Sezzle Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited consolidated U.S. GAAP results. Sezzle operates a buy-now-pay-later platform, earning primarily merchant fees. Q3 figures are compared with Q3 2021; year-to-date figures are compared with the first nine months of 2021.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total income | $30.4 million | $28.5 million | $87.3 million | $81.9 million |
| Operating income (loss) | $6.5 million | ($17.7 million) | ($33.2 million) | ($44.3 million) |
| Net income (loss) | $4.3 million | ($18.8 million) | ($38.7 million) | ($49.2 million) |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $7.1 million | ($31.2 million) |
- Q3 income increased 6.8%; transaction income rose 8.0%, while other-services income was nearly flat. Nine-month income increased 6.6%.
- Q3 profitability included an $11 million reimbursement from Zip for merger-related costs. Excluding that one-time item, the reported operating result would have been an approximately $4.5 million operating loss; the comparable net result would have been an approximately $6.7 million net loss.
- Provision for uncollectible accounts was $5.7 million in Q3, 22.9% of total income, versus $10.5 million and 45.0% a year earlier. For nine months it was $24.0 million, or 33.3% of income, versus $32.9 million, or 48.9%.
- Underlying Merchant Sales (UMS), a non-GAAP operating metric and not revenue, declined 8.5% to $421.5 million in Q3, but increased 3.5% to $1.29 billion for nine months. Active merchants were 45,000 and active consumers 3.17 million at September 30, down 4.5% and 6.8%, respectively, from December 31, 2021.
- No formal guidance is provided. Management said Q4 has historically been the strongest period for income and UMS, with seasonally higher charge-offs.
Financial position and liquidity
- At September 30, cash, cash equivalents and restricted cash totaled $58.8 million, down from $78.9 million at year-end 2021. Working capital was $57.6 million, versus $113.7 million.
- Net notes receivable were $92.2 million, down from $134.0 million at year-end. Gross notes receivable fell to $107.5 million from $162.3 million; the allowance was $11.3 million, compared with $23.1 million. Nine-month net charge-offs were $35.8 million.
- The September 30 line-of-credit balance was $54.0 million gross ($53.7 million net of debt issuance costs); unused capacity was $5.3 million. The weighted-average interest rate was 9.12%. Merchant accounts payable were $83.8 million, including $68.4 million in the merchant interest program.
- Nine-month investing cash use was $0.8 million and financing cash use was $24.8 million, primarily net line-of-credit repayments. Cash, cash equivalents and restricted cash decreased $18.5 million over the period.
- Management stated that its plans and available resources supported going-concern status through at least November 14, 2023. The company reported a going-concern basis of accounting.
Material changes, outlook and risks
- Management shifted focus toward profitability over growth, tightened underwriting, renegotiated or exited unprofitable merchant relationships, and began using a third-party collection agency. Management attributed lower credit-loss provisions and reduced consumer and merchant counts partly to these actions.
- A March workforce reduction was expected to produce approximately $10 million in annualized savings; scaling back international operations was expected to add approximately $7 million in annualized savings. Sezzle ceased payment processing in India and was exploring the potential sale of its European and Brazilian operations.
- Sezzle and Zip mutually terminated their proposed merger on July 11, 2022; Sezzle received the $11 million cost reimbursement the next day.
- On October 14, 2022, after quarter-end, Sezzle entered a new revolving facility of up to $100 million, maturing October 14, 2024, at Adjusted SOFR plus 11.5%, with a 75% advance rate and rising minimum utilization requirements. Lenders also received warrants for up to 2,075,064 shares. The prior facility had been reduced to a $64.3 million commitment and a 70% advance rate in July.
- Risks include consumer defaults and macroeconomic pressure, intense BNPL competition, regulation, merchant and partner concentration or loss, access to capital and covenant compliance, and foreign-exchange exposure. Q3 foreign-currency translation reduced comprehensive income by $1.4 million. Merchant marketing agreements committed up to approximately $23.1 million of future spend at September 30.
- The filing reported no material changes to the 2021 Form 10-K risk factors, no material expected adverse effect from ordinary-course legal proceedings, and effective disclosure controls.
Most important facts for investors to verify
- Whether lower UMS and user/merchant counts stabilize, and whether higher merchant pricing can sustain income without impairing volume.
- Whether improved loss provisions persist; review delinquency trends, charge-offs, recoveries and allowance adequacy, particularly under weaker consumer conditions.
- The new facility’s utilization requirements, high floating-rate cost, collateral availability, covenants and effect of the warrants on dilution and liquidity.
- Whether the stated cost savings are realized and whether the post-quarter financing supports liquidity beyond management’s stated going-concern horizon.
- How much reported profitability depends on one-time merger reimbursement and whether recurring operations can return to profitability.