10-Q/A: Lesaka Restates Q1 2025 Results, Cites Revenue Error

Lesaka Technologies, Inc. filed an amended quarterly report for Q1 2025, restating financial statements due to a revenue misclassification and disclosing multiple material weaknesses in internal controls.

Summary

• Lesaka Technologies, Inc. (Lesaka) filed an Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, to restate its unaudited condensed consolidated financial statements.
• The restatement corrects an error in revenue accounting, where revenue from certain voucher sales was incorrectly classified on an agent basis instead of as a principal, leading to an $8.0 million understatement of revenue and cost of goods sold.
• The company also revised its presentation of long-term borrowings and current portion of long-term borrowings due to a misclassification identified in Q3 2025, reclassifying $12.5 million from long-term to current for September 30, 2024.
• Management concluded that material weaknesses existed in internal control over financial reporting as of September 30, 2024, and that internal control over financial reporting was not effective.
• Net loss for the three months ended September 30, 2024, was $(4.542) million, an improvement from $(5.651) million in the prior year period.
• Revenue increased by 12.8% to $153.568 million (ZAR 2.757 billion) for Q1 2025 compared to $136.089 million (ZAR 2.538 billion) in Q1 2024.
• Group Adjusted EBITDA increased by 17% to $9.363 million (ZAR 168.105 million) for Q1 2025, marking the ninth successive quarter of achieving or outperforming guidance.
• The acquisition of Adumo closed on October 1, 2024, for ZAR 1.67 billion ($96.2 million), settled with 17,279,803 common shares and ZAR 232.2 million in cash.
• Lesaka's ecosystem now serves approximately 1.7 million active consumers and 120,200 merchants, processing over ZAR 270 billion in throughput annually.
• The company's Consumer Division saw revenue and profitability growth, with active EasyPay Everywhere (EPE) transactional accounts reaching 1.5 million and ARPU for permanent grant beneficiaries increasing to ZAR 91.
• The Merchant Division experienced robust growth in VAS and supplier payments throughput, increasing 38% to R9.9 billion, and card acceptance throughput increased 18% to R4.2 billion.
• Capital Connect credit disbursed decreased by 4% to ZAR 166 million, reflecting a deterioration in the financial strength of merchants and strict credit criteria.
• Cash and cash equivalents were $49.7 million as of September 30, 2024, a decrease from $59.065 million at June 30, 2024.

Sentiment

Score: 4

Explanation: While the company shows strong operational growth in key segments and successful strategic acquisitions, the restatement of financial results and the disclosure of multiple material weaknesses in internal controls are significant negative factors. These issues raise concerns about financial reporting reliability and internal governance, overshadowing positive operational performance and strategic expansion.

Positives

• Net loss improved to $(4.542) million in Q1 2025 from $(5.651) million in Q1 2024, representing a 20% reduction.
• Revenue increased by 12.8% year-over-year to $153.568 million (ZAR 2.757 billion), driven by value-added services, prepaid airtime sales, processing fees, and growth in insurance and lending.
• Group Adjusted EBITDA grew by 17% to $9.363 million (ZAR 168.105 million), marking the ninth consecutive quarter of meeting or exceeding guidance.
• The Consumer Division achieved revenue and profitability growth, with active EPE accounts increasing 14% to 1.5 million and average revenue per user (ARPU) for permanent grant beneficiaries rising 10% to ZAR 91.
• EasyPay Loans originated approximately 286,000 loans, a 28% increase, with the gross loan book growing 34% to ZAR 564 million.
• EasyPay Insurance policies written increased 29% to 49,000, and total active policies grew 30% to 466,000, improving customer penetration to 34% of the active permanent grant account base.
• Merchant Division's VAS and supplier payments throughput increased 38% to R9.9 billion, with supplier payments throughput up 60% to R3.2 billion.
• Card acceptance solutions saw a 15% increase in devices and an 18% increase in throughput to R4.2 billion.
• The acquisition of Adumo, completed on October 1, 2024, is expected to enhance the company's platform, customer base, product offerings, and scale in the Southern African fintech sector.

Negatives

• The company restated its Q1 2025 financial statements due to an $8.0 million misclassification of revenue and cost of goods sold.
• Multiple material weaknesses in internal control over financial reporting were identified, leading to a conclusion that controls were not effective as of September 30, 2024.
• The Merchant Division's Segment Adjusted EBITDA in ZAR saw a modest decrease of 1% due to higher operating expenses, despite higher gross margin.
• Capital Connect credit disbursed decreased by 4% to ZAR 166 million, attributed to a deterioration in the financial strength of merchants and strict credit criteria.
• Kazang Pay Advance, a micro-lending offering, was suspended in early fiscal 2024 and is currently in a live pilot phase with stricter lending criteria.
• Cash and cash equivalents decreased to $49.7 million from $59.065 million at June 30, 2024, primarily due to funding scheduled repayments, capital expenditures, and working capital investments.
• Group costs increased by 62% in USD (55% in ZAR) due to higher employee-related expenses, bonuses, travel, consulting, and legal fees.

Risks

• Inability to successfully integrate Adumo's operations with Lesaka's business, potentially diverting senior management attention, leading to cultural differences, and challenges in retaining key personnel.
• Vulnerability to supply shortages and price fluctuations from a limited number of third-party suppliers for smart cards, ATMs, POS devices, and other hardware, which could harm business operations and ability to meet customer demand.
• Dependence on a third-party bank (African Bank Limited) for the EasyPay Everywhere (EPE) solution due to not holding a South African banking license, limiting control and creating risk if the arrangement terminates.
• Failure to comply with payment scheme rules (VISA, Mastercard) and regulatory licenses/registrations, or inability to maintain partnerships with South African banks, could lead to significant fines, loss of licenses, or inability to provide payment services.
• Potential significant operating costs and business disruption from proposed regulatory changes to the national payments system by the South African Reserve Bank, which may introduce an activity-based licensing and authorization regime.
• Material weaknesses in internal control over financial reporting, if not remediated, could result in material misstatements of financial statements, failure to meet reporting obligations, loss of investor confidence, and potential regulatory sanctions or litigation.
• The restatement of prior quarterly financial statements may affect shareholder and investor confidence, harm reputation, and lead to increased costs, legal proceedings, and regulatory inquiries.

Future Outlook

The company expects its cost of borrowing to decline moderately in the foreseeable future due to a 25-basis point reduction in the South African repurchase rate and anticipated further reductions. It is optimistic about the Capital Connect business resuming a growth trend with a more positive political environment, suspension of load-shedding, and potential interest rate down cycle. The Kazang Pay Advance micro-lending offering is in a live pilot phase, with an official relaunch expected later in fiscal 2025. The Adumo Payouts business officially became part of the Consumer Division on October 1, 2024, and its contribution will be reflected in Q2 2025 results. Lesaka will operate in four distinct pillars (Micro-Merchant, Merchant, Enterprise, Consumer) to enhance its customer-centric operating model. Capital spending for Q2 2025 is expected to focus on POS devices, vaults, software, and ATM/branch infrastructure. The company is assessing the impact of new FASB guidance on Segment Reporting (effective July 1, 2024) and Income Taxes (effective July 1, 2025).

Management Comments

• Our mission at Lesaka is driven by a purpose to provide financial services and software to Southern Africa's underserviced consumers (B2C) and merchants (B2B), improving people's lives and increasing financial inclusion.
• We experienced continued improvement in our financial and operational performance in the first quarter of fiscal 2025.
• Group Adjusted EBITDA was at the mid-point of our guidance range, representing the ninth successive quarter of Lesaka achieving or outperforming its Group Adjusted EBITDA guidance.
• Core to our device placement strategy is the decision to focus on quality business and optimizing our existing fleet, which is reflected in a healthy throughput growth and margin per device.
• Supplier payments is an important part of the micro-merchant ecosystem we are developing as part of our strategy to provide a holistic offering to micro-merchants in informal markets.
• We have maintained our strict credit criteria during the high interest rate and inflationary cycle resulting in less merchants qualifying for new or renewals of credit lines.
• With a more positive political environment, the suspension of load-shedding and hopefully the start of an interest rate down cycle, we are more optimistic this business can resume a growth trend.
• Quick access to affordable and flexible opportunity capital is vital in every stage of a merchant's lifecycle, enabling them to never miss an opportunity.
• Our cash business remains a vital product in our merchant offering and is a key differentiator for us in the digitalization of cash.
• Our priority is to grow our permanent grant recipient customers base, where we can build deeper relationships by offering products such as insurance and lending.
• The Adumo transaction is the catalyst to approach the market with a more customer-centric operating model.

Industry Context

Lesaka Technologies operates in the Southern African fintech sector, focusing on financial inclusion for underserviced consumers and merchants. The company's performance reflects broader trends in digital payments adoption, cash management, and the digitalization of commerce in informal markets. The acquisition of Adumo positions Lesaka to consolidate its presence and expand its offerings across consumer and merchant segments, aligning with the growing demand for integrated payment and software solutions in the region. The challenging economic environment, characterized by high interest rates and inflation, has impacted merchant financial strength, necessitating strict credit criteria. Regulatory changes proposed by the South African Reserve Bank indicate a move towards a more robust and activity-based licensing framework for the national payment system, which could significantly impact fintech operations.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• The company is subject to a variety of insignificant claims and suits that arise from time to time in the ordinary course of business. Management believes the resolution of these matters will not have a material adverse impact on financial position, results of operations, or cash flows.

Related Party Transactions

• The Adumo acquisition involved a share purchase agreement where Lesaka SA purchased 2,601,410 Consideration Shares from Crossfin, one of the Adumo sellers' indirect shareholders, for ZAR 207.2 million ($12.0 million).

Stakeholder Impact

• **Shareholders:** The restatement and material weaknesses could erode investor confidence and potentially impact share price. The Adumo acquisition and operational growth in segments could be positive long-term drivers.
• **Employees:** Management changes at the executive and board level, including new appointments and departures, will affect leadership and strategic direction. Retrenchment costs were incurred in both Consumer and Merchant segments.
• **Customers (Consumers):** Continued growth in active EPE accounts, increased ARPU, and expanded lending and insurance offerings indicate improved financial inclusion and service breadth.
• **Customers (Merchants):** Increased VAS, supplier payments, and card acceptance throughput show strong engagement. However, decreased Capital Connect lending reflects challenges in merchant financial health. The Adumo acquisition expands offerings for micro-merchants, merchants, and enterprises.
• **Suppliers/Creditors:** The company's reliance on a limited number of suppliers for hardware and components poses a risk. The reclassification of borrowings and new funding facilities impact the company's debt profile and relationships with lenders.

Next Steps

• Remediate identified material weaknesses in internal control over financial reporting, including enhancing control owner understanding, improving risk assessment procedures, recruiting skilled resources, and increasing automation.
• Monitor the effectiveness of the remediation plan and adjust efforts as needed.
• Finalize terms for a separate lending facility to fund a portion of Consumer lending during fiscal 2025.
• Continue to explore options for the Kazang Pay Advance offering, with an official relaunch expected later in fiscal 2025.
• Integrate Adumo's operations into Lesaka's business and reflect its contribution in Q2 2025 results.
• Complete the purchase price allocation for the Adumo acquisition and include preliminary allocation in Q2 2025 financial statements.
• File a resale registration statement with the SEC covering the resale of the Adumo Consideration Shares.
• Continue to monitor and comply with proposed regulatory changes to the national payments system by the South African Reserve Bank.
• Assess the impact of new FASB guidance on Segment Reporting (effective July 1, 2024) and Income Taxes (effective July 1, 2025).

Key Dates

Recommendation

The filing presents a mixed bag of strong operational growth and strategic expansion, particularly with the Adumo acquisition and positive trends in the Consumer segment. However, the restatement of financial results due to a revenue misclassification and the disclosure of multiple material weaknesses in internal controls are significant concerns. These issues raise questions about the reliability of financial reporting and the effectiveness of internal governance, which could weigh on investor confidence. While the company is actively addressing these weaknesses and showing promising operational metrics, the uncertainty surrounding the remediation of internal controls and potential future impacts warrants a 'hold' recommendation. Investors should monitor the progress of remediation efforts and the integration of Adumo before making further investment decisions.

Keywords

Fintech, SEC Filing, Restatement, Internal Controls, Financial Services, Payments, South Africa, Adumo Acquisition, Quarterly Report, Lending, Insurance, Cash Management, Merchant Solutions, Consumer Solutions, EBITDA, Revenue, Risk Factors