10-Q: Lesaka Technologies Reports Strong Q1 Growth, Internal Control Weaknesses Persist

Lesaka Technologies, Inc. reported significant revenue and EBITDA growth in Q1 fiscal 2026, driven by recent acquisitions and strong Consumer segment performance, despite ongoing material weaknesses in internal financial controls.

Summary

• Revenue increased by 11.6% to $171.4 million (9.7% in ZAR) for the three months ended September 30, 2025, compared to $153.6 million in the prior year.
• Operating income improved significantly to $0.4 million from an operating loss of $0.045 million in the prior year.
• Net loss decreased by 3% to $(4.4) million, compared to $(4.5) million in the prior year, indicating a less negative financial outcome.
• Group Adjusted EBITDA (non-GAAP) surged by 64% to $15.3 million (61% in ZAR) for the quarter.
• Net cash provided by operating activities was $8.9 million, a substantial improvement from net cash utilized of $(4.1) million in the prior year.
• The Consumer segment demonstrated robust growth, with active consumers increasing by 24% to 1.9 million, loan originations up 77% to ZAR 820 million, and insurance gross written premium rising 38% to ZAR 120 million.
• Merchant acquiring throughput increased by 117% to ZAR 9.2 billion, largely due to the inclusion of Adumo, and ADP throughput grew 21% to ZAR 11.9 billion.
• The company continues to carry its investment in Cell C at a fair value of $0 (zero).
• Material weaknesses in internal control over financial reporting, previously identified, persist as of September 30, 2025, across several key processes including Consumer lending, payroll, goodwill impairment, business combinations, revenue recognition, and journal entries.

Sentiment

Score: 7

Explanation: The company demonstrated strong financial and operational growth, particularly in revenue, operating income, and EBITDA, driven by strategic acquisitions and robust performance in its Consumer segment. The positive shift in cash from operations is also a strong indicator. However, the persistence of material weaknesses in internal controls over financial reporting remains a significant concern, tempering an otherwise very positive quarter.

Positives

• Total revenue increased by 11.6% in USD and 9.7% in ZAR, driven by acquisitions and organic growth.
• Operating income improved significantly to $0.383 million from a loss of $(0.045) million year-over-year.
• Group Adjusted EBITDA (non-GAAP) increased by 64% to $15.3 million, reflecting strong operational performance.
• Net cash provided by operating activities turned positive at $8.9 million, compared to net cash utilized of $(4.1) million in the prior year.
• The Consumer segment showed strong growth with active consumers up 24% to 1.9 million, loan originations up 77% to ZAR 820 million, and insurance gross written premium up 38% to ZAR 120 million.
• Merchant acquiring throughput increased by 117% to ZAR 9.2 billion, significantly boosted by the Adumo acquisition and 10% growth from Kazang Pay.
• Average revenue per consumer per month (ARPU) increased by 13% to ZAR 89, indicating improved monetization of the consumer base.
• Short-term credit facilities utilized decreased to $12.5 million from $24.5 million, reflecting reduced reliance on short-term debt.

Negatives

• Net loss, while slightly less negative, remained at $(4.4) million for the quarter.
• Cash and cash equivalents decreased to $72.2 million as of September 30, 2025, from $76.5 million as of June 30, 2025.
• Cash settlements (throughput) in the cash business declined by 4% to ZAR 27.5 billion, indicating ongoing decline in cash usage in the small-to-medium merchant sector.
• Selling, general and administration expenses increased by 48.5% to $39.6 million, primarily due to acquisitions, higher employee-related expenses, and increased allowance for credit losses.
• Depreciation and amortization expense more than doubled to $12.9 million, mainly due to acquisition-related intangible assets and increased POS device deployment.
• Finance loans receivable, net, increased to $80.9 million from $74.1 million, leading to higher allowances for doubtful accounts and finance loans receivable.
• Long-term borrowings increased to $195.5 million from $188.8 million, indicating increased leverage.

Risks

• Exposure to currency exchange risk due to purchases settled in EUR, RMB, and USD, and translation risk from ZAR to USD reporting currency.
• Fluctuations in interest rates (JIBAR and prime rates) impacting borrowing costs.
• Credit risk in consumer microlending and merchant lending activities, with potential for additional allowances if customer payment ability deteriorates.
• Equity price and liquidity risk related to the investment in Cell C, which is currently valued at zero.
• Uncertainty regarding the transition from JIBAR to ZARONIA in South Africa and its impact on borrowing agreements.
• Retention of liability if reinsurers are unable to meet their obligations under insurance contracts.
• Restrictions on subsidiaries' ability to pay dividends or transfer assets, potentially impacting the company's ability to service debt and fund operations.
• Risk of cash loss from theft in ATMs, requiring repayment to African Bank for shortages.
• Material weaknesses in internal control over financial reporting across multiple processes, including consumer lending, payroll, goodwill impairment, business combinations, revenue recognition, and journal entries, which could adversely affect financial reporting reliability.
• Insignificant claims and suits arising in the ordinary course of business, which could still have an adverse effect if aggregated.

Future Outlook

The company expects its cost of borrowing to decline moderately in the foreseeable future, with South African interest rates anticipated to decrease by 25 basis points in Q1 calendar 2026. The lending product mix scaling to larger and longer tenor loans is expected to result in a modest but non-material increase in the credit loss ratio. The company plans to complete the alignment of its Merchant Division brands under the Lesaka master brand by February 2027, with some brands aligned by December 2025. Capital spending for Q2 fiscal 2026 is expected to focus on POS devices, vaults, computer software/equipment, ATM infrastructure, and branch network in South Africa. The proposed acquisition of Bank Zero is expected to close by June 30, 2026.

Management Comments

• 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 active consumer base and improved cross-selling initiatives driven by the launch of our new onboarding engine.
• As the lending product mix scales to the larger and longer tenor loan product, we expect a modest but non-material increase in the credit loss ratio.
• Our insurance product sales continue to grow and is a material contributor to the improvement in our overall ARPU.
• Management currently believes that the resolution of these other matters, individually or in the aggregate, will not have a material adverse impact on the Company's financial position, results of operations or cash flows.
• The executive chairman and the group chief financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2025, due to insufficient time to design, implement and fully test controls to ensure remediation of identified material weaknesses.
• Management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q 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 U.S. GAAP.

Industry Context

The company operates in a dynamic South African market, experiencing differing secular trends. The small-to-medium merchant sector shows an ongoing decline in cash usage with increasing digital displacement, while the micro-merchant market maintains high cash prevalence alongside increasing digital adoption. The growth in digital payment solutions, consumer lending, and insurance products aligns with broader trends of financial inclusion and digital transformation in emerging markets. The anticipated decline in South African interest rates could moderately reduce borrowing costs, a favorable trend for financial services providers.

Comparison to Industry Standards

• The company's credit loss ratio for consumer microlending is approximately 6.5% on an annualized basis, which management expects to increase modestly but non-materially as the lending product mix scales to larger and longer tenor loans. This metric should be compared against similar unsecured short-term loan providers in South Africa to assess its competitiveness and risk management effectiveness.
• The increase in ARPU for active consumers to ZAR 89 per month, up 13% year-over-year, suggests effective cross-selling and product enhancements. This can be benchmarked against other financial service providers targeting similar demographics in South Africa, such as Capitec Bank or TymeBank, to evaluate the company's success in customer monetization.
• The significant growth in merchant acquiring throughput (117% to ZAR 9.2 billion) and ADP throughput (21% to ZAR 11.9 billion) indicates strong market penetration and adoption of digital payment solutions. Comparing these growth rates to competitors like PayGate or Ozow in the South African payment processing market would provide a clearer picture of market share gains and industry leadership.

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, including claims for damages for personal injuries, breach of contract, and employment-related claims. Management believes the resolution of these matters, individually or in the aggregate, will not have a material adverse impact on the company's financial position, results of operations, or cash flows.

Stakeholder Impact

• Shareholders: Positive financial performance (revenue, EBITDA, operating income) and improved cash flow could lead to increased investor confidence, but persistent internal control weaknesses pose a risk to financial reporting reliability and could impact valuation.
• Employees: Retrenchment costs were incurred in both Merchant ($0.2 million) and Consumer ($0.1 million) segments, indicating workforce adjustments. Stock-based compensation charges continue to be a component of employee remuneration.
• Customers (Merchants): Increased merchant acquiring devices and throughput, along with growing lending solutions, suggest expanded services and potentially better access to financial tools.
• Customers (Consumers): Growth in active consumers, loan originations, insurance policies, and ARPU indicates successful expansion of financial services and improved value proposition for consumers.
• Creditors: Reduced short-term credit facilities and scheduled debt repayments demonstrate ongoing debt management, but increased long-term borrowings and the need to fund growth indicate continued reliance on external financing.
• Regulatory Authorities: The persistence of material weaknesses in internal controls over financial reporting will likely keep the company under scrutiny from regulatory bodies like the SEC.

Next Steps

• Continue remediation efforts for identified material weaknesses in internal control over financial reporting.
• Make a cash payment of ZAR 175.0 million ($10.1 million) in March 2026 for deferred consideration related to the Recharger acquisition.
• Make a scheduled debt repayment of ZAR 150 million ($8.7 million) in February 2026.
• Pay ZAR 100 million ($5.8 million) upon the closing of the Bank Zero acquisition, which is expected by June 30, 2026.
• Undertake capital spending for Q2 fiscal 2026 on POS devices, vaults, computer software/equipment, ATM infrastructure, and branch network in South Africa.
• Update existing borrowing agreements to the new South African Overnight Index Average (ZARONIA) when adopted by the financial industry.
• Complete the unification and realignment of Merchant Division brands under the Lesaka master brand by February 2027, with certain brands by December 2025.
• Monitor the Cell C restructure and potential listing, and proceed with the disposal of Cell C shares to TPC under the agreed conditions by November 30, 2025.

Key Dates

Recommendation

Lesaka Technologies demonstrated strong operational and financial performance in Q1 fiscal 2026, with significant revenue and EBITDA growth driven by successful acquisitions and robust expansion in its Consumer segment. The positive shift in cash flow from operations is a notable improvement. However, the persistent and widespread material weaknesses in internal control over financial reporting present a substantial governance and financial reporting risk. While the growth trajectory is compelling, these control deficiencies introduce uncertainty and could lead to future restatements or regulatory issues. A 'hold' recommendation is appropriate, acknowledging the strong business momentum while cautioning investors about the unaddressed internal control risks that need to be fully remediated before a more confident 'buy' stance can be taken.

Keywords

Financial Technology, Payments, Lending, Insurance, South Africa, Merchant Services, Consumer Finance, SEC Filing, 10-Q, EBITDA, Acquisitions, Internal Controls