Sezzle Inc. — Q3 2021 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2021. Sezzle operates a buy-now-pay-later platform, primarily in the U.S. and Canada, and earns most of its income from merchant fees. At quarter-end it reported 44,400 active merchants and 3.193 million active consumers.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total income | $28.5 million | $15.9 million | $81.9 million | $36.7 million |
| Operating loss | $17.7 million | $7.0 million | $44.3 million | $13.3 million |
| Net loss | $18.8 million | $8.2 million | $49.2 million | $16.4 million |
| Net loss per share, basic and diluted | $0.09 | $0.04 | $0.25 | $0.09 |
- Q3 underlying merchant sales (UMS) rose 102% to $460.7 million; nine-month UMS rose 133% to $1.2 billion. Management attributed income growth chiefly to higher UMS.
- Provision for uncollectible accounts was $10.5 million in Q3 and $32.9 million year to date, up from $4.5 million and $9.6 million, respectively. It equaled 42.7% of Sezzle income in Q3 and 46.7% year to date. The filing cites underwriting tests and higher loss rates, including on initial ACH payments; Sezzle tightened credit and added a card-on-file requirement for ACH first payments in September.
- Operating expenses grew to $46.2 million in Q3 and $126.3 million year to date. Personnel, transaction processing, marketing, and credit-loss provisions increased with platform growth and investment.
- Operating cash used was $31.2 million for the nine months, versus $2.2 million in the prior-year period. Investing cash used was $1.1 million; financing cash used was $10.1 million. Cash, cash equivalents, and restricted cash ended at $46.9 million, down from $89.1 million at year-end 2020.
- At September 30, cash and cash equivalents were $44.0 million, restricted cash was $2.9 million, and working capital was $62.2 million. Net notes receivable were $113.7 million, versus $80.8 million at December 31, 2020.
- The new receivables facility has a $250 million maximum capacity, with $125 million committed. Sezzle reported $5.0 million drawn, $87.8 million of unused borrowing capacity, and a June 2023 maturity. It also had $3.7 million of line-of-credit debt net of issuance costs on the balance sheet. Merchant accounts payable totaled $90.7 million, including $78.6 million in the merchant interest program. Sezzle repaid its $1.2 million PPP loan in June.
Material changes, outlook, and risks
- Income more than doubled year over year, but losses widened substantially as expenses and credit-loss provisions rose faster than income.
- Sezzle issued $30 million of common stock to a Discover subsidiary in July at $6.58 per share. The company also repurchased shares to cover employee tax withholding obligations.
- Management stated existing cash, operating cash flow, and available facility capacity should be sufficient for working capital and investment needs beyond the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management noted Q4 has historically been the strongest period for income and UMS due to holiday spending, and has typically brought higher charge-offs. It cautioned that reported interim results may not indicate full-year or future performance.
- Marketing agreements entered into during the first nine months could require spending of up to approximately $36 million, subject in some cases to targets or implementation conditions. Related expenses were $4.1 million year to date.
- Key risks include consumer credit losses, competition and merchant retention, BNPL regulatory scrutiny, consumer spending and macroeconomic conditions, capital needs, cybersecurity, and foreign-exchange exposure. Management also said COVID-related trends and consumer stimulus effects may not persist.
- Disclosure controls and procedures were deemed ineffective as of September 30 because of deficiencies in IT general and application controls affecting the completeness and accuracy of financial-reporting information. Remediation work was underway, but the deficiencies were not yet considered remediated.
Important facts for investors to verify
- Whether credit-loss rates and ACH-related losses improve after the underwriting changes, and how charge-offs and recoveries evolve.
- Whether income and UMS growth can translate into improved operating leverage amid rising personnel, processing, and marketing costs.
- Availability and terms of committed and uncommitted facility capacity, and the liquidity implications of merchant-payable balances that are due on demand subject to program limits.
- Potential cash impact and conditions attached to the marketing commitments, merchant incentives, and other contingent payments.
- Progress and testing results for remediation of the ineffective disclosure controls.