Sezzle Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Sezzle operates a buy-now-pay-later payments platform, primarily in the United States and Canada. At quarter-end it reported 39,000 active merchants and 2.8 million active consumers. The company was winding down operations in India and certain European countries.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total income | $34.7 million | $27.6 million |
| Operating income (loss) | $5.4 million | $(26.1) million |
| Net income (loss) | $1.7 million | $(28.0) million |
| Net income (loss) per diluted share* | $0.31 | $(5.20) |
| Operating cash flow | $(4.1) million | $7.8 million |
| Investing cash flow | $(0.3) million | $(0.4) million |
| Financing cash flow | $(5.3) million | $(26.2) million |
Operating margin was approximately 15.6% versus negative 94.5%; net margin was approximately 5.0% versus negative 101.3%. These are calculated as reported operating income or net income divided by total income.
- Transaction income rose 13.1% to $25.9 million; income from other services rose 84.6% to $8.8 million, primarily reflecting Sezzle Premium, introduced in 2022.
- Operating expenses fell to $29.3 million from $53.8 million. Credit-loss provision declined to $1.7 million from $10.5 million, or 4.9% of income versus 37.9%; management cited tighter underwriting, lower sales volume, better-than-expected performance of 2022 receivables, and the adoption of CECL.
- Net interest expense increased 109.1% to $3.4 million. The credit facility’s effective annual rate was 17.69%, compared with 4.79% in Q1 2022.
Financial position and liquidity
- At March 31, cash, cash equivalents, and restricted cash totaled $60.6 million, down from $69.5 million at December 31, 2022. The quarter’s net decrease was $9.7 million.
- Working capital was $73.6 million, compared with $70.9 million at year-end. Notes receivable, net, were $84.8 million; the related allowance for credit losses was $6.3 million.
- Line-of-credit principal outstanding was $59.8 million ($58.7 million net of debt issuance costs); long-term debt was $0.25 million. Unused credit capacity was approximately $0.5 million. The facility is secured by eligible receivables.
- Stockholders’ equity was $13.7 million, up from $8.8 million at year-end. Total liabilities were $139.8 million.
Management stated that cash, restricted cash, unused borrowing capacity, and expected operating cash flows should be sufficient for working capital and investment needs beyond the next 12 months. However, Q1 operating cash flow was negative despite reported net income.
Changes, outlook, and risks
- Underlying Merchant Sales (UMS) fell 17.9% year over year to $369.8 million. Active merchants declined 20.1% year over year to 39,000, and active consumers declined 19.7% to 2.8 million. Management attributed the declines to a shift toward profitability, tighter credit underwriting, and removal of unprofitable or low-volume merchants.
- Lower expenses reflected reduced headcount, lower processing and marketing costs, and the absence of $4.4 million of prior-year professional fees related to the terminated proposed Zip Co merger. Merchant processing fees were $20.0 million versus $22.3 million, while their share of total income fell to approximately 58% from 81%, partly as other services expanded.
- No formal financial guidance is provided in the supplied filing text. Management cited seasonality, with Q4 historically strongest, and said it expects to focus on merchant profitability. Results for Q1 may not indicate full-year results.
- Future marketing commitments were up to approximately $16.1 million; a further approximately $6.1 million could be spent if specified conditions are met. These agreements generally have remaining terms of two years or less.
- Key disclosed risks include consumer credit losses, competition, macroeconomic conditions, access to capital and higher interest costs, regulatory scrutiny of BNPL, merchant and partner retention, cybersecurity, and foreign-exchange movements. Management reported no material change to the risk factors in its 2022 Form 10-K and did not believe pending ordinary-course legal matters would have a material adverse effect.
- Sezzle adopted CECL on January 1, 2023; adoption reduced the allowance and increased retained earnings by approximately $0.9 million. A 1-for-38 reverse stock split became effective May 11, 2023; presented share and per-share figures were retrospectively adjusted.
Important facts for investors to verify
- Whether lower credit-loss provisions and improved profitability persist, and how delinquency, charge-offs, recoveries, and allowance assumptions evolve under CECL.
- Whether the company can generate positive operating cash flow while UMS and active merchant and consumer counts are declining.
- Credit-facility terms, borrowing costs, minimum-balance requirements, and limited unused capacity; confirm the facility’s ongoing availability and covenants.
- How much of the income increase is recurring subscription or transaction revenue, and the effect of merchant repricing and consumer-related fees on customer retention.
- Timing and potential cash impact of marketing commitments and contingent merchant payments.
*Share and per-share amounts reflect the 1-for-38 reverse split. Figures are rounded; the filing reports exact amounts.