Sezzle Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Sezzle operates a buy-now, pay-later platform, primarily in the U.S. and Canada; India and Europe were early-stage markets. Its core product splits purchases into four interest-free payments over six weeks. At quarter-end, it reported 40,274 active merchants and 2,883,825 active consumers.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total income | $27.85m | $12.61m | $53.88m | $20.78m |
| Operating loss | $(17.81)m | $(2.78)m | $(26.65)m | $(6.28)m |
| Net loss | $(19.06)m | $(3.84)m | $(30.41)m | $(8.19)m |
| Diluted loss per share | $(0.10) | $(0.02) | $(0.15) | $(0.05) |
| Operating cash flow | Not separately provided | Not separately provided | $(5.59)m | $2.53m |
Growth and margins: Total income rose 121% in Q2 and 159% in the first half year over year. UMS, a non-GAAP operating metric representing merchant sales using Sezzle, increased 119% to $411.1m in Q2 and 156% to $786.2m in the first half. Calculated operating and net margins on total income were approximately (64.0)% and (68.4)% in Q2, and (49.5)% and (56.4)% in the first half. The filing does not report gross profit or a gross margin.
Income and costs: Sezzle income was $24.15m in Q2 and $46.40m in the first half; account reactivation fee income was $3.70m and $7.47m, respectively. First-half provision for uncollectible accounts increased to $22.42m from $5.13m, equal to 48.3% of Sezzle income versus 28.7% a year earlier. Personnel expense increased to $27.67m from $9.81m, reflecting headcount and higher equity/incentive compensation. First-half results also included a $1.09m loss on extinguishment of the prior credit facility.
Financial position and liquidity
- Cash, cash equivalents and restricted cash totaled $60.0m at June 30, down from $89.1m at year-end; cash and cash equivalents alone were $58.2m.
- Notes receivable, net, were $99.7m, up from $80.8m at year-end. The allowance for uncollectible accounts was $16.5m, compared with $11.1m; gross receivables past due 1–90 days totaled $22.6m.
- Current assets were $164.8m and current liabilities $101.6m, implying working capital of approximately $63.2m. Merchant accounts payable rose to $88.9m from $60.9m, including $79.0m in the merchant interest program.
- The new receivables facility had $21.0m outstanding and a $19.5m net carrying amount after debt issuance costs. The facility is authorized up to $250m, with $125m committed; the company reported $56.8m of unused borrowing capacity and $116.3m of pledged receivables. The facility matures June 2023 and is secured by pledged consumer receivables.
- First-half investing cash outflow was $0.67m and financing cash outflow was $23.32m. Financing included a $19.0m net paydown of the line of credit, facility-related fees, and repayment of the $1.22m PPP loan.
Changes, outlook and risks
- Growth in income and UMS accompanied materially higher operating expenses and credit-loss provisions. Management attributed increased provisions to expanded underwriting tests with larger merchants, higher losses on non-integrated products, and growth in transaction volume; it noted government stimulus had supported collections and offset losses in some periods.
- Management said existing cash, restricted cash and expected operating cash flows should be sufficient for working capital and investment needs beyond the next 12 months. This is an expectation, not a guarantee; the filing provides no specific revenue or earnings guidance.
- Management committed to spend up to approximately $35m under co-marketing agreements, with some payments contingent on volume or implementation targets. Expense recognized under these agreements was $2.46m in the first half.
- On July 19, 2021, after quarter-end, Sezzle issued Discover 4,559,270 shares for $30m. The companies were still finalizing a proposed expanded commercial partnership, including a BNPL network solution and a referral program.
- Management concluded disclosure controls and procedures were ineffective at June 30 because of deficiencies in the design and implementation of IT general and application controls. Remediation was underway; management said more time and testing were needed. It nevertheless concluded the interim financial statements fairly presented the periods shown.
- Principal risks include consumer delinquencies and losses, competitive pressure and merchant pricing incentives, regulatory scrutiny of BNPL and licensing compliance, access to funding and credit-facility covenants, cybersecurity and privacy, and foreign-exchange and LIBOR transition exposure. The company reported no material legal proceedings, apart from routine litigation.
Key facts for investors to verify
- Whether higher credit-loss provisions and delinquency trends reflect sustained deterioration, and how underwriting expansion affects future loss rates.
- Whether growth in UMS and active users converts to improved unit economics and profitability after processing, marketing, personnel and credit costs.
- Progress and testing results for remediation of the ineffective disclosure controls, including whether any further deficiencies are identified.
- Actual availability and terms of borrowing under the receivables facility, covenant compliance, and dependence on eligible pledged receivables.
- Whether the proposed Discover partnership becomes definitive and what commercial impact follows; also monitor dilution from the $30m share issuance.
- Potential cash requirements under the marketing commitments and contingent merchant incentives, alongside management’s liquidity outlook.