Sezzle Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Sezzle operates a single-segment buy-now, pay-later platform, generally offering consumers four interest-free installments over six weeks and earning most income from merchant fees.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total income | $29.3 million | $27.4 million | $56.9 million | $53.4 million |
| Operating loss | $13.6 million | $17.8 million | $39.7 million | $26.6 million |
| Net loss | $15.1 million | $19.1 million | $43.1 million | $30.4 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $6.1 million | $(5.6) million |
- Q2 total income rose 6.8% year over year; Sezzle income increased 8.6%, while account reactivation fee income declined 4.4%. Six-month total income rose 6.5%.
- Q2 operating loss narrowed year over year; operating margin was approximately negative 46% versus negative 65% in Q2 2021. Net margin was approximately negative 52% versus negative 70%. For the first half, operating and net margins were approximately negative 70% and negative 76%, respectively.
- Provision for uncollectible accounts fell to $7.9 million in Q2 from $13.8 million; it was 30.7% of Sezzle income versus 58.5%. First-half provision declined to $18.4 million from $22.4 million.
- Q2 expenses included $6.2 million for marketing, advertising and tradeshows, up 237%; first-half spending was $11.5 million, up 242%. Zip merger-related costs included in general and administrative expense were $2.1 million for Q2 and $6.5 million for the first half.
- At June 30, cash, cash equivalents and restricted cash totaled $63.3 million, down from $78.9 million at year-end. Working capital was $55.4 million, versus $113.7 million; unused line-of-credit capacity was $10.1 million, versus $29.8 million.
- Gross line-of-credit borrowings were $57.8 million, with a 6.70% weighted-average rate; the balance-sheet amount, net of issuance costs, was $57.1 million. Total liabilities were $160.0 million and stockholders’ equity was only $0.1 million.
- First-half operating cash flow was positive despite the net loss, alongside a $26.1 million cash-flow benefit from lower notes receivable. Financing used $20.9 million, primarily from net line-of-credit repayments; cash, cash equivalents and restricted cash decreased $15.4 million.
Operating trends and material changes
- Underlying Merchant Sales (UMS) increased 1.9% to $419.1 million in Q2 and 10.6% to $869.6 million for the first half. Management attributed slower growth to prioritizing profitability over top-line growth.
- Active Merchants were 48,000 and Active Consumers 3.4 million at June 30. Merchant count rose 1.3% from year-end; consumer count was nearly unchanged from year-end.
- Management cited tighter underwriting and restructured contracts with merchants exhibiting high consumer losses as drivers of improved consumer loss rates. Personnel expense fell 19.8% in Q2, reflecting a March workforce reduction and incentive-program changes.
- During Q2, Sezzle ceased payment processing activities in India and said it was exploring potential sales of its European and Brazilian operations.
Outlook, risks and unusual items
- Management reported approximately $10 million of annualized savings from the workforce reduction and approximately $7 million from scaling back international operations. It said these actions, available liquidity and operating cash flows should meet working-capital and investment needs beyond the next 12 months; the notes state management believes the company can continue as a going concern through at least August 15, 2023. Management cautioned that success is not assured and that failure to improve profitability and liquidity could impair its ability to fund operations.
- After quarter-end, Sezzle and Zip mutually terminated their merger agreement on July 11, 2022. Sezzle received $11 million from Zip on July 12 as reimbursement of merger-related costs.
- Effective July 31, 2022, a credit amendment reduced the funded amount from $125 million to approximately $64.3 million, reduced the advance rate from 90% to 70%, and increased the Class A rate from Adjusted SOFR plus 3.375% to plus 4.375%. The amendment did not extend the modified-covenant period, though the lender may extend it.
- Outstanding agreements contemplated up to approximately $26.4 million in future marketing and advertising spend as of June 30. Merchant and consumer repayment risk, BNPL regulatory scrutiny, competition, macroeconomic conditions, access to capital and floating interest rates remain key risks. No specific financial guidance was provided.
Important facts for investors to verify
- Whether the reduced credit availability and advance rate affect funding capacity, covenant compliance and consumer receivables growth.
- Whether underwriting changes continue to lower losses without materially constraining UMS or merchant and consumer activity.
- Whether cost reductions, the Zip reimbursement and any international asset sales provide durable improvement in cash runway and operating performance.
- How much of first-half operating cash flow reflects repeatable operations versus changes in receivables and merchant payment timing.
- Whether contracted marketing commitments and other merchant incentives generate sufficient volume and returns to justify the associated costs.