Sezzle Inc. — Q1 2022 Form 10-Q
Period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Sezzle operates a single-segment buy-now-pay-later payments platform. It reported 49,000 active merchants and 3.46 million active consumers at quarter-end.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total income | $27.6 million | $26.0 million | +6.2% |
| Operating loss | $26.1 million | $8.8 million | Loss widened |
| Net loss | $28.0 million | $11.4 million | Loss widened |
| Basic and diluted loss per share | $0.14 | $0.06 | Loss per share increased |
| Operating margin | (94.5%) | (33.9%) | Deteriorated |
| Net cash from (used for) operating activities | $7.8 million | ($5.4 million) | Improved |
Sezzle income rose 8.4% to $24.1 million, while account reactivation fee income fell 7.2% to $3.5 million following changes to the fee assessment policy. Underlying Merchant Sales (UMS), a non-GAAP operating metric, increased 20.1% to $450.5 million. The provision for uncollectible accounts was $10.5 million, or 43.4% of Sezzle income, versus $8.6 million, or 38.5%, a year earlier.
Operating expenses increased 54% to $53.8 million. Notable increases included marketing and advertising to $5.3 million from $1.5 million, general and administrative expense to $7.7 million from $2.4 million (primarily merger-related legal fees), and personnel expense to $16.4 million from $12.3 million. Transaction expense rose 32% to $11.8 million, while net interest expense rose 19% to $1.6 million.
Liquidity, debt and balance sheet
Cash, cash equivalents and restricted cash totaled $60.6 million at March 31, 2022, down from $78.9 million at December 31, 2021. Working capital was $62.7 million, down from $113.7 million. Notes receivable, net, were $110.5 million, compared with $134.0 million at year-end; total assets were $178.9 million and stockholders’ equity was $12.7 million.
The line of credit balance was $52.8 million gross, or $51.9 million net of debt issuance costs, with $39.7 million of unused borrowing capacity. Sezzle had pledged $162.9 million of notes receivable. The weighted-average line-of-credit interest rate was 5.53%. Cash used in financing was $26.2 million, primarily from $26.0 million of credit-line repayments. The company reported $7.8 million of operating cash flow, but noted that cash receipts exceeded merchant payments partly because of merchant payment deferrals under its Merchant Interest Program.
Material developments, outlook and risks
- Sezzle entered into a merger agreement with Zip Co Limited on February 28, 2022. The proposed transaction would make Sezzle a wholly owned Zip subsidiary; each eligible Sezzle share would convert into 0.98 Zip ordinary shares or corresponding ADRs, subject to the agreement and closing conditions. The initial U.S. HSR waiting period expired April 18, 2022. Termination fees may apply in specified circumstances.
- A March 10 workforce reduction was expected to produce approximately $10 million in annualized savings. Management was also considering international operational changes expected to produce approximately $7 million in annualized savings: scaling European operations back to essential requirements, planning to cease payment processing in India, and exploring a Brazilian spin-off with a minority stake retained.
- Management stated that these actions, available liquidity and operating cash flows were expected to support operations beyond the next 12 months; the financial statements say management believes the company can continue as a going concern through at least May 16, 2023. The filing cautions that the plans may not succeed sufficiently to meet operating needs and credit-line covenants.
- The February credit amendments revised certain covenant thresholds, cure-period provisions and reporting obligations. The credit facility has covenants, and continued losses could threaten compliance.
- Outstanding merchant marketing agreements contemplated up to approximately $32.5 million of future spend, plus up to $7.7 million if specified conditions are met. The company cited competition, consumer credit losses, macroeconomic conditions, BNPL regulatory scrutiny, funding needs, merger execution and foreign-exchange exposure as risks. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Merger closing conditions, timing, consideration mechanics and any termination-fee exposure.
- Whether cost-reduction and international restructuring plans are implemented and deliver the stated savings.
- Consumer credit performance, charge-offs and allowance adequacy, especially given the higher provision relative to Sezzle income.
- Liquidity, unused credit availability and compliance with amended credit-facility covenants.
- Drivers and durability of operating cash flow, including the effect of merchant payment deferrals and seasonality.
- Future spending obligations under merchant marketing agreements and the impact of competition on merchant pricing and profitability.