, bringing over 51,000 MSMEs into the Merchant business segment. Through the introduction of a suite of solutions and technologies targeted at the MSME merchant sector where we were previously under-represented, we can address the needs of approximately 1.4 million informal and approximately 700,000 formal MSMEs in South Africa.

The informal sector merchants are generally smaller and operate in rural areas or in informal urban areas and do not have access to traditional banking products. The formal merchants are generally in urban areas, have larger turnovers and have ready access to multiple service providers. We operate separate brands in these two sectors of the economy.

Products—We offer a comprehensive set of products and services to our consumer and merchant customers.

In our Consumer Segment, our products include transactional banking, short-term loans, a digital wallet as well as insurance and various VAS to consumers underserved in South Africa, aligning with our purpose of improving people’s lives and increasing financial inclusion. Our value proposition and products are designed to be simple, relevant and cost effective for our target market.

In our Merchant Segment, to the MSME customers, we offer cash management and digitization, card acquiring, growth capital, VAS and bill and supplier payments. At a larger enterprise level we offer bill and supplier payments and VAS through our proprietary financial switch, as well as point of sale devices and maintenance, bank and SIM card production and other specialized technology products.

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Market Opportunity

There are real challenges to delivering financial inclusion and digitization in the South Africa market. One of these major challenges is the deep distrust and a lack of understanding of cash alternatives, which is driven by low levels of financial literacy. Adding to this challenge is the relatively high connectivity costs in South Africa – airtime is an expensive and prized commodity – and smartphone penetration remains low in South Africa where many South Africans still use older style feature phones. Taken together, this all means that although almost 90% of South Africans have a bank account, a significant majority treat them as post boxes – withdrawing their money in one transaction. This has real implications for both merchants and consumers.

On the merchant side, less than 8% of merchants have access to formal credit and less than 4% of informal merchants can accept digital payments. And for consumers, approximately 20% of the estimated 26 million South African consumers in LSM 1-6 have access to credit and savings and a significant majority of the approximately 12 million permanent grant recipients require immediate cash withdrawals of their grant.

These sources of friction and challenges present a significant market opportunity for Lesaka to provide innovative solutions to both merchants and consumers, and more importantly, to facilitate wider financial inclusion and digitization. Lesaka has for a long time been at the forefront of providing financial inclusion and digitization for consumers and merchants in this space.

Consumer financial services for the unbanked: Our focus is on the LSM 1 to 6 population in South Africa, which represents approximately 26 million adults in the country. Within that, we estimate there to be approximately 12 million people reliant on permanent grants. South Africa is primarily a cash-based economy, with approximately 60% of transactions still conducted in cash. In the Consumer Segment, we currently have just over 1.1 million active account holders which represents approximately 4% share of our total addressable market. Our focus is on South African government social grant recipients, of which there are over 12 million, the majority of whom are being inadequately served by the current system. Lesaka is well placed to address the needs of these consumers with its large informal market distribution and affordable financial services.

Merchant payment and financial services for MSMEs. There are approximately 2.1 million MSMEs in South Africa, of which around 1.4 million operate in the informal market, and it is estimated that only 4% of these can accept digital payments. Lesaka has a comprehensive product suite of cash and digital solutions which provide a significant opportunity to assist these businesses to grow, reduce risks and be more efficient. This is an underserved market and so increasing our penetration is not about taking market share from competitors but rather about providing product sets that encourage the adoption of more formalized and non-cash transacting.

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While the informal market presents a major growth opportunity, Lesaka also has a comprehensive offering to the formal MSME and enterprise market.

Lesaka, with its significant distribution footprint of over 58,000 points of presence, across Merchant and Consumer, is well positioned to bring these two sides of the ecosystem together by incentivizing both merchants and consumers to utilize our solutions which will further enhance our growth opportunity.

Competition

With our comprehensive offering to consumers and merchants we compete with a wide range of service providers. There are competitors for individual products and services, though few with an end-to-end offering, particularly at the lower end of the consumer market and the informal merchant market where we have significant footprint and penetration. We believe our ability to bring a large consumer base to our merchant customers, and offer our consumers incentives to use our merchants, is a compelling proposition.

We do have competitors in parts of our ecosystem. For consumers, there are a number of traditional and digital providers of low-cost transactional bank accounts and micro financial services. These include the large South African banks such as FNB, Standard Bank, Absa, Nedbank, African Bank and Capitec, the South African Post Office, and digital banks such as, Tyme Bank and Bank Zero. In the South African ATM network market, we compete against the South African banks, ATM Solutions and Spark ATM Systems, which collectively have a market share in excess of 90%.

In the informal merchant sector, there are no competitors which offer a comprehensive product set of cash, card, payment, VAS and capital solutions, such as ours. In the formal merchant sector there is significantly more competition, with banks and non-bank fintech companies targeting these merchants.

In card acquiring, competitors include Yoco, iKhokha, Sureswipe and the South African banks; in VAS and bill payments, they include Flash, Blue Label, Shop2Shop, Pay@ and Ukeshe; in lending, they include Lulalend, Merchant Capital, Retail Capital and the South African banks; and in cash management, they include Fidelity, G4S, Cashnet and the South African banks.

At an enterprise level, our financial switch and VAS and bill payments business competes with BankservAfrica, Pay@, eCentric and Transaction Junction.

Human Capital Resources

We have hired a diverse team of high-caliber individuals, from different organizations, to form our leadership group. This leadership group is deeply committed to building a high-performance culture that is based on a foundation of care and development for our people.

As such we are on path towards building an aspirational work environment that is characterized by:

• Open and honest engagements;

• Flat organizational structures;

• Humility and respect;

• Embracing diversity, inclusion and a sense of belonging;

• A spirit of generosity for our people, customers and our communities;

• A willingness to partner with our stakeholders towards common goals;

• A deep connection to our shared purpose of inclusive financial services; and

• A culture of learning and curiosity.

Employee training and skills development

We strongly believe that learning is an ongoing process and that the majority of learning is in the doing. As such, while we offer a range of formal programs (as listed further below), more importantly, we continue to build a culture of lifelong learning in everything that we do.

Sustainable employee training and development programs impact employee retention, and we believe that our willingness to invest in employee development contributes to employee satisfaction and belonging. This increases loyalty, which will in turn contribute to employee retention. We offer the following development programs to enhance employee performance and skills:

• unemployed and employed learnerships;

• leadership development programs;

• training programs;

• mentorship programs;

• other in-house and cross-functional training to aid with career advancement; and

• succession planning – training interventions.

4

Equal opportunity

Having an inclusive and diverse workforce which reflects our economically active population and society in general, is crucial for helping the organization attract and retain talent and is important for long-term organizational success. Our human resources team emphasizes recruiting and retaining a talented and diverse workforce with special focus on hiring previously disadvantaged groups whenever possible. We are committed to hiring qualified candidates without regard to their personal status, while taking into account the unique circumstances affecting our operations in South Africa and the need to uplift previously disadvantaged groups. This commitment extends to all levels of our organization, including within senior management and our board of directors.

As of June 30, 2022, the composition of our workforce was:

• 63% female and 37% male;

• 41% between 18 and 34 years old, 56% between 35 and 54 years old, and 3% over 55 years old; and

• 72% Black, 18% two or more races, 5% Indian and 5% White.

We have no female named executive officers.

We continue to strive to build a more inclusive workforce and to enhance our pay structures by taking measures to eliminate potential remuneration discrimination and to help close gender pay gaps to progress towards gender equality at work. We have taken positive strides towards a rewards philosophy that not only allows the corporate hierarchy and its systems to be mapped out in an objective manner, but will reward high performance. In this way, remuneration levels can be set for every function with reference to the external market, and people in similar functions can be paid equally.

Employee compensation programs

We are committed to ensuring that all our employees are paid fair and competitive remuneration. To that end, we offer the following to our employees:

• Access to a comprehensive medical, dental, and vision plan that our employees have the option to join;

• Access to a defined contribution retirement plan that our employees have the option to join;

• Paid sick, study, annual and family responsibility leave;

• Maternity benefits;

• Life and disability insurance coverage;

• Employee assistance programs; and

• Product discounts.

Annual increases and incentive compensation are based on merit, which is communicated to employees at onboarding and documented as part of our annual performance review process.

Our number of employees allocated on a segmental basis as of the years ended June 30, 2022, 2021 and 2020, is presented in the table below:

(1) Fiscal 2022 Consumer includes three executive officers and Merchant includes two executive officers.

On a functional basis, five of our employees were part of executive management, 254 were employed in sales and marketing, 253 were employed in finance and administration, 237 were employed in information technology and 1,908 were employed in operations.

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Health and safety laws and regulations

We are subject to various South African laws and regulations that regulate the health and safety of our South African-based workforce, including those laws monitored by the South African Department of Employment and Labour which stipulates the legal framework within which we need to function. This framework comprises the Occupational Health and Safety Act, Act 85 of 1993 (“OHSA”), the Compensation for Occupational Injuries and Diseases Act, Act 130 of 1993 (“COIDA”), the Basic Conditions of Employment Act, Act 75 of 1997 (“BCEA”) and the Labour Relations Act, Act 66 of 1995 (“LRA”). Compliance with COVID-19 regulations remains regulated by the National Institute of Occupational Health (“NIOH”), and the Occupational Health Surveillance System (“OHSS”), the Centre for Scientific Industrial Research (“CSIR”) and the National Institute for Communicable Diseases (“NICD”).

People are ultimately the most important assets in any organization, therefore successfully managing health and safety in the workplace remains paramount. Successfully managing health and safety in the workplace relies on commitment, consultation, and co-operation.

In order to maintain OHSA compliance, we ensure that:

• Internal health and safety policies remain regularly updated and accessible to all staff;

• All departments/branches keep a summary of applicable Health and Safety legislation and display a summary of such at their respective premises for ease of reference;

• Each of our branches has a designated health and safety representative, a first aider and fire marshal tasked with ensuring compliance as well as being able to assist in an emergency situation when required, each of whom is trained every two years as per stipulated regulations;

• Every branch manager is a delegated official to our Chief Executive Officer: Southern Africa who ensures OHSA compliance and that employees have the necessary knowledge and understanding of applicable health and safety rules and procedures;

• Quarterly inspections are conducted by delegated officials at the respective branches so as to report on any non-compliance or health and safety issues which need tending to;

• Quarterly meetings are conducted with our National Health and Safety Officer to report in on company-wide compliance and any health and safety issues which require tending to; and

• Managers are trained in in the correct reporting procedures and proper incident/ accident investigation.

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Our Executive Officers

The table below presents our executive officers, their ages and their titles:

Christopher G.B. Meyer has been our Group Chief Executive Officer since July 1, 2021. Prior to joining Lesaka, Mr. Meyer was the Head of Corporate & Investment Banking and Joint Managing Director at Investec Bank Plc (“Investec”), an LSE-listed specialist bank and wealth manager, having served in many different roles within the Investec Group since 2001. He was also an executive director for various international and regional subsidiaries of Investec Bank Plc. Mr. Meyer is a member of the South African Institute of Chartered Accountants, holds an MSc Finance from the London Business School and a Post Graduate Diploma in Accounting from the University of Cape Town.

Naeem E. Kola has been our Group Chief Financial Officer, Treasurer and Secretary since March 1, 2022. Mr. Kola has held progressively senior finance roles in Dubai, most notably as Chief Financial Officer of the Emerging Markets Payments Group (“EMP”), a high-growth fintech business that grew materially and successfully concluded and integrated five acquisitions during his six-year tenure as Chief Financial Officer. Prior to becoming Chief Financial Officer, Mr. Kola was Senior Vice President for Investments, Strategy and Business Planning at EMP. Since the acquisition of EMP by Network International in 2017, Mr. Kola has been an Operations Director and Strategic Advisor to the emerging market private equity firm Actis, where he again focused on fintech businesses.

Lincoln C. Mali has been our Chief Executive Officer: Southern Africa since May 1, 2021. Mr. Mali is a financial services executive with over 25 years in the industry. Until April 2021, he was the Head of Group Card and Payments at Standard Bank Group, and previously served in many different roles within that organization since 2001. Mr. Mali chaired the board of directors of Diners Club South Africa until April 2021, and was a member of the Central and Eastern Europe, Middle East and Africa Business Council for Visa. Mr. Mali holds Bachelor of Arts (BA) and Bachelor of Laws (LLB) degrees from Rhodes University, an MBA from Henley Management College, various diplomas and attended an Advanced Management Program at Harvard Business School.

Steven J. Heilbron has been the Chief Executive Officer of the Connect Group since 2013 and joined us following the acquisition of Connect in the same capacity. Mr. Heilbron has two decades of financial services experience, having spent 19 years working for Investec in South Africa and the UK, where he served as Global Head of Private Banking and Joint Chief Executive Officer of Investec. He led a private consortium that acquired Cash Connect Management Solutions (Pty) Ltd (“CCMS”) in 2013. Mr. Heilbron has presided over significant organic growth in the rebranded Connect, as well as spearheading the successful acquisition and integration of Kazang and EFTpos acquired from the Paycorp Group in February 2020. He is a member of the South African Institute of Chartered Accountants.

Alex M.R. Smith has been our Chief Accounting Officer since March 1, 2022, and previously served as our Chief Financial Officer, Treasurer and Secretary from March 1, 2018. Prior to joining Lesaka, Mr. Smith was employed by Allied Electronics Corporation Limited (“Altron”), a JSE-listed company, from 2006 to 2018 and, from August 2008 until February 2018, served as a director and its Chief Financial Officer. Prior to joining Altron, Mr. Smith worked in various positions at PricewaterhouseCoopers in Edinburgh, Scotland and Johannesburg from 1991 to 2005. Mr. Smith holds a Bachelor of Law (Honours) degree from the University of Edinburgh and is a member of the Institute of Chartered Accountants of Scotland.

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Financial Information about Geographical Areas and Operating Segments

Refer to Note 21 to our audited consolidated financial statements included in this annual report contains detailed financial information about our operating segments for fiscal 2022, 2021 and 2020. Revenues based on the geographic location from which the sale originated and geographic location where long-lived assets are held for the years ended June 30, are presented in the table below:

(1) Refer to Note 16 to our audited consolidated financial statements included in this annual report contains detailed financial information about our revenue for fiscal 2022, 2021 and 2020.

Corporate history

Lesaka was incorporated in Florida in May 1997 as Net 1 UEPS Technologies, Inc. and changed its name to Lesaka Technologies, Inc. on May 12, 2022. In 2004, Lesaka acquired Net1 Applied Technology Holdings Limited (“Aplitec”), a public company listed on the Johannesburg Stock Exchange (“JSE”). In 2005, Lesaka completed an initial public offering and listed on the NASDAQ Stock Market. In 2008, Lesaka listed on the JSE in a secondary listing, which enabled the former Aplitec shareholders (as well as South African residents generally) to hold Lesaka common stock directly.

Available information

We maintain a website at www.lesakatech.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as well as our proxy statements, are available free of charge through the “SEC filings” portion of our website, as soon as reasonably practicable after they are filed with the SEC. The information contained on, or accessible through, our website is not incorporated into this Annual Report on Form 10-K.

The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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ITEM 1A. RISK FACTORS

OUR OPERATIONS AND FINANCIAL RESULTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW, THAT COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS, AND THE TRADING PRICE OF OUR COMMON STOCK

Risks Relating to Our Business

We may not be able to successfully integrate Connect’s operations with our business.

On April 14, 2022, we, through our wholly owned subsidiary Lesaka Technologies (Pty) Ltd (“Lesaka SA”), formerly Net1 Applied Technologies South Africa (Pty) Ltd, announced the closing of our ZAR 3.8 billion ($258.9 million) acquisition of Connect. The acquisition of Connect is strategically important for us because we believe that (i) the combination of complementary product offerings will assist us to drive stronger unit economics, (ii) the transaction facilitates expansion of our addressable market in the informal MSME sector, (iii) Connect has an attractive financial profile with a track record of strong and profitable growth opportunities, (iv) we have merged highly skilled teams with complementary expertise, and (v) we will be able to better serve the underserved.

Integrating Connect into our company will require significant attention from our senior management, which may divert their attention from our existing businesses. The difficulties of integration may be increased by cultural differences between our two organizations and the potential difficulties in retaining and integrating personnel, including Connect’s key employees and management team. The services of these individuals will be important to the continued growth and success of Connect’s business and to our ability to integrate the two organizations. If we were to lose the services of these key employees or we fail to sufficiently integrate them, our ability to operate Connect successfully would likely be materially and adversely impacted.

As such, if we are unable to successfully integrate Connect’s operations into our business we could be required to record material impairments and our financial condition, results of operations, cash flows and stock price could suffer.

We may not achieve the expected benefits from our acquisition of Connect.

Our expectations regarding Connect’s business and prospects may not be realized, including as a result of changes in the financial condition of the markets that Connect serves. In addition, there are risks associated with Connect’s operations, including the risk of reduced cash settlements through Connect’s vault infrastructure or higher cash losses, lower than expected growth in Connect’s value-added services, lower than expected customer acquisition rates or higher than expected customer churn, lower than expected levels of loan advances or higher credit losses and slower than expected growth in card transactions. Furthermore, attempting to combine and integrate service offerings may be disruptive to us or unsuccessful, and our customers may not use our combined services to the extent that we hope they will. Any such failure could adversely impact our own business as well as Connect’s, which could then reduce the value of our investment and adversely impact our other business and operational relationships.

Our inability to achieve the expected benefits from the Connect transaction may have a material adverse effect on our business, results of operations or financial condition. For example, our revenues and operating income may be adversely affected and we could be required to impair all, or a part of, our investment in Connect. If some or all of the aforementioned or other risks materialize, our ability to realize the anticipated benefits of the Connect acquisition could be materially impaired, and as a result, our financial condition, results of operations, cash flows and stock price could suffer.

We have a significant amount of indebtedness that requires us to comply with restrictive and financial covenants. If we are unable to comply with these covenants, we could default on this debt, which would have a material adverse effect on our business and financial condition.

We financed our recent acquisition of Connect through South African bank borrowings of ZAR 1.1 billion ($71.7 million, translated at closing date exchange rate (as defined in the Sale Agreement) of $1:ZAR 14.65165). The borrowings are secured by a pledge of certain of our bank accounts, and the cession of Lesaka’s shareholding in certain of its subsidiaries. These borrowings contain customary covenants that require Lesaka SA to maintain a specified total asset cover ratio and restrict the ability of Lesaka, Lesaka SA, and certain of its subsidiaries to make certain distributions with respect to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make investment above specified levels, engage in certain business combinations and engage in other corporate activities.

The loan agreements also include a credit enhancement mechanism of ZAR 350 million ($23.9 million, translated at closing date exchange rate), which has been provided by investment funds managed by Lesaka’s largest shareholder, Value Capital Partners (Pty) Ltd (“VCP”) which includes a contingent subscription for new shares. There can be no assurance that VCP will perform under the commercially agreed terms and failure by it to fulfil its obligation under the credit enhancement mechanism may put our funding or future repayments at risk.

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The Connect credit facilities include (i) an overdraft facility (general banking facility) of ZAR 248.0 million; (ii) Facility A of ZAR 700.0 million (a long-term facility with a bullet repayment); (iii) Facility B of ZAR 350.0 million (a long-term facility with amortizing repayments commencing September 2022); and (iv) an asset-backed facility of ZAR 70.7 million. The amount available under the general banking facility will reduce to ZAR 125.0 million on March 23, 2023. These borrowings are secured by a pledge of, among other things, CCMS’ entire equity interests in its subsidiaries and investments and any claims outstanding. These borrowings contain customary covenants that require CCMS to maintain specified debt service, interest cover and leverage ratios.

These security arrangements and covenants may reduce our operating flexibility or our ability to engage in other transactions that may be beneficial to us. If we are unable to comply with the covenants, we could be in default and the indebtedness could be accelerated. If this were to occur, we might not be able to obtain waivers of default or to refinance the debt with another lender and as a result, our business, financial condition and stock price would suffer.

We have decided to prioritize Southern Africa as our core market. Our future success, and our ability to return to profitability and positive cash flow is substantially dependent on our ability to implement this strategy successfully.

Our board conducted an extensive review of our business strategy and operations in July 2020, and decided to focus on our South African operations and other business opportunities in South Africa and, to a lesser extent, the rest of the African continent. The acquisition of Connect is part of this business strategy. We cannot assure you that we will be able to implement our new strategy successfully and return to profitability and positive cash flow.

Even if we do return to profitability, achieving net income does not necessarily ensure positive cash flows. Future periods of net losses from operations could result in negative cash flow and may hamper ongoing operations or prevent us from sustaining or expanding our business. We cannot assure you that we will achieve, sustain or increase profitability in the future and if we do not, our business will be materially and adversely affected.

Additionally, our reputation in South Africa has been tarnished as a result of public accusations against us, which we have publicly denied and believe have no merit, for illegally providing our services and defrauding social welfare grant recipients. We have attempted to refute these allegations and have appointed a public relations firm to assist us in communicating effectively to the public and our stakeholders that our business practices comply with South African law and are fair to the social welfare grant recipients who purchase the financial services products that we offer. If we are unable to communicate this persuasively, our ability to successfully execute our new strategy may be adversely affected.

We need to significantly grow our consumer operations in order to ensure their profitability and long term sustainability.

Following the conclusion of our contract with SASSA, we refocused our resources and technology on the provision of financial inclusion services to our target market and currently have an established base of approximately one million customers. Our strategy involves significantly expanding this base over the coming years. While we believe that our financial services offerings are convenient and cost-effective, the success of our strategy will depend on the extent to which we successfully market our offering to grow the customer base.

Factors that may prevent us from successfully operating and expanding our South African financial services business include, but are not limited to:

• insufficient adoption and utilization of our products and services;

• inability to access sufficient funding for our ATM infrastructure;

• increased competition in the marketplace and restrictions imposed by SASSA or the South African government on the manner in which grant recipients may transact;

• political interference and changes in the regulatory environment;

• further civil unrest similar to that experienced in July 2021;

• loss of key technical and operations staff; and

• logistical and communications challenges.

We may undertake acquisitions that could increase our costs or liabilities or be disruptive to our business.

Acquisitions are an integral part of our new growth strategy as we seek to expand our business and deploy our technologies in new markets in Southern Africa. However, we may not be able to locate suitable acquisition candidates at prices that we consider appropriate. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate the terms of the transaction, finance it or, if the transaction occurs, integrate the new business into our existing business. These transactions may require debt financing or additional equity financing, resulting in additional leverage or dilution of ownership.

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Acquisitions of businesses or other material operations and the integration of these acquisitions or their businesses will require significant attention from members of our senior management team, which may divert their attention from our day-to-day business. The difficulties of integration may be increased by the necessity of integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not be able to retain key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits that we anticipated when selecting our acquisition candidates. Acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition.

We may need to record write-downs from future impairments of goodwill or other intangible assets, which could reduce our future reported earnings.

Geopolitical conflicts, including the conflict between Russia and Ukraine, may adversely affect our business and results of operations.

The current conflict between Russia and Ukraine is creating substantial uncertainty about the future of the global economy. Countries across the globe are instituting sanctions and other penalties against Russia. The retaliatory measures that have been taken, and could be taken in the future, by the U.S., NATO, and other countries have created global security concerns that could result in broader European military and political conflicts and otherwise have a substantial impact on regional and global economies, any or all of which could adversely affect our business.

While the broader consequences are uncertain at this time, the continuation and/or escalation of the Russian and Ukraine conflict, along with any expansion of the conflict to surrounding areas, create a number of risks that could adversely impact our business, including:

• increased inflation and significant volatility in the macroeconomic environment;

• disruptions to our technology infrastructure, including through cyberattacks, ransom attacks or cyber-intrusion;

• adverse changes in international trade policies and relations;

• disruptions in global supply chains; and

• constraints, volatility or disruption in the credit and capital markets.

All of these risks could materially and adversely affect our business and results of operations. We are continuing to monitor the situation in Ukraine and globally and assessing the potential impact on our business.

A prolonged economic slowdown or lengthy or severe recession in South Africa or elsewhere could harm our operations.

A prolonged economic downturn or recession in South Africa could materially impact our results from operations, particularly in light of severe electricity disruptions in calendar 2022, the July 2021 social unrest in South Africa and our strategic decision to focus on our South African operations. Economic confidence in South Africa, our main operating environment, is currently low and, as a result, the risk of a prolonged economic downturn is increased, which could have a negative impact on merchants and retailers; mobile phone operators; our account holders; the level of transactions we process; the take-up of the financial services we offer and the ability of our customers to repay our loans or to pay their insurance premiums. If financial institutions and retailers experience decreased demand for their products and services, our hardware, software, related technology sales and processing revenue could decrease.

Our investment in MobiKwik subjects us to certain risks, including the possibility of fluctuations in the carrying value based on readily determinable fair values. In addition, our ability to dispose of our interest in MobiKwik on acceptable terms, or at all, may be limited under certain circumstances.

We have elected to account for our investment in MobiKwik at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar instrument of the same issuer because it does not have a readily determinable fair value. The determination of the fair value of an investment requires us to make significant judgments and estimates and we are required to base our estimates on assumptions which we believe to be reasonable, but these assumptions may be unpredictable and inherently uncertain. The value of our investment in MobiKwik as of June 30, 2022 and 2021, was $76.3 million and was determined based on a share issuance concluded by MobiKwik in June 2021, implying a fair value per equity share of $12.275. We did not identify any observable price changes during fiscal 2022 and therefore did not adjust the value of our investment during the year ended June 30, 2022. We recorded a non-cash fair value adjustment of $49.3 million during the year ended June 30, 2021.

MobiKwik filed its draft red herring prospectus in July 2021, with the original intention of completing its initial public offering in November 2021. MobiKwik decided to delay its initial public offering given prevailing market conditions and will reassess their options as market conditions change.

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We may need to record a write-down of the carrying value of our investment in MobiKwik in the future (i) if it is unable to successfully complete its contemplated initial public offering, (ii) due to fluctuations in its market price upon listing, including during the lock up period after its initial public offering, or (iii) if it has not listed, there is an observable transaction indicating a fair value per share which is lower than our June 30, 2022 price per share. Furthermore, it may be difficult to dispose of some or all of our investment on acceptable terms, if at all, if MobiKwik fails to list.

Our ability to fund our ATM network requires that we continue to have access to sufficient lending facilities, which requires compliance with restrictive and financial covenants.

The operational maintenance of our ATM network, along with an increase in our consumer banking client base, necessitates access to large amounts of cash to stock the ATMs and maintain uninterrupted service levels. We have credit facilities from a South African bank which includes security arrangements as well as restrictive and financial covenants. The security arrangements and covenants included in our lending facilities may reduce our operating flexibility or our ability to engage in other transactions that may be beneficial to us. If we are unable to comply with the covenants in South Africa, we could be in default and the indebtedness could be accelerated. If this were to occur, we might not be able to obtain waivers of default or to refinance the debt with another lender and as a result, our business and financial condition would suffer.

We may not be able to extend the terms of these debt facilities or refinance them, in each case, on commercially reasonable terms or at all. Our ability to continue the uninterrupted operation of our ATM network will be adversely impacted by our failure to renew our debt facilities, any adverse change to the terms of our credit facilities, or a significant reduction in the amounts available under our credit facilities, or our failure to increase our facilities if required. We may also suffer reputational damage if our service levels are negatively impacted due to the unavailability of cash.

We may be unable to recover the carrying value of certain Cell C airtime that we own.

We own a substantial amount of Cell C airtime inventory ($13.7 million translated at exchange rates applicable as of June 30, 2022). In support of Cell C’s liquidity position, we are limiting our resale of this airtime to our own distribution channels until such time as Cell C’s recapitalisation process is concluded, which exposes us to market risk for this inventory. Due to wholesale discounts in the distribution market for this airtime, it is not readily saleable in the current market without realising a loss. In light of this, we recorded a loss of $1.3 million during fiscal 2020, related to this airtime inventory. While no further losses were recorded in fiscal 2022 and 2021, we may be required to record further losses in the future or we may be unable to recover the carrying value of this airtime inventory as a result of the business failure of Cell C. Failure to recover the carrying value of this inventory may have a material adverse effect on our results of operations or financial condition.

Our consumer microlending loan book and merchant lending book expose us to credit risk and our allowance for doubtful finance loans receivable may not be sufficient to absorb future write-offs.

All of our microfinance loans made are for a period of six months or less and all of our merchant lending through Connect is for a period of less than 12 months. We have created an allowance for doubtful finance loans receivable related to these books. When creating the allowance, management considered factors including the period of the finance loan outstanding, creditworthiness of the customers and the past payment history of the borrower. We consider this policy to be appropriate as it takes into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. However, additional allowances may be required should the ability of our customers to make payments when due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these microfinance loan receivables.

We may face competition from other companies that offer innovative payment technologies and payment processing, which could result in the loss of our existing business and adversely impact our ability to successfully market additional products and services.

Our primary competitors in the payment processing market include other independent processors, as well as financial institutions, independent sales organizations, new digital and fintech entrants and, potentially card networks. Many of our competitors are companies who are larger than we are and have greater financial and operational resources than we have. These factors may allow them to offer better pricing terms or incentives to customers, which could result in a loss of our potential or current customers and/or force us to lower our prices. Either of these actions could have a significant effect on our revenues and earnings.

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Our future success will depend in part on our ability to attract, integrate, retain and incentivize key personnel and a sufficient number of skilled employees, particularly in the technical, sales and senior management areas.

Our group has undergone a significant change in management over the last twelve months, with various long-serving executives having resigned from the organization and new management joining us through the Connect acquisition. We believe we now have in place a management team that has the right experience and skills to execute on our new strategic direction. However, in order to succeed in our product development and marketing efforts, we may need to identify and attract new qualified technical and sales personnel, as well as motivate and retain our existing employees. As a result, an inability to hire and retain such employees would adversely affect our ability to achieve our strategic goals and maintain our technological relevance. We may face difficulty in managing the transition to a new management team, including team members from Connect, and assimilating our newly-hired personnel, which may adversely affect our business. Competitors may attempt to recruit our top management and employees. In order to attract and retain personnel in a competitive marketplace, we must provide competitive pay packages, including cash and equity-based compensation and the volatility in our stock price may from time to time adversely affect our ability to recruit or retain employees. We do not maintain any “key person” life insurance policies. If we fail to attract, integrate, retain and incentivize key personnel and skilled employees, our ability to manage and grow our business could be harmed and our product development and marketing activities could be negatively affected.

System failures, including breaches in the security of our system, could harm our business.

We may experience system failures from time to time, and any lengthy interruption in the availability of our back-end system computers could harm our business and severely affect our customer relationships. Frequent or persistent interruptions in our services could cause current or potential customers and users to believe that our systems are unreliable, leading them to avoid our technology altogether, and could permanently harm our reputation and brands. These interruptions would increase the burden on our staff, which, in turn, could delay our introduction of new applications and services. Finally, because our customers may use our products for critical transactions, any system failures could result in damage to our customers’ businesses. These customers could seek significant compensation from us for their losses. Even if unsuccessful, this type of claim could be time-consuming and costly for us to address.

Although certain of our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks and similar events. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities.

Protection against fraud is of key importance to the purchasers and end users of our solutions. We incorporate security features, including encryption software, biometric identification and secure hardware, into our solutions to protect against fraud in electronic transactions and to provide for the privacy and integrity of cardholder data. Our solutions may be vulnerable to breaches in security due to defects in the security mechanisms, the operating system and applications or the hardware platform. Security vulnerabilities could jeopardize the security of information transmitted using our solutions. If the security of our solutions is compromised, our reputation and marketplace acceptance of our solutions may be adversely affected, which would cause our business to suffer, and we may become subject to damage claims. We have not yet experienced any significant security breaches affecting our business.

Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems with our system could result in lengthy interruptions to our services. Our current business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.

Cash Paymaster Services, or CPS, has been placed into liquidation. While no claim has been made against Lesaka for CPS’ obligations, we cannot provide assurance that no such claim will be made.

CPS has significant obligations and ongoing litigation related to its SASSA contract and has been placed into liquidation. While no claim has been made against Lesaka to be held liable for CPS’ current obligations or any future obligations under any future court judgments, and while we do not believe that there would be a legitimate legal basis for any such claims, we cannot assure you that no such claim will be made against us. If SASSA or another third party were to seek and ultimately succeed in obtaining a judgment against us in respect of CPS’ liabilities, any such judgment would have a material adverse effect on our financial condition, results of operations and cash flows.

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Defending our intellectual property rights or defending ourselves in infringement suits that may be brought against us is expensive and time-consuming and may not be successful.

Litigation to enforce our patents, trademarks or other intellectual property rights or to protect our trade secrets could result in substantial costs and may not be successful. Any loss of, or inability to protect, intellectual property in our technology could diminish our competitive advantage and also seriously harm our business. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws in countries where we currently have patent protection. Our means of protecting our intellectual property rights in countries where we currently have patent or trademark protection, or any other country in which we operate, may not be adequate to fully protect our intellectual property rights. Similarly, if third parties claim that we infringe their intellectual property rights, we may be required to incur significant costs and devote substantial resources to the defense of such claims, to discontinue using and selling any infringing technology and services, to expend resources to develop non-infringing technology or to purchase licenses or pay royalties for other technology. In addition, if we are unsuccessful in defending any such third-party claims, we could suffer costly judgments and injunctions that could materially adversely affect our business, results of operations or financial condition.

We may incur material losses in connection with our movement of cash through our infrastructure in South Africa.

In our consumer business, many cardholders use our services to access cash using their debit cards. We use armored vehicles and our own fixed ATM infrastructure to deliver large amounts of cash across South Africa to enable these cardholders to receive this cash. In some cases, we also store the cash that will be delivered by the armored vehicles in depots overnight or over the weekend to facilitate delivery to these areas.

In our merchant business we collect and process large volumes of cash from our customers, assuming the risk of loss from the moment that cash is deposited into our vaults. We are then responsible for its collection and transportation to processing centers, which we outsource to various cash in transit service providers. These services extend across all areas of South Africa.

South Africa suffers from high levels of crime and in particular cash in transit heists. We cannot insure against certain risks of loss or theft of cash from our delivery and collection vehicles, ATMs or depots and we will therefore bear the full cost of certain uninsured losses or theft in connection with the cash handling process, and such losses could materially and adversely affect our financial condition, cash flows and results of operations. We have not incurred any material losses resulting from cash distribution in recent years, but there is no assurance that we will not incur any such material losses in the future.

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, POS devices, components for our safe assets, 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 current 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.

Our Smart Life business exposes us to risks typically experienced by life assurance companies.

Smart Life is a life insurance company and exposes us to risks typically experienced by life assurance companies. Some of these risks include the extent to which we are able to continue to reinsure our risks at acceptable costs, reinsurer counterparty risk, maintaining regulatory capital adequacy, solvency and liquidity requirements, our ability to price our insurance products appropriately, the risk that actual claims experience may exceed our estimates, the ability to recover policy premiums from our customers and the competitiveness of the South African insurance market. If we are unable to maintain our desired level of reinsurance at prices that we consider acceptable, we would have to either accept an increase in our risk exposure or reduce our insurance writings. If our reinsurers are unable to meet their commitments to us in a timely manner, or at all, we may be unable to discharge our obligations under our insurance contracts. As such, we are exposed to counterparty risk, including credit risk, of these reinsurers.

Our product pricing includes long-term assumptions regarding investment returns, mortality, morbidity, persistency and operating costs and expenses of the business. Using the wrong assumptions to price our insurance products could materially and adversely affect our financial position, results of operations and cash flows. If our actual claims experience is higher than our estimates, as we have seen during the recent COVID-19 pandemic, our financial position, results of operations and cash flows could be adversely affected.

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Finally, the South African insurance industry is highly competitive. Many of our competitors are well-established, represented nationally and market similar products and we therefore may not be able to effectively penetrate the South African insurance market.

We are unable to ascertain the full impact the COVID-19 pandemic will have on our future financial position, operations, cash flows and stock price.

Our business was impacted by government restrictions and quarantines related to COVID-19. South Africa operates with a five-level COVID-19 alert system, with Level 1 being the least restrictive and Level 5 being the most restrictive. South Africa is currently not subject to any formal COVID-19 restrictions. However, the pandemic did impact our insurance business during fiscal 2022 and 2021 as we experienced a higher level of benefit claims in these years. Should there be further increases in mortality rates across our customer base, we may see an increase in funeral policy claim payouts. We believe that our business activities may be adversely impacted if strict government-enforced restrictions are reintroduced to combat the spread of COVID-19 or similar pandemics.

Some of our employees worked from home following the publication of government-supported initiatives to combat the spread of COVID-19. As a result of the work from home environment, we may face additional challenges providing employees with secure remote access to computer networks as well as initiating and accepting instructions via e-mail or other electronic media should there be a resurgence of the virus or as a result of a similar event requiring our employees to work from home.

Risks Relating to Operating in South Africa and Other Foreign Markets

Operating in Southern Africa, an emerging market, subjects us to greater risks than those we would face if we operated in more developed markets. For example, we saw significant disruption from the civil unrest experienced in early July 2021.

Emerging markets such as Southern Africa are subject to greater risks than more developed markets. While we focus our business primarily on emerging markets because that is where we perceive the greatest opportunities to market our products and services successfully, the political, economic and market conditions these markets present risks that could make it more difficult to operate our business successfully.

Some of these risks include:

• political, legal and economic instability, including higher rates of inflation and currency fluctuations;

• high levels of corruption, including bribery of public officials;

• loss due to civil strife, acts of war or terrorism, guerrilla activities and insurrection;

• a lack of well-developed legal systems which could make it difficult for us to enforce our intellectual property and contractual rights;

• logistical, utilities (including electricity and water supply) and communications challenges;

• potential adverse changes in laws and regulatory practices, including import and export license requirements and restrictions, tariffs, legal structures and tax laws;

• difficulties in staffing and managing operations and ensuring the safety of our employees;

• restrictions on the right to convert or repatriate currency or export assets;

• greater risk of uncollectible accounts and longer collection cycles;

• indigenization and empowerment programs;

• exposure to liability under the UK Bribery Act; and

• exposure to liability under U.S. securities and foreign trade laws, including the Foreign Corrupt Practices Act, or FCPA, and regulations established by the U.S. Department of Treasury’s Office of Foreign Assets Control, or OFAC.

If we do not achieve applicable Broad-Based Black Economic Empowerment objectives in our South African businesses, we may be subject to fines and we risk losing our government and/or private contracts. In addition, it is possible that we may be required to increase the Black shareholding of our company in a manner that could dilute your ownership and/or change the companies from which we purchase goods or procure services (to companies with a better BEE Contributor Status Level).

The legislative framework for the promotion of Broad-Based Black Economic Empowerment (“BEE”), in South Africa has been established through the Broad-Based Black Economic Empowerment Act, No. 53 of 2003, as amended from time to time, and the Amended BEE Codes of Good Practice, 2013, or BEE Codes, and any sector-specific codes of good practice, or Sector Codes, published pursuant thereto. Sector Codes are fully binding between and among businesses operating in a sector for which a Sector Code has been published. Achievement of BEE objectives is measured by a scorecard which establishes a weighting for the various elements. Scorecards are independently reviewed by accredited BEE verification agencies which issue a certificate that presents an entity’s BEE Contributor Status Level. This BEE verification process must be conducted on an annual basis, and the resultant BEE compliance certificate is only valid for a period of 12 months from the conclusion of the verification.

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Certain of our South African businesses are subject to either the Information, Communications and Technology Sector Code, or ICT Sector Code, or the Financial Services Sector Code, or the FS Sector Code. The ICT Sector Code and the FS Sector Code have been amended and aligned with the new BEE Codes and were promulgated in November 2016 and December 2017, respectively. Licensing and/ or regulation authorities overseeing these businesses may set minimum adherence requirements to BEE standards as a condition for an operating license to trade.

The BEE scorecard includes a component relating to management control, which serves to determine the participation of Black people within the board, as well as at various levels of management within a measured entity (including, inter alia, Executive Management, Senior Management, Middle Management and Junior Management). The BEE Codes and/or Sector Codes define the terms "Senior Management", "Middle Management" and "Junior Management" as those occupational categories as determined in accordance with the Employment Equity Regulations, with specific emphasis on improving participation in proportion to the demographics of the Economically Active Population of South Africa, as determined quarterly by Statistics South Africa. Employment Equity legislation seeks to drive the alignment of the workforce with the racial composition of South Africa and accelerate the achievement of employment equity targets, introducing monetary fines for non-achievement and misrepresented submissions. Failing to meet these targets may expose us to fines. Annexure EEA9 to the Employment Equity Regulations sets out the various occupational levels which are determined in accordance with the relevant grading systems applied by the measured entity and referred to in said Annexure.

We have taken a number of actions as a company to increase empowerment of Black (as defined under applicable regulations) South Africans. For instance, the South African competition authorities approved the Connect transaction subject to certain public interest conditions relating to employment, increasing the spread of ownership by historically disadvantaged people (“HDPs”), and investing in both enterprise and supplier development. Further to increasing the spread of ownership by HDPs, we are required to establish an Employee Share Ownership Plan scheme (“ESOP”) within 24 months of the implementation of the transaction that complies with certain design principles. This will benefit the workers of the merged entity and result in them receiving a shareholding in our company equal in value to at least 3% of the issued shares in our company as of April 14, 2022. If within 24 months of the implementation date of the transaction, we generate a positive net profit for three consecutive quarters, the ESOP shall increase to 5% of the issued shares in in our company as of April 14, 2022. The final structure of the ESOP is contingent on shareholder approval and relevant regulatory and governance approvals. The ESOP had not been established as of the date of this Annual Report on Form 10-K.

During fiscal 2022, we provided 10,500 families with flood relief support in response to the devastating impact of the April 2022 KwaZulu-Natal floods, leveraging our branch footprint and proximity to the most affected areas. We have empowered more than 160 young South Africans with learnership opportunities to improve their skills and readiness to participate in the mainstream economy. We have also made an investment into establishing the infrastructure for a multi-year value chain framework that will cut across various BEE pillars and businesses in South Africa. However, it is possible that these actions may not be sufficient to enable us to achieve the applicable BEE objectives set out for specific financial years. In that event, in order to maintain competitiveness with both government and private sector clients, we may have to seek to increase compliance through other means, including by selling or placing additional shares of Lesaka or of our South African subsidiaries to Black South Africans (either directly or indirectly), over and above what has already been approved. Such sales or placements of shares could have a dilutive impact on your ownership interest, which could cause the market price of our stock to decline.

We expect that our BEE Contributor Status Level will be important in order for us to remain competitive in the South African marketplace and we continually seek ways to improve our BEE Contributor Status Level, especially the ownership element (so-called “equity element”) thereof.

We may not be able to effectively and efficiently manage the disruption to our operations as a result of erratic electricity supply in South Africa, which could adversely affect our, financial position, cash flows and future growth.

Our businesses in South Africa are dependent on electricity generated and supplied by the state-owned utility, Eskom, in order to operate, and Eskom has been unable to generate and supply the amount of electricity required by the South African economy which has resulted in significant and often unpredictable electricity supply disruptions. Eskom has implemented a number of short- and long-term mitigation plans to correct these issues but supply disruptions continue to occur regularly and with no predictability. As part of our business continuity programs, we have installed back-up diesel generators in order for us to continue to operate our core data processing facilities in the event of intermittent disruptions to our electricity supply. We have to perform regular monitoring and maintenance of these generators and also source and manage diesel fuel levels. We may also be required to replace these generators on a more frequent basis due to the additional burden placed on them.

Our results of operations, financial position, cash flows and future growth could be adversely affected if Eskom is unable to raise sufficient funding to operate and/or commission new electricity-generating power stations in accordance with its plans, or at all, or if we are unable to effectively and efficiently test, maintain, source fuel for, and replace, our generators.

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Fluctuations in the value of the South African rand have had, and will continue to have, a significant impact on our reported results of operations, which may make it difficult to evaluate our business performance between reporting periods and may also adversely affect our stock price.

The South African rand, or ZAR, is the primary operating currency for our business operations while our financial results are reported in U.S. dollars. Therefore, any depreciation in the ZAR against the U.S. dollar, would negatively impact our reported revenue and net income. The U.S. dollar/ZAR exchange rate has historically been volatile and we expect this volatility to continue (refer to Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Currency Exchange Rate Information.”). Due to the significant fluctuation in the value of the ZAR and its impact on our reported results, you may find it difficult to compare our results of operations between financial reporting periods even though we provide supplemental information about our results of operations determined on a ZAR basis. Similarly, depreciation in the ZAR may negatively impact the prices at which our stock trades.

We generally do not engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations, other than economic hedging using forward contracts relating to our inventory purchases which are settled in U.S. dollars or euros. We cannot guarantee that we will enter into hedging transactions in the future or, if we do, that these transactions will successfully protect us against currency fluctuations.

South Africa’s high levels of poverty, unemployment and crime may increase our costs and impair our ability to maintain a qualified workforce

While South Africa has a highly developed financial and legal infrastructure, it also has high levels of crime and unemployment, relative to peer countries in Africa and other emerging economies, and there are significant differences in the level of economic and social development among its people, with large parts of the population, particularly in rural areas, having limited access to adequate education, healthcare, housing and other basic services, including water and electricity. In addition, South Africa has a high prevalence of HIV/AIDS and tuberculosis. Government policies aimed at alleviating and redressing the disadvantages suffered by the majority of citizens under previous governments may increase our costs and reduce our profitability, all of which could negatively affect our business. These problems may prompt emigration of skilled workers, hinder investment into South Africa and impede economic growth. As a result, we may have difficulties attracting and retaining qualified employees.

The economy of South Africa is exposed to high rates of inflation, interest and corporate tax, which could increase our operating costs and thereby reduce our profitability. Furthermore, the South African government requires additional income to fund future government expenditures and may be required, among other things, to increase existing income tax rates, including the corporate income tax rate, amend existing tax legislation or introduce additional taxes.

The economy of South Africa in the past has been, and in the future may continue to be, characterized by rates of inflation and interest that are substantially higher than those prevailing in the United States and other highly-developed economies. High rates of inflation could increase our South African-based costs and decrease our operating margins. High interest rates increase the cost of our debt financing, though conversely, they also increase the amount of income we earn on any cash balances. The South African corporate income tax rate, of 28%, is higher than the U.S. federal income tax rate, of 21%. While the South African corporate income tax rate is expected to reduce to 27% in fiscal 2023, any subsequent increase in the effective South African corporate income tax rate would adversely impact our profitability and cash flow generation.

Risks Relating to Government Regulation

We are required to comply with certain laws and regulations, including economic and trade sanctions, which could adversely impact our future growth.

We are subject to U.S. and other trade controls, economic sanctions and similar laws and regulations, including those in the jurisdictions where we operate. Our failure to comply with these laws and regulations could subject us to civil, criminal and administrative penalties and harm our reputation. These laws and regulations place restrictions on our operations, trade practices, partners and investment decisions. In particular, our operations are subject to U.S. and foreign trade control laws and regulations, including various export controls and economic sanctions programs, such as those administered by OFAC. We monitor compliance in accordance with the 10 principles as set out in the United Nations Global Compact Principles, the Organisation for Economic Co-operation and Development recommendations relating to corruption, and the International Labor Organization Protocol in terms of certain of the items to be monitored. As a result of doing business in foreign countries and with foreign partners, we are exposed to a heightened risk of violating trade control laws as well as sanctions regulations.

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Violations of trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. We have developed policies and procedures as part of a company-wide compliance program that is designed to assist our compliance with applicable U.S. and international trade control laws and regulations, including trade controls and sanctions programs administered by OFAC, and provide regular training to our employees to create awareness about the risks of violations of trade control laws and sanctions regulations and to ensure compliance with these laws and regulations. However, there can be no assurance that all of our employees, consultants, partners, agents or other associated persons will not act in violation of our policies and these laws and regulations, or that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our local, strategic or joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could materially and adversely affect our reputation, business, results of operations and financial condition. Any expansion into developing countries, and our development of new partnerships and joint venture relationships, could increase the risk of OFAC violations in the future.

In addition, our payment processing and financial services activities are subject to extensive regulation. Compliance with the requirements under the 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.

We are required to comply with anti-corruption laws and regulations, including the FCPA and UK Bribery Act, in the jurisdictions in which we operate our business, which could adversely impact our future growth.

The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining business, or securing any improper business advantage, and requires us to keep books and records that accurately and fairly reflect our transactions. As part of our business, we may deal with state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA. The UK Bribery Act includes provisions that extend beyond bribery of foreign public officials and also apply to transactions with individuals not employed by a government and the act is also more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Some of the international locations in which we operate or have investments lack a developed legal system and have higher than normal levels of corruption.

Any failure by us to adopt appropriate compliance procedures and ensure that our employees, agents and business partners comply with the anti-corruption laws and regulations could subject us to substantial penalties, and the requirement that we comply with these laws could put us at a competitive disadvantage against companies that are not required to comply. For example, in many emerging markets, there may be significant levels of official corruption, and thus, bribery of public officials may be a commonly accepted cost of doing business. Our refusal to engage in illegal behavior, such as paying bribes, may result in us not being able to obtain business that we might otherwise have been able to secure or possibly even result in unlawful, selective or arbitrary action being taken against us.

Violations of anti-corruption laws and regulations are punishable by civil penalties, including fines, as well as criminal fines and imprisonment. We have developed policies and procedures as part of a company-wide compliance program that is designed to assist our compliance with applicable U.S., South African and other international anti-corruption laws and regulations, and provide regular training to our employees to comply with these laws and regulations. However, there can be no assurance that all of our employees, consultants, partners, agents or other associated persons will not take actions in violation of our policies or these laws and regulations, or that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our local, strategic or joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could materially and adversely affect our reputation, business, results of operations and financial condition.

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.

The South African retail banking market is highly regulated. Under current law and regulations, our 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 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 strict anti-money laundering and customer identification regulations of the South African Reserve Bank (“SARB”), when we open new bank accounts for our customers and when they transact. Failure to effectively implement and monitor responses to these regulations may result in significant fines or prosecution of Grindrod Bank and ourselves.

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It has recently been announced that Grindrod Bank will be acquired by African Bank which operates across the lower end of the South African financial services market. It is not yet clear how African Bank will view our current arrangement with Grindrod Bank and whether this changes the risk of termination.

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. Smart Life was granted an Authorized Financial Service Provider, or FSP, license on June 9, 2015, and Moneyline Financial Services (Pty) Ltd and Net1 Mobile Solutions (Pty) Ltd were each granted FSP licenses on July 11, 2017. If our FSP licenses are cancelled, we may be stopped from continuing our financial services businesses in South Africa.

Furthermore, the proposed Conduct of Financial Institutions Bill will make significant changes to the current licensing regime. The second draft of the Conduct of Financial Institutions Bill was published for public comment on 29 September 2020. While the proposals currently indicate that existing licenses will be converted, if we are not successful in our efforts to obtain a conversion of the existing licenses or cannot comply with the new conduct standards to be published at the same time under the Financial Sector Regulation Act, No. 9 of 2017, we may be stopped from continuing our financial services businesses in South Africa.

We may be subject to regulations regarding privacy, data use and/or security, which could adversely affect our business.

We are subject to regulations in a number of the countries in which we operate relating to the processing (which includes, inter alia, the collection, use, retention, security and transfer) of personal information about the people (whether natural or juristic) who use our products and services. The interpretation and application of user data protection laws are in a state of flux. These laws may be interpreted and applied inconsistently from country to country and our current data protection policies and practices may not be consistent with those interpretations and applications. Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Any failure, or perceived failure, by us to comply with any regulatory requirements or international privacy or consumer protection-related laws and regulations could result in proceedings or actions against us by governmental entities or others, subject us to significant penalties and negative publicity. In addition, as noted above, we are subject to the possibility of security breaches, which themselves may result in a violation of these laws.

Amendments to the NCA were signed into law in South Africa in August 2019. Compliance with these amendments may adversely impact our micro-lending operations in South Africa.

In August 2019, the National Credit Amendment Bill, or debt-relief bill, was signed into law in South Africa. The effective date of the debt-relief bill has not yet been announced. We believe that the debt-relief bill will restrict the ability of financial services providers to provide lending products to certain low-income earners and will increase the cost of credit to these consumers. As a result, compliance with the debt-relief bill may adversely impact our micro-lending operations in South Africa. Furthermore, we expect that it will take us, and other financial services providers, some time to fully understand, interpret and implement this new legislation in our lending processes and practices. Non-compliance with the provisions of this new legislation may result in financial loss and penalties, reputational loss or other administrative punishment.

Risks Relating to our Common Stock

If we were deemed an “investment company” under the Investment Company Act, applicable restrictions could make it impractical for us to conduct our business as an operating company and could have a material adverse effect on our business.

We are an operating company whose business is focused on developing and offering payment solutions, transaction processing services and financial technologies across multiple industries directly and through our wholly-owned subsidiaries. Our conduct, public filings and announcements hold us out as such an operating company and do not hold us out as being engaged in the business of investing, reinvesting or trading in securities. We own, and in the past have owned, certain assets that may be deemed to be “investment securities” within the meaning of Section 3(a)(2) of the Investment Company Act. The fluctuating value of our assets that may be deemed to be investment securities, could cause us to be deemed to be an “investment company” under the Investment Company Act if the value of such investment securities exceeds certain defined thresholds.

If we are deemed an investment company and not entitled to an exception or exemption from registration under the Investment Company Act, we would have to register as an investment company, modify our asset profile or otherwise change our business so that it falls outside the definition of an investment company under the Investment Company Act. Registering as an investment company pursuant to the Investment Company Act could, among other things, materially limit our ability to borrow funds or engage in other transactions and otherwise would subject us to substantial and costly regulation. Failure to register, if required, would significantly impair our ability to continue to engage in our business and would have a material adverse impact on our business and operations.

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Our stock price has been and may continue to be volatile.

Our stock price has periodically experienced significant volatility. During the 2022 fiscal year, our stock price ranged from a low of $3.84 to a high of $6.97. We expect that the trading price of our common stock may continue to be volatile as a result of a number of factors, including, but not limited to the following:

• any adverse developments in litigation or regulatory actions in which we are involved;

• fluctuations in currency exchange rates, particularly the U.S. dollar/ZAR exchange rate;

• announcement of additional BEE transactions, especially one involving the issuance or potential issuance of equity securities or dilution or sale of our existing business in South Africa;

• quarterly variations in our operating results;

• significant fair value adjustments or impairment in respect of investments or intangible assets;

• announcements of acquisitions or disposals;

• the timing of, or delays in the commencement, implementation or completion of major projects;

• large purchases or sales of our common stock; and

• general conditions in the markets in which we operate.

Additionally, shares of our common stock can be expected to be subject to volatility resulting from purely market forces over which we have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies, to expand into new markets and to make acquisitions, all of which may be dependent upon our ability to obtain financing through debt and equity or other means.

The put right we granted to the IFC Investors on the occurrence of certain triggering events may have adverse impacts on us.

In May 2016, we issued an aggregate of 9,984,311 shares of our common stock to the IFC Investors, of which, as of June 30, 2022, the IFC Investors held 7,366,866 shares. We granted the IFC Investors certain rights, including the right to require us to repurchase any share held by the IFC Investors pursuant to the May 2016 transaction upon the occurrence of specified triggering events, which we refer to as a “put right.” The put price per share will be the higher of the price per share paid to us by the IFC Investors and the volume-weighted average price per share prevailing for the 60 trading days preceding the triggering event, except that with respect to a put right triggered by rejection of a bona fide offer, the put price per share will be the highest price offered by the offeror. If a put triggering event occurs, it could adversely impact our liquidity and capital resources. In addition, the existence of the put right could also affect whether or on what terms a third party might in the future offer to purchase our company. Our response to any such offer could also be complicated, delayed or otherwise influenced by the existence of the put right.

Approximately 33% of our outstanding common stock is owned by two shareholders. The interests of these shareholders may conflict with those of our other shareholders.

There is a concentration of ownership of our outstanding common stock because approximately 33% of our outstanding common stock is owned by two shareholders. Based on their most recent SEC filings disclosing ownership of our shares, Value Capital Partners (Pty) Ltd, or VCP, and IFC Investors, beneficially own approximately 21% and 12% of our outstanding common stock as of June 30, 2022, respectively.

VCP has agreed, pursuant to an Amended Cooperation Agreement dated December 9, 2020, to refrain from acquiring more than 24.9% of our outstanding common stock, excluding shares that may be issued pursuant to a stock purchase agreement dated March 22, 2022, or taking certain actions, including acting in concert with others, that could result in a change of control of the Company. These restrictions remain in effect through to the business day immediately following our 2022 annual meeting of shareholders.

The interests of VCP and the IFC Investors may be different from or conflict with the interests of our other shareholders. As a result of the significant combined ownership by VCP and the IFC Investors, subject to the limitations applicable to VCP contained in the Amended Cooperation Agreement, they may be able, if they act together, to significantly influence the voting outcome of all matters requiring shareholder approval. This concentration of ownership may have the effect of delaying or preventing a change of control of our company, thus depriving shareholders of a premium for their shares, or facilitating a change of control that other shareholders may oppose.

We may seek to raise additional financing by issuing new securities with terms or rights superior to those of shares of our common stock, which could adversely affect the market price of such shares.

We may require additional financing to fund future operations, including expansion in current and new markets, programming development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies, or to fund acquisitions. We may also wish to raise additional equity funding to reduce the amount of debt funding on our balance sheet.

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Because of the exposure to market risks associated with economies in emerging markets, we may not be able to obtain financing on favorable terms or at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current shareholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common stock, which could adversely affect the market price and voting power of shares of common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us.

Issuances of significant amounts of stock in the future could potentially dilute your equity ownership and adversely affect the price of our common stock.

We believe that it is necessary to maintain a sufficient number of available authorized shares of our common stock in order to provide us with the flexibility to issue shares for business purposes that may arise from time to time. For example, we could sell additional shares to raise capital to fund our operations, to reduce debt or to acquire other businesses, issue shares in a BEE transaction, issue additional shares under our stock incentive plan or declare a stock dividend. Our board may authorize the issuance of additional shares of common stock without notice to, or further action by, our shareholders, unless shareholder approval is required by law or the rules of the NASDAQ Stock Market. The issuance of additional shares could dilute the equity ownership of our current shareholders and any such additional shares would likely be freely tradable, which could adversely affect the trading price of our common stock.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, especially over companies that we may acquire, could have a material adverse effect on our business and stock price. Our management evaluation and auditor attestation regarding the effectiveness of our internal control over financial reporting as of June 30, 2022, excluded the operations of Connect. If we are not able to integrate Connect’s operations into our internal control over financial reporting, our internal control over financial reporting may not be effective.

Under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes, we are required to furnish a management certification and auditor attestation regarding the effectiveness of our internal control over financial reporting. We are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal control that materially affect, or are reasonably likely to materially affect, internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

The requirement to evaluate and report on our internal controls also applies to companies that we acquire. As a group of private companies, Connect was not required to comply with Sarbanes prior to the time we acquired it. The integration of Connect into our internal control over financial reporting is expected to require significant time and resources from our management and other personnel and may increase our compliance costs. If we fail to successfully integrate the operations of Connect, and any other acquisitions, into our internal control over financial reporting, our internal control over financial reporting may not be effective.

While we continue to dedicate resources and management time to ensuring that we have effective controls over financial reporting, including with respect to Connect’s operations, failure to achieve and maintain an effective internal control environment could have a material adverse effect on the market’s perception of our business and our stock price.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions based upon U.S. laws, including federal securities laws or other foreign laws, against us or certain of our directors and officers and experts.

While Lesaka is incorporated in the state of Florida, United States, the company is headquartered in Johannesburg, South Africa and substantially all of the company’s assets are located outside the United States. In addition, the majority of Lesaka’s directors and all its officers reside outside of the United States and the majority of our experts, including our independent registered public accountants, are based in South Africa.

As a result, even though you could effect service of legal process upon Lesaka, as a Florida corporation, in the United States, you may not be able to collect any judgment obtained against Lesaka in the United States, including any judgment based on the civil liability provisions of U.S. federal securities laws, because substantially all of our assets are located outside the United States. Moreover, it may not be possible for you to effect service of legal process upon the majority of our directors and officers or upon our experts within the United States or elsewhere outside South Africa and any judgment obtained against any of our foreign directors, officers and experts in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by a South African court.

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South Africa is not a party to any treaties regarding the enforcement of foreign commercial judgments, as opposed to foreign arbitral awards. Accordingly, a foreign judgment is not directly enforceable in South Africa, but constitutes a cause of action which may be enforced by South African courts provided that:

• the court which pronounced the judgment had international jurisdiction and competence to entertain the case according to the principles recognized by South African law with reference to the jurisdiction of foreign courts;

• the judgment is final and conclusive (that is, it cannot be altered by the court which pronounced it);

• the judgment has not lapsed;

• the recognition and enforcement of the judgment by South African courts would not be contrary to public policy in South Africa, including observance of the rules of natural justice which require that no award is enforceable unless the defendant was duly served with documents initiating proceedings, that he or she was given a fair opportunity to be heard and that he or she enjoyed the right to be legally represented in a free and fair trial before an impartial tribunal;

• the judgment was not obtained by improper or fraudulent means;

• the judgment does not involve the enforcement of a penal or foreign revenue law or any award of multiple or punitive damages; and

• the enforcement of the judgment is not otherwise precluded by the provisions of the Protection of Business Act 99 of 1978 (as amended), of the Republic of South Africa.

It has been the policy of South African courts to award compensation for the loss or damage actually sustained by the person to whom the compensation is awarded. South African courts have awarded compensation to shareholders who have suffered damages as a result of a diminution in the value of their shares based on various actions by the corporation and its management. Although the award of punitive damages is generally unenforceable in the South African legal system, that does not mean that such awards are necessarily contrary to public policy. The award of punitive damages is governed by the relevant South African legislation, the Conventional Penalties Act 15 of 1962 (as amended).

Whether a judgment was contrary to public policy depends on the facts of each case. Exorbitant, unconscionable, or excessive awards will generally be contrary to public policy. South African courts cannot enter into the merits of a foreign judgment and cannot act as a court of appeal or review over the foreign court. Further, if a foreign judgment is enforced by a South African court, it will be payable in South African currency unless approval is obtained from SARB or an Authorised Dealer of SARB, to settle the judgement in another currency. Also, under South Africa’s exchange control laws, the approval of SARB or an Authorised Dealer is required before a defendant resident in South Africa may pay money to a non-resident plaintiff in satisfaction of a foreign judgment enforced by a court in South Africa.

It is doubtful whether an original action based on United States federal securities laws may be brought before South African courts. A plaintiff who is not resident in South Africa may be required to provide security for costs in the event of proceedings being initiated in South Africa. Furthermore, the Rules of the High Court of South Africa require that documents executed outside South Africa must be authenticated for the purpose of use in South African courts. In reaching the foregoing conclusions in respect of South Africa, we consulted with our South African legal counsel, Cliffe Dekker Hofmeyr Inc.

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ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

We lease our corporate headquarters facility which consists of approximately 87,000 square feet in Johannesburg, South Africa. We also lease properties throughout South Africa, including an approximately 36,000 square foot manufacturing facility in Lazer Park, Johannesburg, 213 financial services branches, 80 financial service express stores and 29 satellite branches. We also lease additional office space in Johannesburg, Cape Town and Durban, South Africa; and Gaborone, Botswana. These leases expire at various dates through 2028, assuming the exercise of options to extend. We believe that we have adequate facilities for our current business operations.

ITEM 3. LEGAL PROCEEDINGS

Resolution of NCR application for the cancelation of Moneyline’s registration as a credit provider

In September 2014, the NCR applied to the South African National Consumer Tribunal, or Tribunal, to cancel the registration of our subsidiary, Moneyline, for breach of the NCA based on an investigation concluded by it. We raised a number of procedural points in defense, and argument on these points was heard on November 27, 2015, before three tribunal members. Two ruled against us and one upheld our points. We appealed the majority ruling to the High Court. This matter was heard on December 4, 2018, by a full bench of the Pretoria High Court. In opposing this appeal, the NCR contended that our appeal had no basis and they raised, as a procedural point, that we should have joined the Tribunal as a party to the appeal proceedings. On August 30, 2019, it was ordered that the Tribunal be included in the appeal proceedings and this appeal was scheduled to be heard on October 27, 2021.

The parties settled the matter out of court in mid-October 2021. The settlement process included the NCR withdrawing its application to cancel our NCA registration with the Tribunal and we agreed to withdraw our appeal with the High Court. The settlement was made an order of the High Court on October 27, 2021. The parties agreed to pay their own costs related to this matter.

Litigation related to CPS

As a result of significant obligations relating to, and ongoing litigation arising out of, CPS’ SASSA contract, including the exhaustion of CPS’ legal appeals against a court judgment to repay additional SASSA implementation costs, CPS was placed into liquidation in October 2020. As a result, CPS’ liquidators are currently in control of the CPS liquidated estate and are managing the affairs in relation thereto. We have proven our claims and are noted as a creditor along with other creditors in the liquidated estate.

There are no other material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market information

Our common stock is listed on The NASDAQ Global Select Market, or Nasdaq, in the United States under the symbol “LSAK” and on the JSE in South Africa under the symbol “LSK.” The Nasdaq is our principal market for the trading of our common stock.

Our transfer agent in the United States is Computershare Shareowner Services LLC, 480 Washington Blvd, Jersey City, New Jersey, 07310. According to the records of our transfer agent, as of August 31, 2022, there were 8 shareholders of record of our common stock. We believe that a substantially greater number of beneficial owners of our common stock hold their shares though banks, brokers, and other financial institutions (i.e. “street name”). Our transfer agent in South Africa is JSE Investor Services (Pty) Ltd, 13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein, 2001, South Africa.

Dividends

We have not paid any dividends on shares of our common stock during our last two fiscal years and presently intend to retain future earnings to finance the expansion of the business. We do not anticipate paying any cash dividends in the foreseeable future. The future dividend policy will depend on our earnings, capital requirements, debt commitments, expansion plans, financial condition and other relevant factors.

Issuer purchases of equity securities

On February 5, 2020, our board of directors approved the replenishment of our existing share repurchase authorization to repurchase up to an aggregate of $100 million of common stock. The authorization has no expiration date. We did not repurchase any shares of our common stock during fiscal 2022.

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Share performance graph

The chart below compares the five-year cumulative return, assuming the reinvestment of dividends, where applicable, on our common stock with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph assumes $100 was invested on June 30, 2017, in each of our common stock, the companies in the S&P 500 Index, and the companies in the NASDAQ Industrial Index.

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ITEM 6.[RESERVED]

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ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with Item 8—“Financial Statements and Supplementary Data.” In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See Item 1A— “Risk Factors” and “Forward Looking Statements.”

Overview

We are a provider of financial technology, or fintech, products and services to unbanked and underbanked individuals and small businesses, predominantly in South Africa. We have developed and own most of our payment technologies, and where possible, we utilize this technology to provide financial and value-added services to our customers by including them in the formal financial system.

Sources of Revenue

We generate our revenues by charging transaction fees to merchants, financial service providers, utility providers, bill issuers and consumers; by selling pinned airtime to merchants; by providing loans to merchants and consumers, and insurance products to consumers and by selling hardware, licensing software and providing related technology services to merchants.

We act as a service provider whereby we own and operate the technology and apply it in a system ourselves, charging one-time and ongoing fees for the use of the system either on a fixed or ad valorem basis. For instance, through the acquisition of Connect, we now provide cash management and payment services to merchant customers through a digital vault (safe asset) which is located at the customer’s premises and generate processing revenue from the provision of these services. We also offer merchant customers access to platforms through which we (a) generate revenue from the sale of prepaid airtime and (b) generate fees from distribution of VAS, including prepaid airtime, prepaid electricity, gaming voucher, and other services, to users of our platforms. We also generate fees from debit and credit card transaction processing and interest revenue from qualifying merchant customers who are able to access short-term loans. The revenue and costs associated with these services and sales are included in our merchant operating segment.

We provide consumers with bank accounts from which we generate a monthly fee and also charge fees on an ad valorem basis for goods and services purchased. Usage of our bank accounts also provides our customers with access to short-term loans and life insurance products. We also generate fees from consumers utilizing our ATM network. The revenue and costs associated with this approach are reflected in our consumer operating segment.

Developments during Fiscal 2022

This year has been one of enormous change for the Company with some transformational events occurring which we believe will set Lesaka on a new path of exciting growth, focused on the South African market as well as some of its neighboring countries. All of these events align with our mission of striving to bring financial inclusion to Merchants and Consumers in South Africa and building a world class fintech platform.

Adopting a new brand and identity

As we embarked on creating a world class financial technology platform and repositioning ourselves for growth, it became evident we required a new identity that would resonate with our customers and employees. It was important for our new identity to authentically express our commitment to the local communities we serve and our ambition to drive financial inclusion by giving ordinary people and small businesses access to essential financial services.

For thousands of years, livestock have been seen as a symbol of security, community and wealth and protecting one’s livestock was central to preserving the dignity and pride of a community. To ensure the best possible protection, an enclosure commonly known as a “kraal” in South Africa was built in the center of the community. A kraal is seen as the social and economic heart of a village and only the most reliable people are entrusted with its care and protection. The word Lesaka means Kraal in Setswana and Sesotho, two of South Africa’s official languages, and it was agreed by our shareholders that the existing company name Net1 should change to Lesaka, which aptly represents our new group and its vision.

As Lesaka, we are on a mission to build and protect the financial wellbeing of our communities and our intention is to protect the vulnerable and underserved, by providing widespread access to essential financial services.

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Acquisition of Connect

On April 14, 2022 the Company completed its acquisition of Connect in South Africa, for ZAR 3.8 billion. The acquisition of Connect, a profitable, high-growth and leading South African fintech company, is transformational for Lesaka in its journey to become South Africa’s leading fintech platform.

The acquisition of Connect significantly advances Lesaka’s vision and is truly transformational for the Company. The acquisition adds significant scale to our legacy B2B offering, bringing 44,000 micro, small and medium enterprises into the Merchant business segment. We expect the complementary product offerings to create significant growth opportunities by enabling us to address the needs of approximately 1.4 million informal and approximately 700,000 formal micro, small and medium enterprises in South Africa.

Connect has demonstrated its ability to deliver excellent growth and profitability through its innovative solutions for micro, small and medium enterprises across South Africa, and its combination with Lesaka’s existing B2B operations creates a business with significant scale across all tiers.

Connect is highly profitable with strong unit economics – delivering an historic three-year compound annual growth rate in EBITDA in excess of 40% for its financial year ended February 28, 2022.

Connect has significant opportunities for continued growth within its current addressable market, estimated at more than ZAR 100 billion ($6.6 billion), in merchant financial services for MSMEs in South Africa. Further, this addressable market has strong secular growth due to MSMEs shifting from manual to digitized cash management and from physical cash to digital payment methods.

Connect fills four key gaps in Lesaka’s product offering, namely the provision of value-added services directly to MSME’s, digitized cash management, merchant acquiring and merchant lending. On the other hand, Net1’s legacy businesses bring issuing, insurance and consumer financial services infrastructure to Connect. Offering multiple products to a single customer reduces churn, increases take-rate and improves unit economics.

Refer to Note 3 to our audited consolidated financial statements for additional information related to the acquisition.

Our strategic focus areas

During this fiscal year, we communicated the following four key pillars which we believe are critical to the successful transformation of our company to becoming a leading South African full-service fintech platform:

 Rapidly growing the merchant business;

 Returning the consumer business to profitability;

 Transforming our organization into a world class fintech platform; and

 Strengthening our relationships with key stakeholders.

Focused effort throughout the year on each of these pillars has delivered positive momentum, repositioning the business to capture the long-term growth opportunities across both our merchant and consumer businesses.

Rapid growth of our merchant business

As discussed above, the transformational acquisition of Connect, was key in delivering on this focus area. With market leading affordable products and technologies, Connect is well positioned to continue its growth in the MSME sector. Connect’s MSME offering, combined with our EasyPay platform targeting the larger merchants, and our point-of-sale business, provides a suite of products and services to address the needs of the entire spectrum of merchants in South Africa.

Mr. Steve Heilbron, CEO of Connect, joined our board on April 14, 2022, and will be responsible for heading up our Merchant business. Integrating Connect will be a focus area for us going forward, to ensure we capitalize on the growth opportunity delivered by this acquisition.

Returning the Consumer business to profitability

We have made significant progress in returning the Consumer segment to profitability as is evident from our segment reporting. However, transforming the business and culture, from one which was focused on the logistics of efficiently distributing grants to over ten million grant recipients each month, to a sales focused organization remains a challenge we are focused on. We have spent a lot of time and resources on training and building our sales force, but this remains a work in progress.

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The Consumer segment has shown considerable improvement in performance from a year ago and the positive momentum has been achieved through focusing on three key levers:

 Increasing active EPE account numbers, through driving customer acquisition;

 Improving ARPU, underpinned by increased cross selling; and

 Optimizing the cost structure, in line with a focus on customer centricity.

Progress on driving customer acquisition

During fiscal 2022, we grew our total customer base by approximately 157,000 net active customers of which around 31,000 were EPE lite customers and around 126,000 were EPE customers, ending the year with just over 1.168 million active customers. This active account growth is slower than what we had anticipated. We did, however, register 256,000 gross account openings during the year, and have started to see the benefits of a workstream focusing on improving account activation and utilization that was initiated during the third quarter.

There has been enormous focus during the year on how to optimize our points of presence and upskill our employees in order to drive these numbers. This process has taken longer than originally expected, but with our improved data analytics and ongoing market research we believe we have made major progress and expect to see improvements in the next fiscal year arising from this customer centric approach.

Progress on cross selling

ARPU remains broadly within our targeted ARPU range. We had approximately 396,000 active loans at the end of the quarter, representing a 36% penetration of our active EPE customer base, with a total loan book of ZAR 349 million ($21.5 million) as of June 30, 2022, up 4% in ZAR compared with June 2021. The average loan size grew to ZAR 1,461, while the portfolio loss ratio, calculated as the loans written off during the period as a percentage of the total loan book, remains encouragingly low at around 1.00% for the quarter (i.e. approximately 4% per annum), as a result of our ongoing application of prudent credit scoring and a culture of responsible lending.

Our funeral insurance product provides an important growth opportunity for our cross-selling strategy, with penetration levels now around 19% of the active account base. Over 40,500 new standalone policies were initiated during the year, growing the total number of active policies to approximately 259,000, up 8.3% compared with June 2021.

Progress on cost optimization

In order to optimize the overall cost base and to move the business towards a sales-focused and client solution driven financial services organization, we launched Project Spring during the 2022 financial year. Project Spring focused on the restructuring of our financial services business and the rationalization of the distribution network. Pursuant to Project Spring, a detailed review of the distribution network was performed to identify underperforming branches and optimize our points of presence to meet the needs of our customer base.

We also embarked on a retrenchment process that resulted in our headcount reducing by approximately 800 at a total cost during the third quarter of fiscal 2022 of $5.9 million. Please refer to Note 1 to our audited consolidated financial statements for additional information.

In addition, significant progress has been made on optimizing our cash distribution and ATM network. Our large fleet of mobile ATMs and the associated distribution and security costs have been eliminated. Following a review of the ATM placements, over 50% of our ATM network are now positioned in retailers, providing greater footfall and longer operating hours compared to our branches.

We estimate that the aggregate annualized cost saving for Project Spring is over ZAR 300.0 million.

We continue with our cost optimization efforts despite the completion of Project Spring and its significant achievements. In particular, we are re-examining the performance of all our points of presence and increasingly looking to partner with various retailers, rather than having our own dedicated brick and mortar branches. Furthermore, following the recent acquisition of Connect we are working on how to optimize the cash movement processes of the two businesses.

Transforming our organization into a world class fintech platform

Building a world class fintech platform requires highly talented people, an environment where they can outperform and a clear vision and strategy, where everyone is aligned and understands their role in achieving that vision.

During the fiscal year, we brought in a significant number of experienced, high quality executives to enhance the leadership of the organization. This has been further enhanced by the strong management team that has driven the success of Connect. The leadership team has deep and relevant experience to deliver on the mission of the Company, with the necessary governance structures in place.

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The South African Competition Tribunal’s approval of the Connect acquisition was subject to the company implementing an employee share transaction (“ESOP”) of at least 3% of the issued shares of the company, to increase the spread of ownership by historically disadvantaged people and workers. If within 24 months of the implementation date of the Connect transaction, the company generates a positive net profit for 3 consecutive quarters, the ESOP shall increase to 5% of the issued shares. The final structure of the ESOP is contingent on shareholder approval and relevant regulatory and governance approvals and will only be implemented during fiscal 2023.

Strengthening our relationships with key stakeholders

We continue to build our relationship with SASSA through proactive engagement at a local, provincial and national level, to gain a better understanding of their needs and how we can help and improve the delivery of social grants to over 12 million grant recipients.

We have also made good progress on building relationships with our various key stakeholders, be it shareholders, regulators, suppliers and other participants in our sectors.

Investments

There has been no change to the carrying value of our investment in MobiKwik during fiscal 2022. MobiKwik filed its draft red herring prospectus in July 2021, with the original intention of completing its initial public offering in November 2021. MobiKwik decided to delay its initial public offering given prevailing market conditions and will reassess their options as market conditions change. MobiKwik has been focusing on its buy now pay later (“BNPL”) offering and has seen significant growth in that area in the last year. It continues to grow strongly and is also considering plans for raising additional capital privately.

On March 15, 2022, Blue Label Telecoms Limited, the largest shareholder in Cell C, announced that it has concluded a non-binding term sheet (“Umbrella Restructure Term Sheet”) with Cell C and various Cell C financial stakeholders. In terms of the Umbrella Restructure Term Sheet, Cell C will be restructured and refinanced with the purpose of deleveraging its balance sheet, providing it with liquidity with which to operate and grow its businesses and to position itself to achieve long term success for the benefit of its customers, employees, creditors, shareholders, and other stakeholders. The long form agreements, which will be binding, are currently in process of preparation and will incorporate the terms and conditions contained in the Umbrella Restructure Term Sheet. The latest public announcements have indicated that the recapitalization is expected to close by the middle of September 2022. Our investment in Cell C is held at a carrying value of $0 (zero) as of June 30, 2022.

Impact of COVID-19

During the fiscal year, we did not experience any significant disruptions from the COVID-19 outbreak, and the risk relating to the outbreak appears to have substantially reduced.

Critical Accounting Policies

Our audited consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires management’s judgment based on a variety of assumptions and other determinants such as historical experience, current and expected market conditions and certain scientific evaluation techniques. Management believes that the following accounting policies are critical due to the degree of estimation required and the impact of these policies on the understanding of the results of our operations and financial condition.

Business Combinations and the Recoverability of Goodwill

A significant component of our growth strategy is to acquire and integrate businesses that complement our existing operations. The purchase price of an acquired business is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair value at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill. In determining the fair value of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods, including present value modeling. Further, we make assumptions using certain valuation techniques, including discount rates and timing of future cash flows.

We review the carrying value of goodwill annually or more frequently if circumstances indicating impairment have occurred. In performing this review, we are required to estimate the fair value of goodwill that is implied from a valuation of the reporting unit to which the goodwill has been allocated after deducting the fair values of all the identifiable assets and liabilities that form part of the reporting unit. The determination of the fair value of a reporting unit requires us to make significant judgments and estimates. In determining the fair value of reporting units for fiscal 2022 and 2021, we considered entity-specific growth rates, future expected cash flows to be used in our discounted cash flow model, and the weighted-average cost of capital applicable to peer and industry comparables of the reporting units. We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. In addition, we make judgments and assumptions in allocating assets and liabilities to each of our reporting units.

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The results of our impairment tests during fiscal 2022 and 2021 indicated that the fair value of our reporting units exceeded their carrying values and so did not require impairment.

Intangible Assets Acquired Through Acquisitions

The fair values of the identifiable intangible assets acquired through acquisitions were determined by management using the purchase method of accounting. We completed the acquisition of Connect during fiscal 2022 where we identified and recognized intangible assets. We used the relief from royalty method to value identified brands and the multi-period excess earnings method to value the integrated platform and identified customer relationships. We have used the relief from royalty method, the multi-period excess earnings method, the income approach and the cost approach to value other historic acquisition-related intangible assets. In so doing, we made assumptions regarding expected future revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates, exchange rates, cash tax charges and useful lives.

The valuations were based on information available at the time of the acquisition and the expectations and assumptions that were deemed reasonable by us. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows. To the extent actual cash flows vary, revisions to the useful life or impairment of intangible assets may be necessary. Management assess the useful life of the acquired intangible assets upon initial recognition and revisions to the useful life or impairment of these intangible assets may be necessary in the future. For instance, in the recently closed Connect transaction, management has assigned useful lives to the acquired intangible assets as follows: (a) integrated platform – 10 years; (b) customer relationships – 8 years; and (c) brands – 10 years.

Revenue recognition – principal versus agent considerations

We generate revenue from the provision of transaction-processing services through our various platforms and service offerings. We use these platforms to (a) sell prepaid airtime and (b) distribute VAS, including prepaid airtime, prepaid electricity, gaming voucher, and other services, to users of our platforms. The determination of whether we act as a principal or as an agent when providing these services requires a significant amount of judgement and is based on whether (i) we are primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) we have inventory risk before the specified good or service has been transferred to a customer and (iii) we have discretion in establishing the price for the specified good or service. When we are the principal in a transaction, such as when we purchase (and thus control and assume inventory risk) prepaid airtime before selling it to customers utilizing our platform, revenue is reported on a gross basis. When we are an agent in a transaction, such as when we distribute VAS on behalf of our customers, and do not control the good or service to be provided, revenue is recognized based on the amount that we are contractually entitled to receive for performing the distribution service on behalf of our customers using our platform.

Valuation of investment in Cell C

We have elected to measure our investment in Cell C, an unlisted equity security, at fair value using the fair value option. Changes in the fair value of this equity security are recognized in the caption “change in fair value of equity securities” in our audited consolidated statements of operations. The tax impact related to the change in fair value of equity securities is included in income tax expense in our audited consolidated statements of operation. The determination of the fair value of this equity security requires us to make significant judgments and estimates. We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Refer to Note 6 of our audited consolidated financial statements regarding the valuation inputs and sensitivity related to our investment in Cell C.

We used a discounted cash flow model to determine the fair value of our investment in Cell C as of June 30, 2022 and 2021, and valued Cell C at $0.0 (zero) as of each of June 30, 2022 and 2021. We utilized the latest approved business plan provided by Cell C management for the period ended December 31, 2026, for the June 30, 2022 and 2021 valuations, and the following key valuation inputs were used:

(1) translated from ZAR to U.S. dollars at exchange rates applicable as of June 30, 2022.

(2) translated from ZAR to U.S. dollars at exchange rates applicable as of June 30, 2021.

We believe the Cell C business plan is reasonable based on the current performance and the expected changes in the business model. Refer to the sensitivity analysis included in Note 6 to our audited consolidated financial statements related to our valuation of Cell C as of June 30, 2022.

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Recoverability of equity securities and equity-accounted investments

We review our equity securities and equity-accounted investments for impairment whenever events or circumstances indicate that the carrying amount of the investment may not be recoverable. In performing this review, we are required to estimate the fair value of our equity-accounted investments and other equity securities. The determination of the fair value of these investments requires us to make significant judgments and estimates.

Other equity securities include our investments in MobiKwik and CPS. These equity securities do not have readily determinable fair values and therefore we have elected to measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. If we identify an impairment indicator related to these equity securities, we are required to assess the carrying value of these equity securities against their fair value. We did not identify any impairment indicators during each of fiscal 2022, 2021 and 2020, and therefore did not recognize any impairment losses related to these equity securities during those years.

The determination of the fair value of an investment requires us to make significant judgments and estimates. We are required to base our estimates on assumptions which we believe to be reasonable, but these assumptions may be unpredictable and inherently uncertain.

The Company did not identify any observable transactions during the year ended June 30, 2022, and therefore there was no change in the fair value of MobiKwik during the year. During the year ended June 30, 2021, MobiKwik entered into a number of separate agreements with new shareholders to raise additional capital through the issuance of additional shares. Specifically, we used the following transactions as the basis for our fair value adjustments to our investment in MobiKwik during the year ended June 30, 2021: (i) in early November 2020, $135.54 per share; (ii) in March 2021, $170.33 per share; and (iii) in June 2021, $245.50 per share. We considered each of these transactions to be an observable price change in an orderly transaction for similar or identical equity securities issued by MobiKwik. Accordingly, the carrying value of our investment in MobiKwik increased from $27.0 million as of June 30, 2020, to $76.3 million as of June 30, 2021. The change in the fair value of MobiKwik for the year ended June 30, 2021, of $49.3 million, is included in the caption “Change in fair value of equity securities” in our audited consolidated statement of operations for the year ended June 30, 2021.

We did not identify any impairment indicators during fiscal 2022 and therefore did not recognize any impairment losses related to our equity-accounted investments during that year. We performed impairment assessments during fiscal 2021 and 2020, for certain of our equity-accounted investments following the identification of certain impairment indicators. The results of our impairment tests during fiscal 2021 and 2020, resulted in impairments of $21.1 million and $33.8 million, respectively, related to our equity-accounted investments. These impairments are discussed in Note 9 to our audited consolidated financial statements.

For fiscal 2021, in determining the fair value of certain of our equity-accounted investments, we have considered (i) for Finbond specifically, as it is listed on the Johannesburg Stock Exchange, its market price as of the impairment assessment date, adjusted for a liquidity discount of 15%, and (ii) the net asset value of the equity-accounted investment being assessed as a proxy of fair value because reasonable cash flow forecasts were not available.

For fiscal 2020, in determining the fair value of certain of our equity-accounted investments, we have considered (i) for DNI specifically, the fair value of consideration received on April 1, 2020, adjusted for the accumulated foreign currency translation reserve, (ii) dividend discount models based on projected cash flows, adjusted for identified risks, (iii) various multiples applicable to peer and industry comparables of certain of our equity-accounted investments, and (iv) the net asset value of the equity-accounted investment being assessed as a proxy of fair value because reasonable cash flow forecasts were not available.

We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. The fair value of our investment in Finbond is sensitive to movements in its market price, which is quoted in ZAR, because we use the market price as the basis of our valuation.

Deferred Taxation

We estimate our tax liability through the calculations done for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are disclosed on our balance sheet.

Management then has to assess the likelihood that deferred tax assets are more likely than not to be realized in the foreseeable future. A valuation allowance is created if it is determined that a deferred tax asset will not be realized in the foreseeable future. Any change to the valuation allowance would be charged or credited to income in the period such determination is made. In assessing the need for a valuation allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered. During fiscal 2022, we recorded a net decrease of $1.7 million, to our valuation allowance, and during fiscal 2021 and 2020, respectively, we recorded a net increase of $1.5 million and $13.4 million. As of June 30, 2022 and 2021, the valuation allowance related to deferred tax assets was $117.1 million and $118.8 million, respectively.

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Stock-based Compensation

Management is required to make estimates and assumptions related to our valuation and recording of stock-based compensation charges under current accounting standards. These standards require all share-based compensation to employees to be recognized in the statement of operations based on their respective grant date fair values over the requisite service periods and also requires an estimation of forfeitures when calculating compensation expense.

We utilize the Cox Ross Rubinstein binomial model to measure the fair value of stock options granted to employees and directors. We have also utilized a bespoke adjusted Monte Carlo simulation discounted cash flow model to measure the fair value of restricted stock with market conditions granted to employees and directors. The stock-based compensation cost related to these valuations has been recognized on a straight-line basis. These valuation models require estimates of a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. Our management has estimated forfeitures based on historic employee behavior under similar compensation plans. The fair value of stock options is affected by the assumptions selected. The fair value calculation is especially sensitive to our valuation assumption with respect to expected volatility. For instance, a 5% increase (to 55%) or decrease (to 45%) in the expected volatility used (of 50%) to value stock options granted in February 2022, would result in a charge that was 9% higher (if 55% were used) or 9% lower (if 45% were used). Net stock-based compensation expense from continuing operations was $3.0 million, $0.3 million and $1.7 million for fiscal 2022, 2021 and 2020, respectively.

Accounts Receivable and Allowance for Doubtful Accounts Receivable

We maintain an allowance for doubtful accounts receivable related to our Consumer and Merchant segments with respect to sales or rental of hardware, support and maintenance services provided; or sale of licenses to customers; or the provision of transaction processing services to our customers.

Our policy is to regularly review the aging of outstanding amounts due from customers and adjust the provision based on management’s estimate of the recoverability of the amounts outstanding.

Management considers factors including period outstanding, creditworthiness of the customers, past payment history and the results of discussions by our credit department (and in some cases including our sales and finance teams) with the customer. We consider this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. Additional provisions may be required should the ability of our customers to make payments when due deteriorate in the future. Judgment is required to assess the ultimate recoverability of these receivables, including ongoing evaluation of the creditworthiness of each customer.

Lending

Consumer microlending

We maintain an allowance for doubtful finance loans receivable related to our Consumer services segment with respect to short-term loans to qualifying customers. Our policy is to regularly review the ageing of outstanding amounts due from borrowers and adjust the provision based on management’s estimate of the recoverability of finance loans receivable. We write off microlending loans and related service fees if a borrower is in arrears with repayments for more than three months or dies.

Credit bureau checks as well as an affordability test are conducted as part of the origination process, both of which being in line with local regulations. We consider this policy to be appropriate because the affordability test we perform takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses. Additional allowances may be required should the ability of our customers to make payments when due deteriorates in the future. A significant amount of judgment is required to assess the ultimate recoverability of these finance loan receivables, including ongoing evaluation of the creditworthiness of each customer.

Merchant lending

We maintain an allowance for doubtful finance loans receivable related to our Merchant services segment with respect to short-term loans to qualifying merchant customers. Our policy is to regularly review the ageing of outstanding amounts due from these merchants and an allowance is created for the full amount outstanding if the customer is in arrears for more than 15 days. We write off loans and related interest and fees when it is evident that reasonable recovery procedures, including where deemed necessary, formal legal action, have failed.

Our risk management procedures include adhering to our proprietary lending criteria which uses an online-system loan application process, obtaining necessary customer transaction-history data and credit bureau checks. We consider these procedures to be appropriate because it takes into account a variety of factors such as the customer’s credit capacity and customer-specific risk factors when originating a loan.

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Recent Accounting Pronouncements

Recent accounting pronouncements adopted

Refer to Note 2 of our audited consolidated financial statements for a full description of recent accounting pronouncements, including the dates of adoption and effects on financial condition, results of operations and cash flows.

Recent accounting pronouncements not yet adopted as of June 30, 2022

Refer to Note 2 of our audited consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of June 30, 2022, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.

Currency Exchange Rate Information

Actual exchange rates

The actual exchange rates for and at the end of the periods presented were as follows:

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Translation Exchange Rates

We are required to translate our results of operations from ZAR to U.S. dollars on a monthly basis. Thus, the average rates used to translate this data for the years ended June 30, 2022, 2021 and 2020, vary slightly from the averages shown in the table above. The translation rates we use in presenting our results of operations are the rates shown in the following table:

Results of operations

The discussion of our consolidated overall results of operations is based on amounts as reflected in our audited consolidated financial statements which are prepared in accordance with U.S. GAAP. We analyze our results of operations both in U.S. dollars, as presented in the audited consolidated financial statements, and supplementally in ZAR, because ZAR is the functional currency of the entities which contribute the majority of our results and is the currency in which the majority of our transactions are initially incurred and measured. Due to the significant impact of currency fluctuations between the U.S. dollar and ZAR on our reported results and because we use the U.S. dollar as our reporting currency, we believe that the supplemental presentation of our results of operations in ZAR is useful to investors to understand the changes in the underlying trends of our business.

During November 2021, our chief operating decision maker changed the Company’s operating and internal reporting structures following the establishment of a new management team and the Company’s decision to focus primarily on the South African market. The chief operating decision maker decided to analyze our operating performance primarily based on operational lines which group financial services provided to customers (consumers) into the Consumer operating segment and goods and services provided to corporate and other juristic entities into the Merchant operating segment. Refer to Note 21 in our audited consolidated financial statements for additional information.

Our operating segment revenue presented in “—Results of operations by operating segment” represents total revenue per operating segment before intercompany eliminations. A reconciliation between total operating segment revenue and revenue presented in our audited consolidated financial statements is included in Note 21 to those statements. Our chief operating decision maker evaluates segment performance based on segment earnings before interest, tax, depreciation and amortization (“EBITDA”), adjusted for items mentioned in the next sentence (“Segment Adjusted EBITDA”). We do not allocate depreciation and amortization, impairment of goodwill or other intangible assets, certain lease charges (“Lease adjustments”), non-recurring items (including gains or losses on disposal of investments, fair value adjustments to equity securities, fair value adjustments to currency options), interest income, interest expense, income tax expense or loss from equity-accounted investments to our reportable segments. The Lease adjustments reflect lease charges excluded from the calculation of Segment Adjusted EBITDA and are therefore reported as a reconciling item to reconcile the reportable segments’ Segment Adjusted EBITDA to the Company’s loss before income tax expense. A reconciliation of this Segment Adjusted EBITDA to net income (loss) before income tax is included in Note 21 to our consolidated financial statements. Unless otherwise stated, reference to EBITDA in the discussion below relates to Segment Adjusted EBITDA.

Fiscal 2022 includes consolidation of Connect from April 14, 2022. We deconsolidated CPS from June 1, 2020 and its results are excluded from that date. We disposed of our South Korean operation in the third quarter of fiscal 2020 and it has been presented as a discontinued operation for fiscal 2020. We used the equity method to account for DNI in fiscal 2020. We disposed of FIHRST during the second quarter of fiscal 2020 and its contribution to our reported results is excluded from December 1, 2019. Refer also to Note 3, Note 9 and Note 24 to the audited consolidated financial statements for additional information regarding these transactions.

We analyze our business and operations in terms of three inter-related but independent operating segments: (1) Consumer, (2) Merchant and (3) Other. In addition, corporate and corporate office activities that are impracticable to ascribe directly to any of the other operating segments, as well as any inter-segment eliminations, are included in Corporate/Eliminations.

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Fiscal 2022 Compared to Fiscal 2021

The following factors had a significant influence on our results of operations during fiscal 2022 as compared with the same period in the prior year:

 Higher revenue: Our revenues increased 65% in ZAR, primarily due to the contribution from Connect, an increase in hardware sales, an increase in merchant transaction processing fees, and a moderate increase in lending and insurance revenues;

 Lower operating losses: Operating losses decreased, delivering an improvement of 28% in ZAR compared with the prior period primarily due to the positive contribution from Connect, the closure of the loss-making IPG operations and the implementation of various cost reduction initiatives in our Consumer business, which was partially offset by an increase in acquisition related intangible asset amortization and transaction costs. During fiscal 2022, we recorded a reorganization charge of $5.9 million related to the retrenchment process we commenced in January 2022;

 Significant transaction costs: We expensed $6.0 million of transaction costs related to the Connect acquisition; and

 Foreign exchange movements: The U.S. dollar was 3% stronger against the ZAR during fiscal 2022, which impacted our reported results.

Consolidated overall results of operations

This discussion is based on the amounts prepared in accordance with U.S. GAAP.

The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:

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The increase in revenue was primarily due to the inclusion of Connect, which has substantial low margin prepaid airtime sales in addition to its core processing revenue, an increase in hardware sales, an increase in merchant transaction processing fees, and moderate increases in lending and insurance revenues.

The increase in cost of goods sold, IT processing, servicing and support was primarily due to the inclusion of Connect, an increase in the cost of hardware sales, higher costs related to transaction fees and an increase in insurance-related claims experience, which were partially offset by the benefits of various cost reduction initiatives in our Consumer business.

In ZAR, the decrease in selling, general and administration expenses was primarily due to lower IPG-related expenses incurred following its closure, some benefits from our cost reduction initiatives, as well as a recalibration, in June 2022, of our allowance for doubtful microlending finance loans receivable, in our Consumer business, from 10% of the lending book outstanding to 6.5% of the lending book, which resulted in a release from the allowance in fiscal 2022. These reductions were partially offset by the inclusion of expenses related to Connect’s operations, higher employee-related expenses related to the expansion of our senior management team, and the year-over-year impact of inflationary increases on employee-related expenses.

Depreciation and amortization expense increased in fiscal 2022 compared with fiscal 2021 due to the inclusion of acquisition-related intangible asset amortization related to intangible assets identified pursuant to the Connect acquisition, as well as the inclusion of depreciation expense related to Connect’s property, plant and equipment.

We embarked on a retrenchment process on January 10, 2022, and incurred reorganization expenses of $5.9 million during fiscal 2022.

Transaction costs related to Connect acquisition includes fees paid to external service providers associated with the contract drafting and negotiations; corporate finance advisory services; legal, financial and tax due diligence activities performed; warranty and indemnity insurance related to the transaction; and other advisory services procured; as well as our portion of the fees paid to competition authorities related to the regulatory filings made in various jurisdictions.

Our operating loss margin in fiscal 2022 and 2021 was (18.1%) and (41.2%), respectively. Adjusting for the restructuring and transaction costs incurred, the underlying operating loss margin in fiscal 2022 was (12.7%). We discuss the components of operating loss margin under “—Results of operations by operating segment.”

The change in fair value of equity securities during fiscal 2021 represents a non-cash fair value adjustment gain related to MobiKwik. We continue to carry our investment in Cell C at $0 (zero). Refer to Note 9 to our consolidated financial statements for the methodology and inputs used in the fair value calculation for MobiKwik and Note 6 for the methodology and inputs used in the fair value calculation for Cell C.

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Gain related to fair value adjustment to currency options represents the realized gain related to foreign exchange option contracts entered into in November 2021 in order to manage the risk of currency volatility and to fix the USD amount to be utilized for part of the Connect purchase consideration settlement. The foreign exchange option contracts matured on February 24, 2022. Refer to Note 6 to our consolidated financial statements for additional information related to these currency options.

We recorded a gain of $0.7 million related to the disposal of our entire interest in an equity security during fiscal 2022. Refer to Note 9 to our consolidated financial statements for additional information regarding this gain.

We recorded a loss of $0.4 million related to the disposal of a minor portion of our investment in Finbond during fiscal 2022. Refer to Note 9 to our consolidated financial statements for additional information regarding these disposals.

We recorded a loss of $0.5 million related to the disposal of Bank Frick during fiscal 2021.

Interest on surplus cash decreased to $2.1 million (ZAR 31.7 million) from $2.4 million (ZAR 38.0 million), primarily due to the utilization of a significant portion of our surplus cash reserves to acquire Connect as well as lower average daily cash balances in fiscal 2022.

Interest expense increased to $5.8 million (ZAR 88.6 million) from $3.0 million (ZAR 46.9 million), primarily as a result of additional interest expense incurred related to borrowings obtained to partially fund the acquisition of Connect, interest expenses incurred in Connect to fund our cash management, digitization and VAS offerings, and a higher utilization of our facilities to fund our ATMs.

Fiscal 2022 tax expense was $0.3 million (ZAR 5.0 million) compared to $7.6 million (ZAR 118.8 million) in fiscal 2021. Our effective tax rate for fiscal 2022 was impacted by the tax expense recorded by our profitable South African operations, a deferred tax benefit related to acquisition-related intangible asset amortization, non-deductible expenses (including transaction expenses related to the acquisition of Connect), the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities.

Our effective tax rate for fiscal 2021 was impacted by the tax effect on the change in the fair value of our equity securities, which is at a lower tax rate than the South African statutory rate, the tax charge related to our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities, which was partially offset by the reversal of the deferred tax liability related to one of our equity-accounted investments following its impairment.

The disposal of certain of our equity-accounted investments in fiscal 2021 and 2020, as well as a number of impairments, has impacted the comparability of our loss from equity-accounted investments. We disposed of our investment in Bank Frick in fiscal 2021. The largest impairment recorded in fiscal 2021 related to our investment in Finbond following a slow-down in its business activity and lower listed share price. Refer to Note 9 to our audited consolidated financial statements for additional information regarding our equity-accounted investments, including disclosure regarding the disposals and impairments. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first half and its annual results during our fourth quarter. The table below presents the relative loss from our equity accounted investments:

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Results of operations by operating segment

The composition of revenue and the contributions of our business activities to operating (loss) income are illustrated below:

Consumer

The underlying decrease in revenue was primarily due to lower processing fees, partially offset by higher insurance and lending revenue and account holder fees. We embarked on a retrenchment process during the third quarter of fiscal 2022 and recorded an expense of $5.9 million which is included in the Segment EBITDA loss, refer to Note 1 to our consolidated financial statements for additional information regarding this process. Segment EBITDA loss, excluding the reorganization charge, has decreased primarily due to the implementation of various cost reduction initiatives and a recalibration, in June 2022, of our allowance for doubtful microlending finance loans receivable from 10% of the lending book outstanding to 6.5% of the lending book, which resulted in a release from the allowance in fiscal 2022, which decreases were partially offset by an increase in insurance-related claims experience.

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Our EBITDA loss margin in fiscal 2022 and 2021 was (33.7%) and (39.8%), respectively. After adjusting for the reorganization charge our fiscal 2022 EBITDA loss margin was (24.8%).

Merchant

Segment revenue increased due to the inclusion of Connect for two and a half months and an increase in hardware sales and processing fees. The increase in segment EBITDA is primarily due to the inclusion of Connect, which was partially offset by higher costs related to processing fees and higher employee-related expenses. Connect records a significant proportion of its airtime sales in revenue and cost of sales, while only earning a relatively small margin. This depresses the EBITDA margins shown by the business.

Our EBITDA margin in fiscal 2022 and 2021 was 7.3% and 7.7%, respectively.

Other

Segment revenue decreased due to lower revenue following the closure of IPG in fiscal 2021. We recorded an EBITDA contribution during fiscal 2022 following the closure of our loss-making activities performed through IPG.

Our EBITDA (loss) margin for the Other segment was 29.7% and (312.7%) during fiscal 2022 and 2021, respectively.

Corporate/ Eliminations

Our corporate expenses generally include acquisition-related intangible asset amortization; expenses incurred related to corporate actions; expenditures related to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors’ fees; certain employee and executive bonuses; stock-based compensation; legal fees; audit fees; directors and officer’s insurance premiums; elimination entries; and from fiscal 2022 our group CEO’s compensation.

Our corporate expenses for fiscal 2022 increased compared with fiscal 2021 primarily due to transaction related expenses of $6.0 million (ZAR 91.6 million) related to Connect, legacy processing adjustments of $1.6 million (ZAR 25.7 million), and significantly higher stock-based compensation charges due to the expansion of our senior management team. The legacy processing adjustments represents amounts we identified during the current fiscal quarter related to prior periods that are payable to third parties. Fiscal 2021 corporate expenses included an allowance on doubtful loans receivable from equity-accounted investments of $3.7 million.

Fiscal 2021 Compared to Fiscal 2020

The following factors had a significant influence on our results of operations during fiscal 2021 as compared with the same period in the prior year:

 Lower revenue: Our revenues decreased 19% in ZAR primarily due to fewer prepaid airtime and hardware sales and lower transaction and account fee revenue, which was partially offset by modestly higher lending and insurance revenue;

 Ongoing operating losses: Operating costs were largely in line with the prior period in ZAR due to the largely fixed cost nature of the cost base. As a result, we continue to experience operating losses because of depressed revenues;

 Non-cash increase in fair value of MobiKwik: We recorded a non-cash fair value gain during fiscal 2021 of $49.3 million related to the change in fair value of MobiKwik; and

 Foreign exchange movements: The U.S. dollar was 11% weaker against the ZAR during fiscal 2021, which impacted our reported results.

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The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:

(1) Refer to Note 24 to the audited consolidated financial statements for discontinued operations disclosures.

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(1) Refer to Note 24 to the audited consolidated financial statements for discontinued operations disclosures.

The decrease in revenue was primarily due to fewer prepaid airtime and hardware sales and lower transaction and account fee revenue, which was partially offset by modestly higher lending and insurance revenue.

The decrease in cost of goods sold, IT processing, servicing and support was primarily due to lower cost of prepaid airtime sales, which was partially offset by higher costs related to transaction fees and an increase in insurance-related claims experience.

In ZAR, the decrease in selling, general and administration expense was primarily due to the impact of a weaker U.S. dollar on U.S. dollar-denominated expenses measured in ZAR and lower stock-based compensation charges, which was partially offset by the year-over-year impact of inflationary increases on employee-related expenses, and allowances for doubtful loans receivable from equity-accounted investments created during fiscal 2021.

Depreciation and amortization decreased primarily due to lower overall depreciation related to tangible assets that were fully depreciated during fiscal 2021.

During fiscal 2020, we recorded an impairment loss of $5.6 million related to the impairment of a portion of our EasyPay business unit’s allocated goodwill and a $0.7 million impairment loss related to our Maltese e-money license. Refer to Note 10 of our audited consolidated financial statements for additional information regarding these impairment losses.

Our operating loss margin for fiscal 2021 and 2020 was (41.2%) and (30.7%), respectively. We discuss the components of operating (loss) income margin under “—Results of operations by operating segment.”

The change in fair value of equity securities during fiscal 2021 represents a non-cash fair value gain related to MobiKwik. There was no change in the fair value of equity securities during fiscal 2020. We continue to carry our investment in Cell C at $0 (zero). Refer to Note 9 to our audited consolidated financial statements for the methodology and inputs used in the fair value calculation for MobiKwik and Note 6 for the methodology and inputs used in the fair value calculation for Cell C.

We recorded a loss of $0.5 million related to the disposal of Bank Frick during fiscal 2021, refer to Note 9 to our audited consolidated financial statements for additional information regarding this transaction.

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We recorded a gain of $9.7 million related to the disposal of FIHRST during fiscal 2020, which was partially offset by a $1.0 million loss on the disposal of our remaining interest in DNI and a $7.1 million loss on the deconsolidation of CPS. We also paid a termination fee of $17.5 million in respect of our decision not to exercise our option to acquire control of Bank Frick

Interest on surplus cash decreased to $2.4 million (ZAR 38.0 million) from $2.8 million (ZAR 49.3 million), due primarily to the higher average daily cash balances following the increase in our cash reserves as a result of the disposal of certain business in fiscal 2020, which was more than offset by lower rates of interest earned on surplus cash.

Interest expense decreased to $3.0 million (ZAR 46.9) million from $7.6 million (ZAR 134.2 million), primarily as a result of lower borrowings, a reduction in South African interest rates and lower utilization of our ATM facilities because we used our cash reserves to fund our ATMs.

Fiscal 2021 tax expense was $7.6 million (ZAR 118.8 million) compared to $2.7 million (ZAR 46.7 million) in fiscal 2020. Our effective tax rate for fiscal 2021 was impacted by the tax effect on the change in the fair value of our equity securities, which is at a lower tax rate than the South African statutory rate, the tax charge related to our profitable South African operations, non-deductible expenses, the on-going losses incurred by certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding net operating losses incurred by these entities, which was partially offset by the reversal of the deferred tax liability related to one of our equity-accounted investments following its impairment.

Our effective tax rate for fiscal 2020, was impacted by the tax-neutral disposals of FIHRST and DNI, the tax-neutral deconsolidation of CPS, non-deductible impairment losses, the option termination fee paid, the ongoing losses incurred by IPG and certain of our South African businesses and the associated valuation allowances created related to the deferred tax assets recognized regarding those net operating losses, other non-deductible expenses, including certain corporate transactions-related expenditure, and the tax expense recorded by our profitable businesses, primarily in South Africa.

The disposal of certain of our equity-accounted investments in the fiscal 2021 and 2020, as well as a number of impairments, has impacted the comparability of our loss from equity-accounted investments. We disposed of our investment in Bank Frick in fiscal 2021 and disposed of our investment in DNI in fiscal 2020. The largest impairment recorded in fiscal 2021 related to our investment in Finbond following a slow-down in its business activity and lower listed share price. The largest impairment recorded in fiscal 2020 related to our investment in Bank Frick following our decision not to exercise our option to take control of the bank. Refer to Note 9 to our audited consolidated financial statements for additional information regarding our equity-accounted investments, including disclosure regarding the disposals and impairments. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first half and its annual results during our fourth quarter. The table below presents the relative loss (earnings) from our equity accounted investments:

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Results of operations by operating segment

The composition of revenue and the contributions of our business activities to operating income are illustrated below: