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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-56267

szl-20220331_g1.jpg

SEZZLE INC.
(Exact name of registrant as specified in its charter)

Delaware81-0971660
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
251 N 1st Avenue, Ste. 200, Minneapolis, Minnesota
55401
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: +1 651 504 5402

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.00001 per share, outstanding at April 30, 2022 were 206,902,974.







SEZZLE INC.

TABLE OF CONTENTS

2


FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10-Q (“Form 10-Q”) includes “forward-looking statements” under Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical fact included in this Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described in the section “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. There is a risk that such predictions, estimates, projections, and other forward-looking statements will not be achieved. Nevertheless, and despite the fact that management’s expectations and estimates are based on assumptions management believes to be reasonable and data management believes to be reliable, our actual results, performance or achievements are subject to future risks and uncertainties, any of which could materially affect our actual performance. Risks and uncertainties that could affect such performance include, but are not limited to:
our ability to complete the merger and other transactions contemplated by the Agreement and Plan of Merger (“Zip Merger Agreement”) dated February 28, 2022, by and among Sezzle Inc., Zip Co Limited (“Zip”) and Zip’s wholly owned subsidiary Miyagi Merger Sub, Inc. (“Merger Sub”), including due to the failure to satisfy the conditions for the completion of the merger;
risks related to disruption of management’s attention from business operations due to the proposed merger;
the effect of the proposed merger on our results of operations and business generally; including our ability to retain and hire key personnel and maintain our relationships with customers and partners;
the risk that the proposed merger will not be completed in a timely manner, increasing the expected costs of the proposed merger;
the occurrence of any event, change or circumstance that could give rise to the termination of the Zip Merger Agreement;
impact of the “buy-now, pay-later” (“BNPL”) industry becoming subject to increased regulatory scrutiny;
impact of operating in a highly competitive industry;
impact of macro-economic conditions on consumer spending;
our ability to increase our merchant network, our base of consumers and Underlying Merchant Sales (“UMS”);
our ability to effectively manage growth, sustain our growth rate and maintain our market share;
our ability to meet additional capital requirements;
impact of exposure to consumer bad debts and insolvency of merchants;
impact of the integration, support and prominent presentation of our platform by our merchants;
impact of any data security breaches, cyberattacks, employee or other internal misconduct, malware, phishing or ransomware, physical security breaches, natural disasters, or similar disruptions;
impact of key vendors or merchants failing to comply with legal or regulatory requirements or to provide various services that are important to our operations;
impact of the loss of key partners and merchant relationships;
impact of exchange rate fluctuations in the international markets in which we operate;
our ability to protect our intellectual property rights;
our ability to retain employees and recruit additional employees;
impact of the costs of complying with various laws and regulations applicable to the BNPL industry in the United States and the international markets in which we operate; and
our ability to achieve our public benefit purpose and maintain our B Corporation certification;
the other factors identified in the “Risk Factors” section of the 2021 Form 10-K.
We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, the risks described in the section “Risk Factors” included in the 2021 Form 10-K. Should one or more of the risks or uncertainties described in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Form 10-Q are expressly qualified in their entirety by these cautionary statements. These cautionary statements should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the cautionary statements in this section, to reflect events or circumstances after the date of this Form 10-Q.
3


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets (unaudited)
As of
March 31, 2022December 31, 2021
Assets
Current Assets
Cash and cash equivalents$58,371,390 $76,983,728 
Restricted cash, current2,188,775 1,886,440 
Notes receivable, net110,486,449 133,986,583 
Other receivables, net2,125,753 5,084,099 
Prepaid expenses and other current assets3,510,655 3,350,053 
Total current assets176,683,022 221,290,903 
Non-Current Assets
Internally developed intangible assets, net1,115,354 910,584 
Property and equipment, net607,136 662,472 
Operating right-of-use assets225,530 285,865 
Restricted cash, non-current20,000 20,000 
Other assets244,486 233,752 
Total Assets$178,895,528 $223,403,576 
Liabilities and Stockholders' Equity
Current Liabilities
Merchant accounts payable$95,273,209 $96,516,668 
Operating lease liabilities153,418 171,959 
Accrued liabilities13,897,456 7,996,772 
Other payables4,643,610 2,874,046 
Total current liabilities113,967,693 107,559,445 
Long Term Liabilities
Long term debt250,000 250,000 
Lease liabilities53,599 90,962 
Line of credit, net of unamortized debt issuance costs of $903,267 and $1,088,869, respectively
51,896,733 77,711,131 
Total Liabilities166,168,025 185,611,538 
Commitments and Contingencies
Stockholders' Equity
Common stock, $0.00001 par value; 750,000,000 shares authorized; 207,631,997 and 204,891,057 shares issued, respectively; 206,754,032 and 204,230,939 shares outstanding, respectively
2,069 2,044 
Additional paid-in capital171,445,100 168,338,673 
Stock subscriptions: 1,343,750 and 20,729 shares subscribed, respectively
(305,833)(18,545)
Treasury stock, at cost: 877,965 and 660,118 shares, respectively
(3,994,461)(3,691,322)
Accumulated other comprehensive income971,897 563,911 
Accumulated deficit(155,391,269)(127,402,723)
Total Stockholders' Equity12,727,503 37,792,038 
Total Liabilities and Stockholders' Equity$178,895,528 $223,403,576 

See the accompanying Notes to the Consolidated Financial Statements.
4


Consolidated Statements of Operations and Comprehensive Loss (unaudited)

For the three months ended
March 31, 2022March 31, 2021
Income
Sezzle income$24,127,630 $22,252,390 
Account reactivation fee income3,506,332 3,778,368 
Total income27,633,962 26,030,758 
Operating Expenses
Personnel16,379,638 12,302,173 
Transaction expense11,794,369 8,924,927 
Third-party technology and data2,076,314 1,151,193 
Marketing, advertising, and tradeshows5,298,707 1,523,770 
General and administrative7,743,061 2,383,515 
Provision for uncollectible accounts10,465,595 8,576,978 
Total operating expenses53,757,684 34,862,556 
Operating Loss(26,123,722)(8,831,798)
Other Expense
Net interest expense(1,615,339)(1,353,619)
Other expense, net(228,339)(57,038)
Loss on extinguishment of line of credit (1,092,679)
Loss before taxes(27,967,400)(11,335,134)
Income tax expense21,146 18,223 
Net Loss(27,988,546)(11,353,357)
Other Comprehensive Income
Foreign currency translation adjustment407,986 134,931 
Total Comprehensive Loss$(27,580,560)$(11,218,426)
Net Losses per Share:
Basic and diluted loss per common share$(0.14)$(0.06)
Basic and diluted weighted average shares outstanding204,572,060 197,088,869 

See the accompanying Notes to the Consolidated Financial Statements.
5


Consolidated Statements of Stockholders’ Equity (unaudited)

Common StockAdditional Paid-in CapitalStock SubscriptionsTreasury Stock, At CostAccumulated Other Comprehensive IncomeAccumulated Deficit
SharesAmountTotal
Balance at January 1, 2021196,926,674 $1,970 $112,640,974 $(69,440)$(875,232)$494,505 $(52,234,360)$59,958,417 
Equity based compensation— — 2,183,589 — — — — 2,183,589 
Stock option exercises202,350 2 70,582 — — — — 70,584 
Restricted stock issuances and vesting of awards290,989 — 473,111 — — — — 473,111 
Stock subscriptions receivable related to stock option exercises56,250 — 61,925 (61,925)— — —  
Stock subscriptions collected related to stock option exercises— — — 69,440 — — — 69,440 
Repurchase of common stock(84,055)— — — (407,434)— — (407,434)
Foreign currency translation adjustment— — — — — 134,931 — 134,931 
Net loss— — — — — — (11,353,357)(11,353,357)
Balance at March 31, 2021197,392,208 $1,972 $115,430,181 $(61,925)$(1,282,666)$629,436 $(63,587,717)$51,129,281 

Common StockAdditional Paid-in CapitalStock SubscriptionsTreasury Stock, At CostAccumulated Other Comprehensive IncomeAccumulated Deficit
SharesAmountTotal
Balance at January 1, 2022204,230,939 $2,044 $168,338,673 $(18,545)$(3,691,322)$563,911 $(127,402,723)$37,792,038 
Equity based compensation— — 1,768,718 — — — — 1,768,718 
Stock option exercises643,678 6 82,520 — — — — 82,526 
Restricted stock issuances and vesting of awards753,512 8 949,369 — — — — 949,377 
Stock subscriptions receivable related to stock option exercises1,343,750 13 305,820 (305,833)— — —  
Stock subscriptions collected related to stock option exercises— — — 18,545 — — — 18,545 
Repurchase of common stock(217,847)(2)— — (303,139)— — (303,141)
Foreign currency translation adjustment— — — — — 407,986 — 407,986 
Net loss— — — — — — (27,988,546)(27,988,546)
Balance at March 31, 2022206,754,032 $2,069 $171,445,100 $(305,833)$(3,994,461)$971,897 $(155,391,269)$12,727,503 

See the accompanying Notes to the Consolidated Financial Statements.
6


Consolidated Statements of Cash Flows (unaudited)
For the three months ended
March 31, 2022March 31, 2021
Operating Activities:
Net loss$(27,988,546)$(11,353,357)
Adjustments to reconcile net loss to net cash provided from (used for) operating activities:
Depreciation and amortization223,967 163,401 
Provision for uncollectible accounts10,465,595 8,576,978 
Provision for other uncollectible receivables2,514,301 1,319,290 
Equity based compensation and restricted stock vested2,718,095 2,656,700 
Amortization of debt issuance costs185,602 130,457 
Loss on extinguishment of line of credit 1,092,679 
Changes in operating assets and liabilities:
Notes receivable13,221,231 (25,514,031)
Other receivables444,861 (1,388,618)
Prepaid expenses and other assets(180,022)(294,996)
Merchant accounts payable(1,467,348)15,588,578 
Other payables1,776,019 611,611 
Accrued liabilities5,891,198 3,016,748 
Operating leases4,387 (14,440)
Net Cash Provided from (Used for) Operating Activities7,809,340 (5,409,000)
Investing Activities:
Purchase of property and equipment(56,488)(189,838)
Internally developed intangible asset additions(317,681)(199,465)
Net Cash Used for Investing Activities(374,169)(389,303)
Financing Activities:
Proceeds from line of credit 26,666,667 
Payments to line of credit(26,000,000)(39,666,667)
Payments of debt issuance costs (1,617,720)
Payment of debt extinguishment costs (1,000,000)
Proceeds from stock option exercises82,526 70,584 
Stock subscriptions collected related to stock option exercises18,545 69,440 
Repurchase of common stock(303,141)(579,212)
Net Cash Used for Financing Activities(26,202,070)(16,056,908)
Effect of exchange rate changes on cash456,896 129,389 
Net decrease in cash, cash equivalents, and restricted cash(18,766,899)(21,855,211)
Cash, cash equivalents, and restricted cash, beginning of year78,890,168 89,103,903 
Cash, cash equivalents, and restricted cash, end of period$60,580,165 $67,378,081 
Noncash investing and financing activities:
Withholding of restricted stock units to cover employee tax withholding 139,676 
Supplementary disclosures:
Interest paid1,567,639 1,488,369 
Income taxes paid 8,326 

See the accompanying Notes to the Consolidated Financial Statements.
7


Notes to Consolidated Financial Statements (unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

These unaudited consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. While these consolidated financial statements and the accompanying notes thereof reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These consolidated financial statements and their accompanying notes should be read in conjunction with the consolidated financial statement disclosures in our 2021 annual consolidated financial statements. Operating results reported for the three months ended March 31, 2022 might not be indicative of the results for any subsequent period or the entire year ending December 31, 2022.

Sezzle Inc. (the “Company” or “Sezzle”) uses the same accounting policies in preparing quarterly and annual consolidated financial statements. The Company consolidates the accounts of subsidiaries for which it has a controlling financial interest. The accompanying consolidated financial statements include all the accounts and activity of Sezzle Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation.

Segments

We conduct our operations through a single operating segment and, therefore, one reportable segment. There are no significant concentrations by state or geographical location, nor are there any significant individual customer concentrations by balance.

Fair Value

Fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:

Level 1 — Unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 — Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and
Level 3 — Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk.

The Company measures the value of its money market securities on a regular basis. The fair value of its money market securities, totaling $1,893,726 and $6,408,389 as of March 31, 2022 and December 31, 2021, respectively, are based on Level 1 inputs and are included within cash and cash equivalents on the consolidated balance sheets.

Impairment of Long-Lived Assets

The Company reviews the carrying value of long-lived assets, which includes property, equipment, and internally developed intangible assets, for impairment whenever events and circumstances indicate that the assets’ carrying value may not be recoverable from the future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends, and prospects; the manner in which the asset is used; and the effects of obsolescence, demand, competition, and other economic factors.

Impairment costs are recorded in general and administrative within operating expenses in the consolidated statements of operations and comprehensive loss. There were no impairment losses for the three months ended March 31, 2022 and 2021.


8


Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet as of March 31, 2022 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

Liquidity and Financial Condition

The Company meets its liquidity requirements primarily through proceeds from its line of credit, of which it is subject to various covenants. During the year ended December 31, 2021, the Company incurred net losses from its operations, which if continued at the same level in future periods would result in the breach of one or more of such line of credit covenants. The Company's line of credit is a significant component of its working capital management.

On February 25, 2022 the Company amended its existing line of credit covenants as disclosed in Note 7. Line of Credit within the notes to the consolidated financial statements. Additionally, on March 10, 2022 the Company undertook a workforce reduction to provide the Company with an additional cost savings. Management is also exploring scaling back the Company’s international operations to further reduce the Company’s future expenses.

Management believes that the implementation of these plans will allow the Company to continue as a going concern through at least May 16, 2023.

There are no assurances that the Company’s implementation of these efforts will be successful, or that the degree of success will be sufficient to meet its current operating costs and requirements under its line of credit covenants. If the Company is unable to increase its profitability and liquidity, it may not be able to fund its ongoing operations.

The accompanying consolidated financial statements assume that the Company will continue as a going concern and have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as a result of uncertainties.

Recent Accounting Pronouncements

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2022-02, “Financial Instruments – Credit Losses: Troubled Debt Restructurings and Vintage Disclosures” which requires an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. As a smaller reporting company, Sezzle plans to adopt this standard beginning January 1, 2023 in conjunction with ASU 2016-13. At that time, Sezzle will include this additional disclosure within its vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit-quality indicator and class of financing receivable by year of origination.

None of the other recent accounting pronouncements issued by the FASB during the three months ended March 31, 2022 are within scope for the Company; therefore, it does not expect any of the other recent accounting pronouncements issued to have a material effect on the Company’s consolidated financial statements.

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Note 2. Total Income

Sezzle Income

Sezzle income as disclosed within the consolidated statements of operations and comprehensive loss is comprised of merchant fees and rescheduled payment fees, less note origination costs.

Sezzle earns its income primarily from fees paid by merchants in exchange for Sezzle’s payment processing services. These fees are applied to the underlying sales to consumers passing through the Company’s platform and are predominantly based on a percentage of the consumer order value plus a fixed fee per transaction. Consumer installment payment plans typically consist of four installments, with the first payment made at the time of purchase and subsequent payments coming due every two weeks thereafter. Consumers are allowed to reschedule their initial installment one time without incurring a reschedule fee and the principal of a rescheduled payment is not considered to be delinquent. If consumers reschedule a payment more than once in the same order cycle they are subject to a reschedule fee. Note origination costs are comprised of costs paid to third-parties to obtain data for underwriting consumers which result in a successful transaction. Such costs which result in a declined order are recorded within third-party technology and data on the consolidated statements of operations and comprehensive loss.

Sezzle income is initially recorded as a reduction to notes receivable, net, within the consolidated balance sheets. Sezzle income is then recognized over the average duration of the note using the effective interest rate method. Total Sezzle income to be recognized over the duration of existing notes receivable outstanding was $4,611,497 and $5,240,919 as of March 31, 2022 and December 31, 2021, respectively. Total Sezzle income recognized was $24,127,630 and $22,252,390 for the three months ended March 31, 2022 and 2021, respectively. Sezzle income in the fourth quarter has historically been strongest for the Company, in line with consumer spending habits during the holiday shopping season.

Account Reactivation Fee Income

Sezzle also earns income from consumers in the form of account reactivation fees. These fees are assessed to consumers who fail to make a timely payment. Sezzle allows, at a minimum and subject to state jurisdiction regulation, a 48-hour waiver period where fees are dismissed if the installment is paid by the consumer. Account reactivation fees are recognized at the time the fee is charged to the consumer, less an allowance for uncollectible amounts. Account reactivation fee income recognized totaled $3,506,332 and $3,778,368 for the three months ended March 31, 2022 and 2021, respectively.

Note 3. Notes Receivable

Sezzle’s notes receivable comprise outstanding consumer principal and reschedule fees that Sezzle reasonably expects to collect from its consumers. As of March 31, 2022 and December 31, 2021, Sezzle’s notes receivable, related allowance for uncollectible accounts, and deferred net origination fees are recorded within the consolidated balance sheets as follows:

As ofMarch 31, 2022December 31, 2021
Notes receivable, gross$134,799,279 $162,341,675 
Less allowance for uncollectible accounts:
Balance at beginning of year(23,114,173)(11,133,146)
Provision(10,465,595)(52,621,682)
Charge-offs, net of recoveries totaling $1,427,547 and $6,153,728, respectively
13,878,435 40,640,655 
Total allowance for uncollectible accounts(19,701,333)(23,114,173)
Notes receivable, net of allowance115,097,946 139,227,502 
Deferred Sezzle income(4,611,497)(5,240,919)
Notes receivable, net$110,486,449 $133,986,583 

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Sezzle maintains an allowance for uncollectible accounts at a level necessary to absorb estimated probable losses on principal and reschedule fee receivables from consumers. Any amounts delinquent after 90 days are charged-off with an offsetting reversal of the allowance for doubtful accounts through the provision for uncollectible accounts. Additionally, amounts identified as no longer collectible—such as when a consumer becomes deceased or bankrupt—are charged off immediately. Principal payments recovered after the 90 day charge-off period are recognized as a reduction to the allowance for uncollectible accounts in the period the receivable is recovered. Sezzle has not changed the methodology for estimating its allowance for uncollectible accounts during the three months ended March 31, 2022.

Sezzle uses its judgment to evaluate the allowance for uncollectible accounts based on current economic conditions and historical performance of consumer payments. The historical vintages are grouped into semi-monthly populations for purposes of the allowance assessment. The balances of historical cumulative charge-offs by vintage support the calculation for estimating the allowance for uncollectible accounts for vintages outstanding less than 90 days.

Sezzle estimates the allowance for uncollectible accounts by segmenting consumer accounts receivable by the number of days balances are delinquent. Balances that are at least one day past the initial due date are considered delinquent. Balances that are not delinquent are considered current. Consumer notes receivable are charged-off following the passage of 90 days without receiving a qualifying payment, upon notice of bankruptcy, or death. Consumers are allowed to reschedule a payment one time without incurring a reschedule fee and the principal of a rescheduled payment is not considered to be delinquent. If consumers reschedule a payment more than once in the same order cycle they are subject to a reschedule fee.

Deferred Sezzle income is comprised of unrecognized merchant fees and consumer reschedule fees net of direct note origination costs, which are recognized over the duration of the note with the consumer and are recorded as an offset to Sezzle income on the consolidated statements of operations and comprehensive loss. Sezzle’s notes receivable had a weighted average days outstanding of 34 days, consistent with the prior year’s duration.

The following table summarizes Sezzle’s gross notes receivable and related allowance for uncollectible accounts as of March 31, 2022 and December 31, 2021:

As ofMarch 31, 2022December 31, 2021
Gross ReceivablesLess AllowanceNet ReceivablesGross ReceivablesLess AllowanceNet Receivables
Current$114,963,752 $(5,377,350)$109,586,402 $139,024,393 $(7,989,217)$131,035,176 
Days past due:
1–288,096,237 (3,707,669)4,388,568 12,263,154 (5,126,611)7,136,543 
29–564,306,780 (3,390,980)915,800 5,266,164 (4,267,236)998,928 
57–907,432,510 (7,225,334)207,176 5,787,964 (5,731,109)56,855 
Total$134,799,279 $(19,701,333)$115,097,946 $162,341,675 $(23,114,173)$139,227,502 


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Note 4. Other Receivables

As of March 31, 2022 and December 31, 2021, the balance of other receivables, net, on the consolidated balance sheets is comprised of the following:

As ofMarch 31, 2022December 31, 2021
Account reactivation fees receivable, net$348,401 $1,325,443 
Receivables from merchants, net1,777,352 3,758,656 
Other receivables, net$2,125,753 $5,084,099 

Account reactivation fees are applied to principal installments that are delinquent for more than 48 hours (or longer depending on the regulations within a specific state jurisdiction) after the scheduled installment payment date. Any account reactivation fees associated with a delinquent payment are considered to be the same number of days delinquent as the principal payment. Account reactivation fees receivable, net, is comprised of outstanding account reactivation fees that Sezzle reasonably expects to collect from its consumers.

As of March 31, 2022 and December 31, 2021, Sezzle’s account reactivation fees receivable and related allowance for uncollectible accounts are recorded within the consolidated balance sheets as follows:

As ofMarch 31, 2022December 31, 2021
Account reactivation fees receivable, gross$2,143,361 $3,016,514 
Less allowance for uncollectible accounts:
Balance at start of period(1,691,071)(1,071,588)
Provision(2,320,268)(6,128,851)
Charge-offs, net of recoveries totaling $327,068 and $1,273,319, respectively
2,216,379 5,509,368 
Total allowance for uncollectible accounts(1,794,960)(1,691,071)
Account reactivation fees receivable, net$348,401 $1,325,443 

Sezzle maintains the allowance at a level necessary to absorb estimated probable losses on consumer account reactivation fee receivables. Any amounts delinquent after 90 days are charged-off with an offsetting reversal of the allowance for doubtful accounts through the provision for uncollectible accounts. Additionally, amounts identified as no longer collectible—such as when a consumer becomes deceased or bankrupt—are charged off immediately. Payments recovered after the 90 day charge-off period are recognized as a reduction to the allowance for uncollectible accounts in the period the receivable is recovered. Sezzle has not changed the methodology for estimating its allowance for uncollectible accounts during the three months ended March 31, 2022.

Receivables from merchants primarily represent merchant fees receivable for orders settled with the Sezzle Virtual Card solution. Such receivables totaled $1,718,834 and $3,738,765 as of March 31, 2022 and December 31, 2021, respectively. Virtual card transactions are settled with the merchant for the full purchase price at the point of sale and Sezzle separately invoices the merchant for the merchant fees due to Sezzle.

Additionally, the Company had other uncollectible receivables, net, which totaled $58,518 and $19,891 as of March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022 and 2021, the Company recorded direct write-downs of $194,033 and $344,636, respectively, related to these other uncollectible receivables from merchants which are included in transaction expense on the consolidated statements of operations and comprehensive loss. Such write-downs are also included in the provision for uncollectible other receivables on the consolidated statements of cash flows.

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Note 5. Leases

Sezzle is currently entered into operating leases for its corporate office spaces in the United States, Canada, India, Lithuania, and Brazil. Total lease expense incurred for the three months ended March 31, 2022 and 2021 was $108,659 and $137,180, respectively. Lease expense is recognized within general and administrative on the consolidated statements of operations and comprehensive loss. Cash payments for leases totaled $105,266 and $154,022 for the three months ended March 31, 2022 and 2021, respectively

Right-of-use assets and lease liabilities are recognized as of the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods that the Company is reasonably certain to exercise. Right-of-use assets and lease liabilities are recorded within current assets and liabilities, respectively, on the consolidated balance sheets. The Company has elected not to recognize right-of-use assets and lease liabilities on short-term leases with terms of one year or less.

The expected maturity of the Company’s operating leases as of March 31, 2022 is as follows:

2022$134,842 
202390,822 
202412,540 
Interest(31,187)
Present value of lease liabilities$207,017 

As of March 31, 2022, the weighted average remaining term of the Company’s operating leases is 1.4 years and its weighted average discount rate for all operating leases is 5.25%. As of December 31, 2021, the weighted average remaining term of the Company’s operating leases was 1.5 years and its weighted average discount rate for all operating leases was 5.25%. As of March 31, 2022, Sezzle has not entered into any lease agreements that contain residual value guarantees or financial covenants.

Note 6. Merchant Accounts Payable

Sezzle offers its merchants an interest bearing program in which merchants may defer payment from the Company in exchange for interest. Merchant accounts payable in total were $95,273,209 and $96,516,668 as of March 31, 2022 and December 31, 2021, respectively, as disclosed in the consolidated balance sheets. Of these amounts, $77,793,261 and $78,097,910 were recorded within the merchant interest program balance as of March 31, 2022 and December 31, 2021, respectively.

Effective March 1, 2022, deferred payments retained in the program bear interest at the Secured Overnight Financing Rate (“SOFR”) plus three percent on an annual basis, compounding daily. Prior to that, deferred payments retained in the program bore interest at the LIBOR daily (3 month) rate plus three percent on an annual basis, compounding daily. The weighted average annual percentage yield was 3.19% and 3.27% for the three months ended March 31, 2022 and 2021, respectively. Interest expense associated with the program totaled $593,576 and $462,735 for the three months ended March 31, 2022 and 2021, respectively.

Deferred payments are due on demand, up to $250,000 during any seven day period, at the request of the merchant. Any request larger than $250,000 is honored after 7 days. Sezzle reserves the right to impose additional limits on the program and make changes to the program without notice or limits. These limits and changes to the program can include but are not limited to: maximum balances, withdrawal amount limits, and withdrawal frequency.

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Note 7. Line of Credit

The Company had an outstanding line of credit balance of $52,800,000 as of March 31, 2022, recorded within line of credit, net, as a non-current liability on the consolidated balance sheets. As of March 31, 2022, Sezzle had pledged $162,882,057 of its notes receivable and had an unused borrowing capacity of $39,717,682.

For the three months ended March 31, 2022 and 2021, interest expense relating to the utilization of its lines of credit was $788,298 and $669,248, respectively. Interest expense relating to unused daily amounts was $82,300 and $100,180 for the three months ended March 31, 2022 and 2021, respectively. Interest expense recorded for the amortization of debt issuance costs related to its line of credit totaled $185,602 and $130,457 for the three months ended March 31, 2022 and 2021, respectively.

Effective January 1, 2022, the Company amended its Revolving Credit and Security Agreement, dated as of February 10, 2021, as amended (the “2021 Credit Agreement” and, such amendment, the “January Credit Agreement Amendment”), which was entered into by Sezzle Funding SPE II, LLC, a wholly owned indirect subsidiary of Sezzle (the “Borrower”), Goldman Sachs Bank USA (the “Class A senior lender”), and Bastion Consumer Funding II LLC and Bastion Funding IV LLC (the “Class B mezzanine lenders”). The January Credit Agreement replaced references to LIBOR with the U.S. Federal Reserve’s Secured Overnight Financing Rate (“SOFR”) plus a spread adjustment of 0.262% (collectively, “Adjusted SOFR”). The 2021 Credit Agreement carries an interest rate of Adjusted SOFR+3.375% and Adjusted SOFR+10.689% (the Adjusted SOFR floor rate is set at 0.25%) for funds borrowed from the Class A senior lender and the Class B mezzanine lenders, respectively. As of March 31, 2022, the weighted average interest rate was 5.53%.

On February 25, 2022, the Company entered into an additional amendment (the “February Credit Agreement Amendment”) to the 2021 Credit Agreement. As part of the February Credit Agreement Amendment, certain definitions and events of default under the 2021 Credit Agreement were amended to clarify the terms of applicable cure periods, involving replacement of the servicer and a required change in the level of availability and data exchanged with the backup servicer.

On February 25, 2022, the Company entered into Amendment No. 1 (the “Limited Guaranty Amendment”) to that certain Limited Guaranty and Indemnity Agreement, dated as of February 10, 2021, by and among the Company (as “Limited Guarantor” thereunder) and the Administrative Agent (the “Limited Guaranty”). The Limited Guaranty Amendment adjusted and provided alternatives for certain Limited Guarantor financial covenant measurement thresholds and required certain Limited Guarantor compliance reporting obligations during a defined modification period. The length of the modification period is dependent in part upon the ongoing status and progress towards the closing of the Zip Merger.

Note 8. Commitments and Contingencies

Merchant Contract Obligations

The Company has entered into several agreements with third-parties in which Sezzle will reimburse these third-parties for mutually agreed upon co-branded marketing and advertising costs. As of March 31, 2022 and December 31, 2021, the Company had outstanding agreements that stipulate Sezzle will commit to spend up to approximately $32.5 million and $35.1 million, respectively, in marketing and advertising spend in future periods. These agreements generally have contractual terms ranging from one to three years.

Expenses incurred relating to these agreements totaled $4,361,830 and $1,105,936 for the three months ended March 31, 2022 and 2021, respectively. These expenses are included within marketing, advertising, and tradeshows on the consolidated statements of operations and comprehensive loss. Sezzle had $165,622 and $83,333 recorded as a prepaid expense related to these agreements in the consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

Certain agreements also contain provisions that may require payments by the Company and are contingent on Sezzle and/or the third party meeting specified criteria, such as achieving volume targets and implementation benchmarks. As of March 31, 2022 and December 31, 2021, the Company had outstanding agreements that stipulate Sezzle may spend approximately $7.7 million and $6.7 million, respectively, in future periods if such criteria are met.


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Note 9. Net Loss Per Share

The computation for basic net loss per share is established by dividing net losses for the period by the weighted average shares outstanding during the reporting period, including repurchases carried as treasury stock. Diluted net loss per share is computed in a similar manner, with the weighted average shares outstanding increasing from the assumed exercise of employee stock options (including options classified as liabilities) and assumed vesting of restricted stock units (if dilutive). Given the Company is in a loss position, the impact of including assumed exercises of stock options and vesting of restricted stock units would have an anti-dilutive impact on the calculation of diluted net loss per share and, accordingly, diluted and basic net loss per share were equal for the three months ended March 31, 2022 and 2021.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”). This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Forward-Looking Statements”, “Factors Affecting Results from Operations”, and “Risk Factors” sections of the 2021 Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

Overview

We are a purpose-driven payments company that is on a mission to financially empower the next generation. Launched in 2017, we have built a digital payments platform that allows merchants to offer their consumers a flexible alternative to traditional credit. As of March 31, 2022, our platform has supported the business growth of 49 thousand Active Merchants while serving 3.5 million Active Consumers. Through our payments products we aim to enable consumers to take control over their spending, be more responsible, and gain access to financial freedom. Our vision is to create a digital ecosystem benefiting all of our stakeholders— merchant partners, consumers, employees, communities and investors—while continuing to drive ethical growth.

The Sezzle Platform connects consumers with merchants via our core proprietary, digital payments platform that instantly extends credit at the point-of-sale. Our core product is differentiated from traditional lenders through our credit-and-capital-light approach, and we believe that it is mutually beneficial for our merchants and consumers given the network effects inherent in our platform. We enable consumers to acquire merchandise upfront and spread payments over four equal, interest-free installments over six weeks. We realize high repeat usage rates by many of our consumers, with the top 10% of our consumers measured by Underlying Merchant Sales (UMS, as defined below) transacting an average of 47 times per year based on the transaction activity during the rolling twelve months ended March 31, 2022, although historical transaction activity is not an indication of future results.

Our core product offering is completely free for consumers who pay on time; instead, we generate a substantial majority of our revenues by charging our merchants fees in the form of a Merchant Discount Rate. We also offer Sezzle Up, an upgraded version of the core Sezzle experience which provides a credit-building solution for new-to-credit consumers, helping consumers adopt credit responsibly and build their credit history. Additionally, we have expanded our product suite to provide consumers with access to a long-term installment lending option through partnerships, which is still in an early development stage.

A critical component of our business model is the ability to effectively manage the repayment risk inherent in allowing consumers to pay over time. To that end, a team of Sezzle engineers and risk specialists oversee our proprietary systems, identify transactions with elevated risk of fraud, assess the credit risk of the consumer and assign spending limits, and manage the ultimate receipt of funds. Further, we believe repayment risk is more limited relative to other traditional forms of unsecured credit because consumers primarily settle 25% of the purchase value upfront. Additionally, ongoing user interactions allow us to continuously refine and enhance the effectiveness of these platform tools through machine learning.
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Proposed Merger with Wholly-Owned Subsidiary of Zip

On February 28, 2022, we entered into the Zip Merger Agreement, pursuant to which, upon the terms and subject to the conditions thereof, Merger Sub will be merged with and into Sezzle Inc., with Sezzle Inc. surviving the merger as a wholly-owned subsidiary of Zip (the “Zip Merger”). Subject to the terms and conditions of the Zip Merger Agreement, each share of our common stock (including each share of our common stock in respect of which a Company CDI (as defined in the Zip Merger Agreement) has been issued) issued and outstanding immediately prior to the Effective Time (other than shares of our common stock that are held by us (or any of our subsidiaries), Zip (or any of its subsidiaries) or Merger Sub) shall be cancelled and converted into the right to receive, at the election of our stockholders (subject to the immediately following sentence), (a) a number of Zip ordinary shares equal to 0.98 (the “Exchange Ratio”) or (b) a number of Zip American depositary receipts (“Zip ADRs”) representing a number of Zip ordinary shares equal to the Exchange Ratio. Any person who is an Australian Stockholder (as defined in the Zip Merger Agreement) will only be entitled to consideration in the form of Zip ordinary shares.

The Zip Merger Agreement includes customary representations, warranties and covenants by us, Zip and Merger Sub. Subject to the terms of the Zip Merger Agreement and certain exceptions, we and Zip have agreed to operate our respective businesses in the ordinary course consistent with past practice and use commercially reasonable efforts to maintain their respective business organizations and advantageous business relationships until the closing of the transaction. Concurrently with the execution and delivery of the Zip Merger Agreement, certain significant stockholders of both us (Charles Youakim and Paul Paradis) and Zip (Larry Diamond and Peter Gray) entered into support agreements pursuant to which, among other things, they agreed to vote all of their stock or ordinary shares of common stock, as applicable in favor of the transaction.

Subject to the terms and conditions of the Zip Merger Agreement, unvested and outstanding options and Restricted Stock Units (“RSUs”) will be converted into Zip options and performance rights with similar terms and conditions as existing options and RSUs, provided, that each company option that is subject to a Company total shareholder return performance-based vesting condition (“Company TSR”) shall, immediately prior to the Effective Time, become earned, if at all, by using the Closing Date (as defined in the Zip Merger Agreement) as the end of the applicable performance period for purposes of measuring performance based vesting with the resulting option, if any, subject to service-based vesting through the end of the original performance period, and vested options and RSUs will be cancelled and converted into the right to receive merger consideration.

The consummation of the transaction is subject to certain closing conditions, including, but not limited to (i) the declaration by the SEC of the effectiveness of the registration statements on Form F-4 and Form F-6 (and the absence of any stop order or proceedings suspending such effectiveness), (ii) the Zip ADRs being authorized for listing on a United States Exchange (as defined in the Zip Merger Agreement) and the Zip Ordinary Shares issuable pursuant to the Zip Merger Agreement being authorized for listing on the ASX, (iii) the Australian Prospectus (to the extent required by applicable Law (as defined in the Zip Merger Agreement)) being lodged with the Australian Securities and Investments Commission (the “ASIC”) and the exposure period prescribed by section 727(3) of the Corporations Act will have elapsed (if applicable) and no stop order is issued by ASIC in relation to the Australian Prospectus and remains in effect (or waivers from the requirement to lodge the Australian Prospectus have been received from ASIC), (iv) receipt of required waivers from the ASX and the ASIC, (v) the expiration or termination of any applicable waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), (vi) no governmental order or law prohibiting the consummation of the Contemplated Transactions or making the consummation of the Contemplated Transactions illegal and (vii) the required Australian approvals having been obtained and the condition described in the preceding clause (v) being satisfied without the imposition of a Burdensome Condition (as defined in the Zip Merger Agreement). The initial waiting period under the HSR Act expired on April 18, 2022. If the Zip Merger Agreement is terminated under certain circumstances, the Company may be required to pay Zip a termination fee of A$7,800,000 or Zip may be required to pay the Company a termination fee of A$31,400,000.

The information contained herein relating to the Zip Merger Agreement and the transactions contemplated thereby is qualified in its entirety by reference to the full text of the Zip Merger Agreement and related documents attached as exhibits to the Current Report on Form 8-K filed with the SEC on February 28, 2022.
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Factors Affecting Results of Operations

We have set out below a discussion of the key factors that have affected our financial performance and that are expected to impact our performance going forward.

Adoption of the Sezzle Platform

Our ability to profitably scale our business is reliant on adoption of the Sezzle Platform by both consumers and merchants. Changes in our Active Merchant and Active Consumer bases (as such terms are defined below) have had, and will continue to have, an impact on our results of operations. It is costly for us to recruit (and in some cases retain) Active Merchants. Turnover in our merchant base could result in higher than anticipated overhead costs.

We believe that we have built a sustainable, transparent business model in which our success is aligned with the financial success of our merchants and consumers. We earn fees from our merchants predominately based on a percentage of the UMS value plus a fixed fee per transaction, or the Merchant Discount Rate. We pay our merchants for transaction value upfront net of the merchant fees owed to us and assume all costs associated with the consumer payment processing, fraud and payment default. Merchant-related fees comprised approximately 83% and 82% of our Total Income for the three months ended March 31, 2022 and 2021, respectively.

Growth and Diversification of Merchants offered on the Sezzle Platform

We depend on continued relationships with our current merchants or merchant partners and on the acquisition of new merchants to maintain and grow our business. We added 2 thousand Active Merchants during the three months ended March 31, 2022, totaling 49 thousand Active Merchants on the platform at the end of the same period. Although for the three months ended March 31, 2022, we did not depend on any one merchant for more than 10% of Merchant-related fees, our business is still at a relatively early stage and our merchant revenue is not as diversified as it might be for a more mature business.

Our integration into scaled e-commerce platforms is expected to give more merchants the opportunity to offer Sezzle as a payment option at checkout, and we expect that our partnerships with larger retailers will familiarize more consumers with the Sezzle Platform.

In addition, investment in sales, co-marketing, and offering of competitively priced merchant fee rates and incentives are critical for us to onboard new and retain existing merchants and grow utilization of the Sezzle Platform. We currently provide our merchants with a toolkit to grow their businesses. Our merchants gain access to our marketing efforts that begin with a launch campaign to introduce new brands to Sezzle consumers. We face intense competitive pressure to bring new larger merchants on to our platform. In order to stay competitive, we have and may continue to need to adjust our pricing or offer incentives to larger merchants to increase payments volume. These pricing structures with merchants include up-front cash payments, fee discounts, rebates, credits, performance-based incentives, marketing, and other support payments that impact our revenues and profitability. We expect to continue to incur substantial costs to acquire these larger merchants. Certain agreements contain provisions that may require us to make payments to certain merchants and are contingent on us and/or the merchants meeting specified criteria, such as achieving volume targets and implementation benchmarks. If we are not able to increase our volumes as predicted, the financial impact of these incentives, fee discounts, and rebates, these arrangements with certain merchants will impact our results of operations and financial performance.

There is a risk that we may lose merchants for a variety of reasons, including a failure to meet key contractual or commercial requirements, or merchants shifting to other service providers, including competitors or in-house offerings. We also face the risk that our key partners could become competitors of our business if such partners are able to determine how we have designed and implemented our model to provide our services.


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New Products

Our expanding product suite enables us to further promote our mission of financial empowerment, and the adoption of these products by our consumers is expected to drive operating and financial performance. In partnership with TransUnion, we engineered Sezzle Up, an upgraded version of the core Sezzle experience that launched in 2020 and supports consumers in building their credit scores by permitting us to report their payment histories to credit bureaus. As these consumers pay on time, their credit scores and spending limits on the Sezzle Platform can increase, which may result in consumers making larger purchases that will generate an increase in merchant fees. Other parts of our product suite and proprietary merchant interface are specifically designed to streamline the merchant experience. For example, we believe that our Sezzle Virtual Card bolsters our omnichannel offering and provides a rapid-installation, point-of-sale option for brick-and-mortar retailers through its compatibility with Apple Pay and Google Pay. With the Sezzle Virtual Card, consumers can enjoy in-store shopping with the convenience of immediately tapping into the Sezzle Platform with the “swipe” of their card at the point-of-sale. In addition, we work with other lending partners to offer consumers at participating merchants longer-term, monthly fixed-rate installment-loan products, which will support consumer purchases for big ticket items and earn us a fee on such transactions. We continue to seek out new partners to adopt our existing products and strategize on new products to complement our platform and core products, which we believe will have an impact on continued growth of our business.

Growth of our Consumer Base

To continue to grow our business, we need to maintain and increase our existing Active Consumer base and introduce new consumers to our platform. We rely heavily on our growing merchant base to offer our core product to new consumers at the point of sale for online transactions. We continue to provide offerings such as Sezzle Spend, which is a way we can issue credit to Sezzle accounts for various reasons, often involving rewards and promotions to new consumers. We have consistently added Active Consumers each quarter since our inception, while the number of transactions per Active Consumer has typically increased each quarter as well. We added 0.1 million Active Consumers during the three months ended March 31, 2022, totaling 3.5 million Active Consumers on the platform at the end of the same period. We realize high repeat usage rates as a result of our differentiated offering, with the top 10% of our consumers measured by UMS transacting 47 times per year based on the transaction activity during the rolling twelve months ended March 31, 2022, although historical transaction activity is not an indication of future results.

Managing Credit Risk

A critical component of our business model is the ability to effectively manage the repayment risk inherent in allowing consumers to pay over time. To that end, a team of Sezzle engineers and risk specialists oversee our proprietary systems, identify transactions with elevated risk of fraud, assess the credit risk of the consumer and assign spending limits, and manage the ultimate receipt of funds. Because consumers primarily settle 25% of the purchase value upfront at the point of sale, we believe repayment risk is more limited relative to other traditional forms of unsecured consumer credit. Further, ongoing user interactions allow us to continuously refine and enhance the effectiveness of these platform tools through machine learning.

We absorb the costs of all core product uncollectible receivables from our consumers. The provision for uncollectible accounts is a significant component of our operating expenses, and excessive exposure to consumer repayment failure may impact our results of operations. We believe our systems and processes are highly effective and allow for predominantly accurate, real-time decisions in connection with the consumer transaction approval process. As our consumer base grows, the availability of data on consumer repayment behavior will also better optimize our systems and ability to make real-time consumers repayment capability decisions on a go forward basis. Optimizing repayment capacity decisions of our current and future consumer base may reduce our provision for uncollectible accounts and related charge-offs by providing optimal limitations on spending power to qualified consumers.

Maintaining our Capital-Light Strategy

Maintaining our funding strategy and our low cost of capital is important to our ability to grow our business. We have created an efficient funding strategy which, in our view, has allowed us to scale our business and drive rapid growth. The speed with which we are able to recycle capital due to the short-term nature of our products has a multiplier effect on our committed capital.

Our funding helps drive our low cost of capital. We rely on more efficient revolving credit facilities with high advance rates to fund our receivables over time and also use merchant account payables as an alternative low-cost funding source.


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General Economic Conditions and Regulatory Climate

Our business depends on consumers transacting with merchants, which in turn can be affected by changes in general economic conditions. For example, the retail sector is affected by such macro-economic conditions as unemployment, interest rates, consumer confidence, economic recessions, downturns or extended periods of uncertainty or volatility, all of which may influence customer spending, and suppliers’ and retailers’ focus and investment in outsourcing solutions. This may subsequently impact our ability to generate income. Additionally, in weaker economic environments, consumers may have less disposable income to spend and so may be less likely to purchase products by utilizing our services and bad debts may increase as a result of consumers’ failure to repay the loans originated on the Sezzle Platform. Our industry is also impacted by numerous consumer finance and protection regulations, both domestic and international, and the prospects of new regulations, and the cost to comply with such regulations, have an ongoing impact on our results of operations and financial performance.

International Operations

We primarily operate in the United States and have operations in Canada, India, Brazil and certain countries in Europe. During the first quarter of 2022, we decided to scale back operations in Europe to essential requirements, such as supporting cross-border merchant relationships. Additionally, we are planning to cease payment processing activities in India. Finally, we are exploring the possibility of spinning off our Brazilian operations to the local management team and taking a minority stake in the resulting company.

Seasonality

We experience seasonality as a result of spending patterns of our Active Consumers. Sezzle Income and UMS in the fourth quarter have historically been strongest for us, in line with consumer spending habits during the holiday shopping season, which has typically been accompanied by increased charge-offs when compared to the prior three quarters. This is most evident in merchant fees as these are recognized over the duration of the note with the consumer once the terms of the executed merchant agreement have been fulfilled and the merchant successfully confirms the transaction.

Impact of COVID-19

The COVID-19 pandemic has had, and continues to have, a significant impact on the U.S. economy and the markets in which we operate. We believe that our performance during this period demonstrates the value and effectiveness of our platform, the resilience of our business model, and the capabilities of our risk management and underwriting approach. Our employees continue to primarily work from home, although employees have the option to work from the office under a hybrid model. Additionally, our sales and marketing teams have begun to selectively attend group events and industry-related conferences.
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Key Operating Metrics

Underlying Merchant Sales

For the three months ended March 31, Change
20222021$%
(in thousands)
Underlying Merchant Sales ("UMS")$450,539 $375,066 $75,473 20.1 %

UMS is defined as the total value of sales made by merchants based on the purchase price of each confirmed sale where a consumer has selected the Sezzle Platform as the applicable payment option. UMS does not represent revenue earned by us, is not a component of our income, nor is included within our financial results prepared in accordance with GAAP. However, we believe that UMS is a useful operating metric to both us and our investors in assessing the volume of transactions that take place on the Sezzle Platform, which is an indicator of the success of our merchants and the strength of the Sezzle Platform.

For the three months ended March 31, 2022 and 2021, UMS totaled $450.5 million and $375.1 million, respectively, which is an increase of 20.1%.

Active Merchants and Active Consumers

As of Change
March 31, 2022December 31, 2021#%
(in thousands)
Active Merchants49 47 3.6 %
Active Consumers3,460 3,400 60 1.7 %

Active Merchants is defined as merchants who have had transactions with us in the last twelve months. As of March 31, 2022, we had 49 thousand Active Merchants, an increase of 3.6% when compared to the 47 thousand Active Merchants as of December 31, 2021. There is no minimum required number of transactions to meet the Active Merchant criteria.

Active Consumers is defined as unique end users who have placed an order with us within the last twelve months. As of March 31, 2022, we had 3.5 million Active Consumers, an increase of 1.7% when compared to our 3.4 million Active Consumers as of December 31, 2021.

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Components of Results of Operations

Total Income

We refer to our primary component of total income as “Sezzle Income”. Sezzle Income is comprised primarily from fees paid by merchants in exchange for our payment processing services. These fees are applied to the underlying sales to consumers passing through our platform and are predominantly based on a percentage of the consumer order value plus a fixed fee per transaction. Consumer installment payment plans typically consist of four installments, with the first payment of 25% of the consumer order value made at the time of purchase and subsequent payments coming due every two weeks thereafter. Additionally, consumers may reschedule their initial installment plan by delaying payment for up to two weeks, for which we generally earn a rescheduled payment fee. The total of merchant fees and rescheduled payment fees, less note origination costs (underwriting costs incurred that result in a successful transaction with the consumer), are collectively referred to as Sezzle Income within the consolidated statements of operations and comprehensive loss. Sezzle Income is then recognized over the average duration of the note using the effective interest rate method.

We also earn income from consumers in the form of account reactivation fees, recorded within “Account reactivation fee income” (a component of Total Income) on the consolidated statements of operations and comprehensive loss. When a consumer’s payment fails in the automated payment process the consumer must pay a fee, which we refer to as an Account Reactivation Fee, before the consumer is able to use the Sezzle Platform again. We allow, at a minimum and subject to state jurisdiction regulation, a 48-hour waiver period where fees are dismissed if the installment is paid by the consumer. Account reactivation fees are recognized at the time the fee is charged to the consumer, less an allowance for uncollectible amounts.

Personnel

Personnel primarily comprises all wages and salaries paid to employees, contractor payments, employer-paid payroll taxes and employee benefits, and stock and incentive–based compensation.

Transaction Expense

Transaction expense primarily comprises processing fees paid to third parties to process debit, credit and ACH payments received from consumers, merchant affiliate program and partnership fees, and consumer communication costs. We incur merchant affiliate program and partnership fees when consumers make purchases with merchants who either were referred by another merchant or are associated with partner platforms with which we have a contractual agreement. We incur customer communication costs when we notify the consumer about the transaction status and upcoming payments. Communications are primarily made via text message directly to the consumer.

Third-Party Technology and Data

Third-party technology and data primarily comprises costs related to fraud prevention, other cloud-based computing services, and costs of failed loan applications. Underwriting costs incurred that result in successfully originated loans are an element of Sezzle Income and recognized as a reduction of the overall income and, therefore, are not included in third-party technology and data.

Marketing, Advertising, and Tradeshows

Marketing, advertising, and tradeshows primarily comprises costs related to marketing, sponsorships, advertising, attending tradeshows, promotions, and co-marketing the Sezzle brand with our merchants.

General and Administrative

General and administrative primarily comprises legal, compliance, audit, tax, and other consultation costs; third-party implementation fees; and charitable contributions.


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Provision for Uncollectible Accounts

We calculate our provision for uncollectible accounts on notes receivable on an expected-loss basis. We maintain an allowance for uncollectible accounts at a level necessary to absorb estimated probable losses on principal and reschedule fee receivables from consumers. Any amounts delinquent after 90 days are charged-off with an offsetting reversal of the allowance through the provision for uncollectible accounts. Additionally, amounts identified as no longer collectible—such as when a consumer becomes deceased or bankrupt—are charged off immediately. We use our judgment to evaluate the allowance for uncollectible accounts based on current economic conditions and historical performance of consumer payments.

Net Interest Expense

We incur interest expense on a continuous basis as a result of draws on our revolving line of credit to fund consumer notes receivable as well as our Merchant Interest Program, whereby merchants may defer their payments owed by us in exchange for interest. Effective January 1, 2022, the interest paid on borrowings under our line of credit and Merchant Interest Program are based on SOFR.

Income Tax Expense

Income tax expense consists of income taxes in various jurisdictions, primarily U.S. Federal and state income taxes, and also the other foreign jurisdictions in which we operate. Tax effects of transactions reported in the consolidated financial statements consist of taxes currently due. Additionally, we record deferred taxes related primarily to differences between the basis of receivables, property and equipment, equity based compensation, and accrued liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Given our history of losses, a full valuation allowance is recorded against our deferred tax assets.

Other Comprehensive Income

Other comprehensive income is comprised of foreign currency translation adjustments.

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Results of Operations

Total Income

For the three months ended March 31, Change
20222021$%
Sezzle income$24,127,630 $22,252,390 $1,875,240 8.4 %
Account reactivation fee income3,506,332 3,778,368 (272,036)(7.2)%
Total income$27,633,962 $26,030,758 $1,603,204 6.2 %

Total income is comprised of Sezzle income and account reactivation fees. Sezzle income for the three months ended March 31, 2022 and 2021 totaled $24.1 million and $22.3 million, respectively, which was an increase of 8.4%. The increase compared to the prior comparative period was driven by growth in our Active Merchants and Active Consumers, as well as increased repeat usage.

Account reactivation fee income recognized totaled $3.5 million and $3.8 million for the three months ended March 31, 2022 and 2021, respectively. Account reactivation fees as a percentage of total income was 12.7% and 14.5% for the three months ended March 31, 2022 and 2021, respectively. The decrease in this metric during the three months ended March 31, 2022 when compared to the three months ended March 31, 2021 was due to changes in our account reactivation fees assessment policy.

The breakout of Sezzle income for the three months ended March 31, 2022 and 2021 is as follows:

For the three months ended March 31, Change
20222021$%
Merchant fees$23,042,395 $21,436,095 $1,606,300 7.5 %
Consumer reschedule fees1,233,136 1,000,925 232,211 23.2 %
Direct note origination costs(147,901)(184,630)36,729 (19.9)%
Sezzle income$24,127,630 $22,252,390 $1,875,240 8.4 %

Merchant fees totaled $23.0 million and $21.4 million for the three months ended March 31, 2022 and 2021, respectively, or 95.5% and 96.3% of Sezzle income, respectively. The decrease in merchant fees as a percentage of Sezzle income during the three months ended March 31, 2022 when compared to the three months ended March 31, 2021 was a result of a greater share of transactions taking place with enterprise merchants who have a lower Merchant Discount Rate during the three months ended March 31, 2022.

Consumer reschedule fees totaled $1.2 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively. Consumer reschedule fee income as a percentage of Sezzle income was 5.1% and 4.5% for the three months ended March 31, 2022 and 2021, respectively. The increase in this metric was due to higher reschedule fee forgiveness in the prior comparative period related to our COVID-19 hardship program.

Personnel

For the three months ended March 31, Change
20222021$%
Personnel$16,379,638 $12,302,173 $4,077,465 33.1 %

Personnel costs increased by 33.1% to $16.4 million for the three months ended March 31, 2022, from $12.3 million for the three months ended March 31, 2021. The increase in personnel costs was primarily a result of hiring more employees to support our operations. In March 2022, we undertook a workforce reduction which we expect to reduce personnel costs in future periods.

Recorded within personnel, equity and incentive–based compensation totaled $3.7 million and $5.2 million for the three months ended March 31, 2022 and 2021, respectively, which was a 28.9% decrease. The decrease in equity and incentive–based compensation was a result of higher prior period expenses associated with our long-term incentive program attributable to changes in our stock price, as well as cancellation of awards associated with our workforce reduction executed in March 2022.
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Transaction Expense

For the three months ended March 31, Change
20222021$%
Payment processing costs$9,327,774 $6,532,231 $2,795,543 42.8 %
Affiliate and partner fees1,288,954 1,360,708 (71,754)(5.3)%
Other transaction expense1,177,641 1,031,988 145,653 14.1 %
Transaction expense$11,794,369 $8,924,927 $2,869,442 32.2 %

Transaction expenses were $11.8 million and $8.9 million for the three months ended March 31, 2022 and 2021, respectively.

Payment processing costs were $9.3 million and $6.5 million for the three months ended March 31, 2022 and 2021, respectively. The 42.8% increase in costs period-over-period were primarily driven by the increase in volume of orders transacted by consumers and the related processing of payments associated with those orders, in addition to a greater proportion of card payments relative to ACH payments during the three months ended March 31, 2022 when compared to the prior comparative period.

Merchant affiliate program and partnership fees are incurred by us when consumers make purchases with merchants who either were referred by another merchant, or are associated with a partner platforms with which we have contractual agreements. Such costs were $1.3 million and $1.4 million for the three months ended March 31, 2022 and 2021, respectively. The decrease in costs was related to the renegotiation of a partner contract effective at the beginning of the current year, which reduced our partner revenue-sharing fees.

Other costs included in transaction expense were $1.2 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively. Such costs are comprised of consumer communication costs, and consumer and merchant service adjustments. The increase in costs were a result of increased Active Consumers, Active Merchants, and orders on the Sezzle Platform.

Third-Party Technology and Data

For the three months ended March 31, Change
20222021$%
Third-party technology and data$2,076,314 $1,151,193 $925,121 80.4 %

Third-party technology and data costs totaled $2.1 million and $1.2 million for the three months ended March 31, 2022 and 2021, respectively. The increase in expense was primarily related to our growth in Active Consumers and Underlying Merchant Sales and includes cloud-based infrastructure, fraud prevention, obtaining underwriting data that resulted in failed loan applications, and consumer engagement. Additionally, the increase in costs period-over-period was due to the implementation and expanded use of key cloud-based systems to support the growth of our operations.

Marketing, Advertising, and Tradeshows

For the three months ended March 31, Change
20222021$%
Marketing, advertising, and tradeshows$5,298,707 $1,523,770 $3,774,937 247.7 %

Marketing, advertising, and tradeshow costs increased to $5.3 million for the three months ended March 31, 2022, compared to $1.5 million for the three months ended March 31, 2021. The increase in costs were primarily a result of increased initiatives to co-market the Sezzle brand with our enterprise merchants and partners. Costs related to Sezzle Spend promotions, digital advertising, and attending tradeshows also contributed to increased expenses period-over-period.

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General and Administrative

For the three months ended March 31, Change
20222021$%
General and administrative$7,743,061 $2,383,515 $5,359,546 224.9 %

General and administrative costs increased to $7.7 million for the three months ended March 31, 2022, compared to $2.4 million for the three months ended March 31, 2021. General and administrative expenses are primarily comprised of professional fees, implementation incentives with merchants, insurance, and travel. Professional fees include legal, compliance, audit, tax, and consulting services to support the growth of our company. The increase period-over-period was primarily driven by accrued legal fees related to the Zip Merger.

Provision for Uncollectible Accounts

For the three months ended March 31, Change
20222021$%
Provision for uncollectible accounts$10,465,595 $8,576,978 $1,888,617 22.0 %

The total provision for uncollectible accounts was $10.5 million for the three months ended March 31, 2022, compared to $8.6 million for the three months ended March 31, 2021. As a percentage of Sezzle income, the provision for uncollectible accounts was 43.4% and 38.5% for the three months ended March 31, 2022 and 2021, respectively.

During the three months ended March 31, 2021, we saw a benefit to collections driven by the U.S. stimulus checks offered to many of our consumers under the American Rescue Plan Act of 2021. Starting in the second quarter of 2021, we had substantial growth in enterprise merchants UMS as a proportion of our total volume. Our non-integrated product offerings with enterprise merchants drove adverse selection, resulting in higher provision expense. To mitigate these losses, we implemented underwriting strategies with enterprise merchants during the three months ended March 31, 2022, and our provision expense as a percentage of Sezzle income decreased by 10.2% from 53.6% for the year ended December 31, 2021.

Net Interest Expense

For the three months ended March 31, Change
20222021$%
Net interest expense$1,615,339 $1,353,619 $261,720 19.3 %

Net interest expense was $1.6 million and $1.4 million for the three months ended March 31, 2022 and 2021, respectively. The increase in expense was driven by a higher average balance in our Merchant Interest Program and line of credit, partially offset against lower average interest rates for both when compared to the same quarter last year. Higher amortization of debt issuance costs during the three months ended March 31, 2022 also contributed to an increased expense.


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Income Taxes

Income tax expense for the three months ended March 31, 2022 and 2021 was $21,146 and $18,223, respectively. Our effective income tax rate for the three months ended March 31, 2022 and 2021 was 0.1% and 0.2%, respectively. Our effective income tax rate was minimal due to a full valuation allowance and is comprised of minimum income taxes owed to state and local jurisdictions. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, a full valuation allowance is recorded against our net deferred tax assets as of March 31, 2022 and December 31, 2021.

Other Comprehensive Income

We had $407,986 and $134,931 of foreign currency translation adjustments recorded within other comprehensive income for the three months ended March 31, 2022 and 2021, respectively. Foreign currency translation adjustments are a result of the financial statements of our non-U.S. subsidiaries being translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. We expect to record foreign currency translation adjustments in future periods and changes will be dependent on fluctuations in foreign currencies of countries in which we have operations.
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Liquidity and Capital Resources

We have incurred net losses since inception, incurring a net loss of $28.0 million and $11.4 million for the three months ended March 31, 2022 and 2021, respectively. We have historically financed our operating and capital needs primarily through private sales of equity, our initial public offering on the Australian Securities Exchange, and our revolving line of credit. As of March 31, 2022, our principal sources of liquidity were cash, cash equivalents, restricted cash, the unused borrowing capacity on our line of credit, and certain cash flows from operations.

As of March 31, 2022, we had cash, cash equivalents, and restricted cash of $60.6 million, compared to $78.9 million as of December 31, 2021. Our cash and cash equivalents were held primarily for working capital requirements and the continued investment in our business. Substantially all of our restricted cash is made available for use within 2-3 business days.

As of March 31, 2022 and December 31, 2021, we had working capital of $62.7 million and $113.7 million, respectively. Additionally, as of March 31, 2022 we had an unused borrowing capacity on our line of credit of $39.7 million, compared to $29.8 million as of December 31, 2021.

We meet our liquidity requirements primarily through proceeds from our line of credit, which is subject to various covenants. On February 25, 2022, we amended our existing line of credit covenants as disclosed in Note 7. Line of Credit within the accompanying notes to consolidated financial statements. If our net losses continue at the level they did in 2021, it would have resulted in the breach of one or more of such line of credit covenants prior to the amendment. Our line of credit is a significant component of our working capital management.

Additionally, on March 10, 2022, we undertook a workforce reduction to provide us with annualized cost savings of approximately $10 million. We are also exploring scaling back international operations, which would provide us with an additional annualized cost savings of approximately $7.0 million.

We believe that the implementation of these plans, along with our existing cash, cash equivalents, restricted cash, our unused borrowing capacity on our line of credit, and certain cash flows from operations will be sufficient to meet our working capital and investment requirements beyond the next 12 months.

For the three months ended
March 31, 2022March 31, 2021
Net Cash Provided from (Used for) Operating Activities7,809,340 (5,409,000)
Net Cash Used for Investing Activities(374,169)(389,303)
Net Cash Used for Financing Activities(26,202,070)(16,056,908)
Net decrease in cash, cash equivalents, and restricted cash(18,766,899)(21,855,211)

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Operating Activities

Net cash provided from (used for) operating activities was $7.8 million and ($5.4) million for the three months ended March 31, 2022 and 2021, respectively.

During the three months ended March 31, 2022, receipts from consumers totaled $451.1 million compared with cash payments to merchants of $409.2 million. Cash receipts from consumers exceeded payments to merchants primarily due to the deferral of payments to merchants under the Merchant Interest Program. Additionally, the Company incurred cash outflows of $12.2 million for personnel related expenses, $12.4 million for transaction expenses (primarily payment processing costs), $4.3 million for advertising, marketing and tradeshow related expenses, $1.6 million of interest expense payments, and $3.7 million of cash outflows for third-party technology and other general and administrative expenses.

During the three months ended March 31, 2021, receipts from consumers totaled $346.2 million compared with cash payments to merchants of $330.3 million. Cash receipts from consumers exceeded payments to merchants primarily due to the deferral of payments to merchants under the Merchant Interest Program. Additionally, the Company incurred cash outflows of $6.5 million for personnel related expenses, $8.9 million for transaction expenses (primarily payment processing costs), $0.9 million for advertising, marketing and tradeshow related expenses, $1.5 million of interest expense payments, and $3.4 million of cash outflows for third-party technology and data, along with various general and administrative expenses.

The net cash provided from consumers (to merchants) for the three months ended March 31, 2022 and 2021 was $42.0 million and $15.9 million, respectively. Beginning in the third quarter of the previous year, payments to merchants began generally growing at a faster rate than receipts from consumers due to a higher proportion of enterprise merchants. Large enterprise merchants typically do not participate in the Merchant Interest Program, and as a result do not defer their payments. The first quarter of the current year saw an increase in net cash provided from consumers as a result of seasonality. The increase in personnel cash outflows, period-over-period, are driven by an increase in employee headcount. The increase in cash outflows for transaction and interest related expenses are driven by the overall increase in UMS. Other increases in cash outflows, year-over-year, are due to overall growth in the Company's operations.

Investing Activities

Net cash used for investing activities during the three months ended March 31, 2022 was $0.4 million, consistent with the prior comparative period. Cash outflows for investing activities were primarily used for purchasing computer equipment, as well as payments of salaries to employees who create capitalized internal-use software.

Financing Activities

Net cash used for financing activities during the three months ended March 31, 2022 was $26.2 million, compared to $16.1 million during the three months ended March 31, 2021.

Significant financing cash outflows during the three months ended March 31, 2022 included payments to our line of credit totaling $26.0 million and the repurchase of shares of common stock from employees to cover minimum statutory tax obligations totaling $0.3 million. Financing cash inflows during the three months ended March 31, 2022 consisted of proceeds from stock option exercises totaling $0.1 million.

Line of Credit

Refer to Note 7. Line of Credit on the accompanying notes to our consolidated financial statements for discussion about our line of credit.

Merchant Contract Obligations

Refer to Note 8. Commitments and Contingencies on the accompanying notes to our consolidated financial statements for discussion about our merchant contract obligations.
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Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. These principles require us to make certain estimates and judgments that affect the amounts reported in our consolidated financial statements. We base our estimates on historical experience and on various other assumptions that management believes to be reasonable. Our actual results may differ materially from our estimates because of certain accounting policies requiring significant judgment. To the extent that there are material differences between our estimates and actual results, our future consolidated financial statements will be affected.

We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to our allowance for uncollectible accounts, equity-based compensation, income taxes, and internally developed intangible assets. We believe these estimates have the greatest risk of affecting our consolidated financial statements; therefore, we consider these to be our critical accounting policies and estimates.

Receivables and Credit Policy

Notes receivable represent amounts from uncollateralized consumer receivables generated from the purchase of merchandise. The original terms of the notes for our core product are to be paid back in equal installments every two weeks over a six-week period. We do not charge interest on the notes to consumers. We defer direct note origination costs over the average life of the notes receivable using the effective interest rate method. These net deferred costs are recorded within notes receivable, net on the consolidated balance sheets. Notes receivable are recorded at net realizable value and are recorded as current assets. We evaluate the collectability of the balances based on historical performance, current economic conditions, and specific circumstances of individual notes, with an allowance for uncollectible accounts being provided as necessary.

Other receivables represent the net realizable value of consumer account reactivation fees receivable, merchant accounts receivable, and merchant processing fees receivable. Consumer account reactivation fees receivable, less an allowance for uncollectible accounts, represent the amount of account reactivation fees we reasonably expect to receive from consumers. Receivables from merchants represent amounts merchants owe us relating to transactions placed by consumers on their sites. All notes receivable from consumers, as well as related fees, outstanding greater than 90 days past due are charged off as uncollectible. It is our practice to continue collection efforts after the charge-off date.

Sezzle Income

We receive our income primarily from fees paid by merchants in exchange for our payment processing services. These fees are applied to the underlying sales to consumers passing through our platform and are predominantly based on a percentage of the consumer order value plus a fixed fee per transaction. Consumer installment payment plans typically consist of four installments, with the first payment made at the time of purchase and subsequent payments coming due every two weeks thereafter. Additionally, consumers may reschedule their initial installment plan by delaying payment for up to two weeks, for which we generally earn a rescheduled payment fee. The total of merchant fees and rescheduled payment fees, less note origination costs, are collectively referred to as Sezzle income within the consolidated statements of operations and comprehensive loss. Sezzle income is initially recorded as a reduction to notes receivable, net within the consolidated balance sheets. Sezzle income is then recognized over the average duration of the note using the effective interest rate method.

Equity Based Compensation

We maintain stock compensation plans that offer incentives in the form of non-statutory stock options and restricted stock to employees, directors, and advisors of the Company. Equity based compensation expense reflects the fair value of awards measured at the grant date and recognized over the relevant vesting period. We estimate the fair value of stock options without a market condition on the measurement date using the Black-Scholes option valuation model. The fair value of stock options with a market condition is estimated, at the date of grant, using the Monte Carlo Simulation model. The Black-Scholes and Monte Carlo Simulation models incorporate assumptions about stock price volatility, the expected life of the options, risk-free interest rate, and dividend yield. For valuing our stock option grants, significant judgment is required for determining the expected volatility of our shares of common stock and is based on the historical volatility of both its shares of common stock and its defined peer group. The fair value of restricted stock awards and restricted stock units that vest based on service conditions is based on the fair market value of our shares of common stock on the date of grant. The expense associated with equity-based compensation is recognized over the requisite service period using the straight-line method. We issue new shares of common stock upon the exercise of stock options and vesting of restricted stock units.

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Income Taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of receivables, property and equipment, and accrued liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance is recorded against our deferred tax assets.

We evaluate our tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual is necessary for uncertain tax positions. To date we have not recorded any liabilities for uncertain tax positions.

New Accounting Pronouncements

Refer to Note 1. Significant Accounting Policies on the accompanying notes to our consolidated financial statements for discussion about recent accounting pronouncements.

Off Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our performance and the performance of our subsidiaries.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks during our ordinary course of business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices, interest rates, and foreign currency exchange rates. Our primary risk exposure is the result of fluctuations in interest rates and foreign currency exchange rates.

Interest Rate Risk

Our cash, cash equivalents, and restricted cash are primarily held in checking, savings, and money market accounts. As of March 31, 2022 and December 31, 2021, we had approximately $1.9 million and $6.4 million of cash equivalents invested in money market funds. The fair value of our cash and cash equivalents would not be materially affected by either an increase or decrease in interest rates due to the short-term nature of these investments.

Our line of credit accrues interest at a floating rate based on a formula tied to the U.S. Federal Reserve’s Secured Overnight Financing Rate (“SOFR”). A 0.1 percentage point increase or decrease in SOFR would not have a material affect on our accrued interest.

Foreign Currency Risk

During the ordinary course of business, we enter into transactions denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net income as a result of transaction gains or losses related to revaluing monetary assets and liabilities that are denominated in currencies other than the functional currency of the entities in which they are recorded. If a hypothetical 10% foreign currency exchange rate change was applied to total monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they were recorded at the balance sheet date, it would not have a material impact on our financial results. At this time, we have not entered into derivatives or other financial instrument transactions in an attempt to hedge our foreign currency exchange risk due to its immaterial nature. In the future, we may enter into such transactions should our exposure become more substantial.

We are also subject to foreign currency exchange risk related to translation, as a number of our subsidiaries have functional currencies other than the U.S. Dollar. Translation from these foreign currencies to the U.S. Dollar is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income on the consolidated balance sheets. A hypothetical 10% change in our subsidiaries’ functional currencies against the U.S. Dollar compared to the exchange rate as of March 31, 2022 would result in a foreign currency translation adjustment of approximately $1.7 million.

32


ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of March 31, 2022, Sezzle conducted an evaluation, under supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (Exchange Act).

Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the three months ended March 31, 2022, no changes in our internal control over financial reporting materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
33


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently involved in any material legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries is a party or of which any of their property is subject. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these matters, individually or in the aggregate, will have a material adverse effect on our consolidated balance sheets, operations and comprehensive loss, or cash flows.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors described in Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Throughout the three months ended March 31, 2022, we repurchased shares from employees to cover minimum statutory tax obligations owed for vested restricted stock units issued under our equity incentive plans. The table below presents information with respect to common stock purchases made by us during the three months ended March 31, 2022, as follows:


Period
Total Number of Shares Purchased(1)
Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced ProgramsDollar Value of Shares that May Yet Be Purchased Under Publicly Announced Programs
January 1, 2022 through January 31, 202243,761 $2.03 — $— 
February 1, 2022 through February 28, 202217,294 1.51 — — 
March 1, 2022 through March 31, 2022156,792 1.07 — — 
Total217,847 $1.29 — $— 

(1)All 217,847 shares were surrendered to satisfy minimum statutory tax obligations under our equity incentive plans.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

34


ITEM 6. EXHIBITS

ExhibitIncorporated by ReferenceFiled
NumberExhibit DescriptionFormFile NumberFile DateHerewith
2.18-K000-562672/28/22
3.110-12G/A000-5626710/25/21
3.210-12G/A000-5626710/25/21
10.18-K000-562672/28/22
10.28-K000-562672/28/22
10.38-K000-562672/28/22
10.48-K000-562672/28/22
10.510-K000-562673/30/22
10.610-K000-562673/30/22
31.1X
31.2X
32.1X
32.2X
101.INSXBRL Instance DocumentX
101.SCHInline XBRL Taxonomy Extension Schema DocumentX
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentX
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentX
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)X

#Indicates a management contract or compensation plan, contract, or arrangement.
*Certain exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the SEC a copy of any omitted exhibits or schedules upon request.
35


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SEZZLE INC.
Dated: May 16, 2022
By:/s/ Charles Youakim
Charles Youakim
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Karen Hartje
Karen Hartje
Chief Financial Officer
(Principal Financial Officer)
36



Exhibit 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

Certifications

I, Charles Youakim, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Sezzle Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.[paragraph omitted in accordance with Exchange Act Rule 13a-14(a)]
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 16, 2022

/s/ Charles Youakim
Charles Youakim
Chairman and Principal Executive Officer



Exhibit 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

Certifications

I, Karen Hartje, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Sezzle Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.[paragraph omitted in accordance with Exchange Act Rule 13a-14(a)]
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 16, 2022

/s/ Karen Hartje
Karen Hartje
Principal Financial Officer



Exhibit 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
AS ADOPTED PURSUANT TO 18 U.S.C. SECTION 1350
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Sezzle Inc., a Delaware corporation (“the Company”), for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (“the Report”), the undersigned officer of the Company certifies pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the officer's knowledge:

1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: May 16, 2022

/s/ Charles Youakim
Charles Youakim
Chairman and Principal Executive Officer



Exhibit 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
AS ADOPTED PURSUANT TO 18 U.S.C. SECTION 1350
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Sezzle Inc., a Delaware corporation (“the Company”), for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (“the Report”), the undersigned officer of the Company certifies pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the officer's knowledge:

1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: May 16, 2022

/s/ Karen Hartje
Karen Hartje
Principal Financial Officer