10-Q/A: Lesaka Restates Q2 Results, Cites Material Weaknesses

Lesaka Technologies, Inc. filed an amended quarterly report, restating Q2 2025 financials due to revenue misclassification and disclosing multiple material weaknesses in internal controls.

Summary

• Restated unaudited condensed consolidated financial statements for the three and six months ended December 31, 2024, to correct an error in revenue accounting (principal vs. agent).
• Reclassified $11,453k from long-term borrowings to current portion of long-term borrowings for December 31, 2024, and $11,841k for June 30, 2024, due to misclassification of the CCC Revolving Credit Facility.
• Management identified new material weaknesses in internal control over financial reporting, in addition to previously disclosed ones, as of December 31, 2024.
• Acquired Adumo (RF) Proprietary Limited on October 1, 2024, for ZAR 1.67 billion ($96.2 million), comprising 17,279,803 shares and $13.4 million cash.
• Acquired the remaining 50% of Innervation Value Added Services Namibia Pty Ltd (IVAS Nam) for $0.4 million effective November 1, 2024.
• Announced the acquisition of Recharger (Pty) Ltd on November 20, 2024, for ZAR 507 million ($27.0 million), expected to close in Q3 fiscal 2025.
• Recorded a non-cash fair value loss of $33.7 million on the investment in MobiKwik following its listing on the National Stock Exchange of India.
• Repurchased 2,601,410 common shares for ZAR 207.2 million ($12.0 million) from Crossfin Holdings on October 1, 2024, outside of the existing share repurchase authorization.
• Net loss for the three months ended December 31, 2024, was $(32,106)k, significantly higher than $(2,707)k in the prior year.
• Net loss for the six months ended December 31, 2024, was $(36,648)k, significantly higher than $(8,358)k in the prior year.
• Group Adjusted EBITDA for the three months ended December 31, 2024, increased to $11,810k from $8,952k in the prior year.
• Group Adjusted EBITDA for the six months ended December 31, 2024, increased to $21,173k from $16,975k in the prior year.
• The Broad Based Black Economic Empowerment (B-BBEE) rating improved to Level 3 from Level 4.

Sentiment

Score: 3

Explanation: The significant net loss, substantial operating income decline, and the disclosure of multiple material weaknesses in internal controls, leading to a restatement, indicate severe operational and financial reporting challenges. While revenue growth and strategic acquisitions are positive, they are overshadowed by these fundamental issues.

Positives

• Revenue increased by 22% (USD) for the three months ended December 31, 2024, and 18% (USD) for the six months ended December 31, 2024, driven by the Adumo acquisition and increased value-added services activity.
• Group Adjusted EBITDA increased by 32% (USD) for the three months ended December 31, 2024, and 25% (USD) for the six months ended December 31, 2024.
• Strategic acquisitions of Adumo and the pending Recharger acquisition expand market presence and offerings in the Southern African fintech sector.
• The Consumer segment's total active EasyPay Everywhere (EPE) transactional account base grew 11% year-on-year to approximately 1.6 million.
• Consumer lending gross loan book increased 41% to ZAR 709 million as of December 31, 2024.
• Total active insurance policies grew 29% to approximately 496,000 as of December 31, 2024.
• Average revenue per customer (ARPU) for permanent grant beneficiaries increased to approximately ZAR 94 per month for Q2 fiscal 2025.
• The B-BBEE rating improved to Level 3 from Level 4, enhancing compliance and market standing in South Africa.

Negatives

• Reported a significant net loss of $(32,106)k for the three months ended December 31, 2024, and $(36,648)k for the six months ended December 31, 2024, a substantial increase from prior periods.
• Operating income decreased substantially by 66% for the three months ended December 31, 2024, and 71% for the six months ended December 31, 2024.
• Recorded a non-cash fair value loss of $33.7 million on the MobiKwik equity securities investment.
• Net interest charge increased due to higher overall borrowings.
• Financial statements were restated due to an incorrect revenue classification, indicating past accounting errors.
• Disclosed multiple material weaknesses in internal control over financial reporting, including new ones identified, indicating significant control deficiencies.
• The CCC Revolving Credit Facility repayment was extended to June 30, 2025, and was previously misclassified as long-term.
• Incurred high transaction costs related to the Adumo acquisition ($1.7 million for the six months ended December 31, 2024).
• Enterprise segment revenue decreased by 25% for the three months ended December 31, 2024, and 3% for the six months ended December 31, 2024.

Risks

• May not be able to successfully integrate Adumo and Recharger operations, potentially leading to material impairments and adverse impacts on financial condition.
• Dependence on a limited number of third-party suppliers for hardware (smart cards, ATMs, POS devices) makes the company vulnerable to supply shortages, price fluctuations, and geopolitical shocks.
• Lack of a South African banking license for the EasyPay Everywhere (EPE) solution, relying on a third-party bank arrangement which, if terminated, would halt EPE operations without alternative access.
• Failure to comply with payment scheme rules (VISA, Mastercard) or maintain regulatory licenses/registrations could lead to significant fines or loss of ability to provide payment services.
• Proposed regulatory changes by the South African Reserve Bank (SARB) to the national payments system (Directive, Exemption Notice, NPS Bill) could substantially impact business, increase operating costs, and require direct regulation for non-banks.
• Identified material weaknesses in internal control over financial reporting could result in material misstatements, failure to meet reporting obligations, adverse impact on stock price, and potential litigation or regulatory inquiries.
• The restatement of prior financial statements may affect shareholder and investor confidence, harm reputation, and lead to increased costs and legal proceedings.

Future Outlook

Expects to conclude renegotiation of borrowing facilities before March 31, 2025. The acquisition of Recharger (Pty) Ltd is anticipated to close in Q3 fiscal 2025, serving as an entry point into the South African private utilities space. Anticipates further reductions in South African interest rates in the short-term, which could lead to moderately declining borrowing costs. However, proposed regulatory changes by the South African Reserve Bank (SARB) to the national payments system are expected to have a substantial impact, potentially increasing operating costs and requiring significant resources for compliance. New FASB guidance on Segment Reporting, Income Taxes, and Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures will become effective in fiscal years 2025, 2026, and 2028, respectively.

Management Comments

• "We are building an integrated multiproduct platform that is organized around addressing a number of customer needs."
• "The acquisition of Adumo enhances the Companys strength in both the consumer and merchant markets in which it operates."
• "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."
• "We have not amended our credit scoring or other lending criteria, and the growth is reflective of the demand for our tailored loan product for this market, growth in EPE bank account customer base and improved cross-selling capabilities."
• "We expect the acquisition [Recharger] to act as an entry point for us into the South African private utilities space while augmenting the Enterprise divisions alternative payment offering."
• "Management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q/A fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with GAAP."

Industry Context

The company is actively consolidating in the Southern African fintech sector through strategic acquisitions like Adumo and the pending Recharger deal, aiming to offer a comprehensive suite of payment processing and integrated software solutions. This aligns with a broader trend of market consolidation and expansion of digital payment ecosystems in emerging markets. The South African Reserve Bank (SARB) is implementing significant reforms to its reference interest rate (transitioning from JIBAR to ZARONIA) and proposing new regulations for the national payments system, which could reshape the competitive and operational landscape for payment providers. The listing of MobiKwik on the National Stock Exchange of India reflects the growing trend of fintech companies seeking public market access, although the company recorded a fair value loss on this investment. The company operates in a highly regulated retail banking market in South Africa, relying on third-party banking licenses for its EPE solution, highlighting the complex regulatory environment for fintech players.

Management Changes

Corporate Governance

Legal Proceedings

• Subject to a variety of insignificant claims and suits that arise from time to time in the ordinary course of business, which management believes will not have a material adverse impact.
• Proposed regulatory changes by the South African Reserve Bank (SARB) to the national payments system (Directive, Exemption Notice, NPS Bill) are expected to have a substantial impact on how the company conducts business, potentially leading to increased operating costs and direct regulation.

Related Party Transactions

• On October 1, 2024, repurchased 2,601,410 shares of common stock for ZAR 207.2 million ($12.0 million) from Crossfin Holdings (RF) Proprietary Limited, an indirect shareholder of one of the Adumo sellers.

Stakeholder Impact

• Shareholders face significant dilution from share-based acquisitions (Adumo, Recharger), potential stock price volatility due to restatement, material weaknesses, and fair value losses. Confidence may be eroded by control deficiencies.
• Employees are impacted by stock-based compensation plans (grants, vesting, forfeitures) and retrenchment costs mentioned in segment EBITDA.
• Customers benefit from expanded product offerings and integrated platforms through acquisitions (Adumo, Recharger). Consumer lending and insurance products continue to grow.
• Creditors/Lenders face ongoing renegotiation of borrowing facilities, with some short-term facilities due for repayment soon (RMB Bridge by Feb 28, 2025; CCC Revolving Credit Facility by June 30, 2025). Misclassification of borrowings was corrected.
• Regulatory Bodies will likely increase scrutiny due to the restatement and multiple material weaknesses in internal controls. Proposed SARB regulations could significantly alter the operating environment.

Next Steps

• Conclude renegotiation of borrowing facilities before March 31, 2025.
• Close the acquisition of Recharger (Pty) Ltd in Q3 fiscal 2025.
• Implement a comprehensive remediation plan for identified material weaknesses in internal control over financial reporting.
• Monitor the effectiveness of the remediation plan and adjust efforts as needed.
• Continue to assess the impact of FASB guidance on Segment Reporting (effective July 1, 2024), Income Taxes (effective July 1, 2025), and Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures (effective July 1, 2027).
• Engage with borrowers to negotiate changes to existing borrowing agreements or introduce language for the transition to ZARONIA.
• Assess and comply with revised SARB regulations for the national payments system expected later in 2025.

Key Dates

Recommendation

The filing reveals a deeply concerning financial and operational picture. The restatement of financials, coupled with the disclosure of multiple new and persistent material weaknesses in internal controls, signals fundamental issues in financial reporting reliability and operational oversight. The substantial increase in net loss and the non-cash fair value loss on a key equity investment further underscore financial underperformance. While strategic acquisitions and revenue growth are present, the severity of the control deficiencies and the significant losses outweigh these positives, suggesting a high-risk investment profile and potential for further negative surprises. A seasoned investor would likely view these issues as a strong indicator to exit or avoid the stock until significant remediation and sustained financial improvement are demonstrated.

Keywords

Lesaka Technologies, SEC filing, 10-Q/A, financial restatement, material weaknesses, internal controls, Adumo acquisition, Recharger acquisition, MobiKwik, net loss, EBITDA, South Africa, fintech, payment processing, microlending, insurance, regulatory risk, corporate governance, share repurchase