Lesaka(US:LSAK)2021-09-13 20:16Currency and Economic Impact - Fluctuations in the South African rand (ZAR) significantly impact reported revenue and net income, complicating performance evaluations across reporting periods [92]. - The company is exposed to currency exchange risk, particularly with fluctuations in the USD/ZAR exchange rate, which could adversely affect financial results [331]. - The company has experienced significant fluctuations in its operating results due to translation risk, as most revenues and expenses are incurred in ZAR while reporting is in USD [333]. - The company does not engage in significant currency hedging, relying primarily on economic hedging through forward contracts for inventory purchases [93]. Regulatory Environment - The South African corporate income tax rate is 28%, higher than the U.S. federal rate of 21%, which may adversely affect profitability and cash flow generation [99]. - The South African retail banking market is highly regulated, and the company relies on a third-party bank for its EPE solution, limiting control over this business [109]. - The company is subject to extensive regulations regarding privacy and data security, which could lead to substantial compliance costs and potential penalties [113]. - The company faces risks related to government regulations, including potential penalties for non-compliance with trade control laws and anti-corruption regulations [102]. - Compliance with the National Credit Amendment Bill may restrict lending to low-income earners and increase credit costs, adversely affecting micro-lending operations [114]. Operational Challenges - Eskom's inability to provide sufficient electricity has led to unpredictable supply disruptions, necessitating the installation of backup diesel generators to maintain operations [96]. - The South African economy faces high inflation and interest rates, which could increase operating costs and reduce profitability [98]. - The National Credit Regulator has applied to cancel the registration of Moneyline Financial Services as a credit provider, which could severely impact its ability to provide loans [100]. Financial Position and Shareholder Dynamics - Approximately 36% of the company's outstanding common stock is owned by two shareholders, Value Capital Partners (22%) and IFC Investors (14%), which may lead to conflicts of interest [121]. - The company may need to raise additional financing to fund operations and expansion, which could dilute current shareholders' equity if new securities are issued [125]. - The company has granted put rights to IFC Investors, which could adversely impact liquidity and capital resources if triggered [120]. - The company has sold non-core businesses, resulting in a large infusion of cash that has not yet been deployed into operating businesses [116]. Interest and Credit Risk Management - As of June 30, 2021, the estimated annual expected interest charge on South African overdraft was $4.895 million, which could increase to $5.594 million with a hypothetical 1% increase in the prime interest rate, or decrease to $4.195 million with a 1% decrease [336]. - The company maintains credit risk policies to minimize overall credit risk, focusing on counterparties with a credit rating of "B" or better, as determined by agencies like Standard & Poor's, Moody's, and Fitch Ratings [337]. - In microlending activities, the company performs affordability tests and assigns a "creditworthiness score" to manage credit risk for unsecured short-term loans [339]. Investment and Market Performance - The company's stock price ranged from a low of $2.87 to a high of $6.62 during the fiscal year 2021, indicating significant volatility [119]. - As of June 30, 2021, the company did not hold any exchange-traded equity securities as available for sale, indicating a focus on long-term investments rather than short-term volatility [340]. - The fair value of the company's investment in Finbond, which represents approximately 31.5% of its issued share capital, was $29.9 million as of June 30, 2021, accounting for about 7.0% of total assets [343].