Sezzle Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited consolidated results. Sezzle operates a buy-now, pay-later platform, principally in the United States and Canada, and said it was winding down operations in India and certain European countries. It reported 35,000 active merchants and 2.6 million active consumers at quarter-end.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total income | $34.9 million | $29.3 million | $69.6 million | $56.9 million |
| Operating income (loss) | $3.8 million | ($13.6 million) | $9.2 million | ($39.7 million) |
| Net income (loss) | $1.1 million | ($15.1 million) | $2.9 million | ($43.1 million) |
| Operating margin | 10.8% | (46.3%) | 13.2% | (69.8%) |
| Net margin | 3.3% | (51.6%) | 4.1% | (75.7%) |
| Net interest expense | $3.9 million | $1.7 million | $7.3 million | $3.3 million |
Total income grew 19.4% in Q2 and 22.4% in the first half. Q2 transaction income rose 4.0%, while income from other services increased 108.9%, primarily due to subscription revenue. For the first half, transaction income was up 8.4% and other-services income up 96.1%. Merchant processing fees represented approximately 57% of first-half 2023 income, down from 81% a year earlier, reflecting revenue diversification.
Q2 provision for credit losses was $4.3 million, or 12.3% of income, versus $7.9 million, or 27.0%, a year earlier. First-half provision was $6.0 million, or 8.6% of income, compared with $18.4 million, or 32.3%. Management attributed the reduction to tighter underwriting and Prophet Score risk tools, lower sales volume, and better-than-expected performance of 2022 receivables; adoption of the new expected-credit-loss standard also affected the allowance.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $2.5 million, versus $6.1 million in 2022. Investing cash outflow was $0.7 million; financing cash outflow was $8.0 million, including $6.7 million of net line-of-credit repayments and $1.3 million of share repurchases. Cash, cash equivalents and restricted cash declined $6.3 million to $63.4 million.
- At June 30, cash and cash equivalents were $62.1 million; current assets were $152.7 million and current liabilities $78.7 million. Working capital was $74.0 million, compared with $70.9 million at year-end 2022.
- Net notes receivable were $83.8 million, including a $6.5 million credit-loss allowance. Merchant accounts payable totaled $67.4 million, including $52.4 million in the merchant interest program.
- Line-of-credit principal was $58.3 million (balance-sheet carrying value, net of issuance costs, $57.4 million), down from $65.0 million at year-end. Unused capacity was $1.7 million. The facility is secured by eligible receivables; the filing states it carried a minimum outstanding balance requirement of $80 million during the first half.
- The line of credit carried a 22.90% effective annual rate in Q2 and 19.92% for the first half, compared with 6.06% and 4.76%, respectively, in 2022. It bears interest at Adjusted SOFR plus 11.5%; management cited higher borrowing costs as the driver of increased interest expense.
Material changes, outlook and risks
- Underlying Merchant Sales (UMS) declined 8.6% in Q2 to $383.1 million and 13.4% in the first half to $752.9 million. Management linked lower volume and smaller active-customer and merchant counts to its strategic focus on profitability, tighter underwriting, and discontinuing unprofitable or low-volume merchants.
- Active merchants fell 17.6% from December 2022 to 35,000; active consumers fell 10.6% to 2.637 million. Both metrics were also lower year over year. Personnel expense declined 17.8% for the first half, while marketing expense fell 43.6% and general and administrative expense fell 62.4%; the latter also reflects $6.5 million of merger-related professional fees in first-half 2022.
- Management said current cash, available credit and expected operating cash flows should cover working-capital and investment needs beyond the next 12 months, but cautioned that delinquencies, lower consumer purchases, financing access, macroeconomic conditions and financial-market instability could weaken liquidity. No specific financial guidance or numerical outlook was provided; management cautioned that interim results may not indicate full-year performance.
- Merchant agreements committed up to approximately $12.5 million in future marketing and advertising spend, with terms of one year or less; an additional approximately $6.0 million of potential spend depended on specified criteria being met.
- Sezzle adopted CECL on January 1, 2023, reducing the allowance and increasing retained earnings by approximately $0.9 million, primarily reflecting estimated future recoveries. A 1-for-38 reverse stock split became effective May 11, 2023; share and per-share figures were retrospectively adjusted.
- A new six-year headquarters lease commenced July 1, 2023, with a recognized right-of-use asset and lease liability of approximately $1.1 million. The filing reported no material change to previously disclosed risk factors; risks include consumer credit losses, competition, regulation, macroeconomic conditions, funding availability, cybersecurity and foreign-exchange movements. Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower UMS and shrinking merchant and consumer counts stabilize as the profitability strategy continues, and how they affect future income growth.
- Whether credit-loss improvements persist, including performance of newer receivable vintages and the adequacy of estimates under CECL.
- How the high effective borrowing rate, facility terms and limited unused capacity affect interest expense and liquidity; reconcile the stated $80 million minimum balance requirement with reported period-end principal.
- Whether subscription and other-services growth is durable and offsets pressure on merchant processing income.
- The timing and conditions of committed merchant marketing spend, and any additional liquidity or regulatory developments after the filing.