Minneapolis, MN 55401, USA

(Address of principal executive offices) (Zip Code)

+1 651 504 5402

(Registrant’s telephone number, including area code)

Suite 6.02, Level 6

28 O’Connell Street

Sydney NSW 2000

(Address of principal executive offices)

+61 2 9048 8856

(Registrant’s telephone number, including area code)

Securities to be registered pursuant to Section 12(b) of the Act:

None

Securities to be registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.00001  per share

(Title of class)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in rule 12b-2 of the Exchange Act.

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 standards provided pursuant to Section 13(a) of the Exchange Act ☐

TABLE OF CONTENTS

EXPLANATORY NOTE

Pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, we are filing this General Form for Registration of Securities on Form 10, or this registration statement, to register our common stock, par value $0.00001 per share, or common stock. The common stock is publicly traded on the Australian Securities Exchange, or the ASX, under the ticker “SZL” in the form of CHESS Depositary Interests, or CDIs. CDIs are units of beneficial ownership in shares of our common stock held by CHESS Depositary Nominees Pty Limited, or CDN, a subsidiary of ASX Limited, the company that operates the ASX. The CDIs entitle holders to dividends, if any, and other rights economically equivalent to shares of our common stock on a 1-for-1 basis, including the right to attend stockholders’ meetings. The CDIs are also convertible at the option of the holders into shares of our common stock on a 1-for-1 basis, such that for every CDI converted, a holder will receive one share of common stock. CDN, as the stockholder of record, will vote the underlying shares in accordance with the directions of the CDI holders from time to time.

This registration statement will become effective automatically by lapse of time 60 days from the date of the original filing pursuant to Section 12(g)(1) of the Exchange Act or within such shorter period as the Securities and Exchange Commission, or the SEC, may direct. As of the effective date of the registration statement, we will be subject to the requirements of Regulation 13(a) under the Exchange Act and will be required to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and we will be required to comply with all other obligations of the Exchange Act applicable to issuers filing registration statements pursuant to Section 12(g) of the Exchange Act.

Unless otherwise noted, references in this registration statement to “we,” “us,” “our,” “Company,” or “Sezzle” refer to Sezzle Inc.

All dollar amounts contained herein are expressed in United States dollars, or US$, except where otherwise stated. References to “A$” are references to Australian dollars, the lawful currency of the Commonwealth of Australia. Some numerical figures included in this registration statement have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in certain tables may not equal the sum of the figures that precede them.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies. These provisions include, but are not limited to:

We have elected to take advantage of certain reduced disclosure obligations in this registration statement and may elect to take advantage of other reduced reporting requirements in future filings. In addition, the JOBS Act permits us, as an emerging growth company, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. As a result, the information that we provide to our stockholders may be different from what you might receive from other public reporting companies in which you hold equity interests.

We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year following the fifth anniversary of the date of our first sale of our common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), (ii) the first fiscal year after our annual gross revenues exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding three-year period, issued more than $1.00 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

FORWARD-LOOKING STATEMENTS

The information in this registration statement 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 registration statement, 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 registration statement, 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 under the heading “Risk Factors” included in this registration statement. 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. 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:

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 under “Risk Factors” in this registration statement. Should one or more of the risks or uncertainties described in this registration statement 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 registration statement 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 statements in this section, to reflect events or circumstances after the date of this registration statement.

Overview

We are a technology-enabled payments company based in the United States with current operations in the United States and Canada, and exploratory operations in India. Sezzle is incorporated in the state of Delaware as a public benefit corporation, and in March 2021 we became certified as a B Corporation. Sezzle’s mission is to financially empower the next generation. This mission is accomplished by enabling merchants to offer consumers a more consumer friendly credit alternative. Many consumers today are locked out of the existing credit system or prefer not to use payment methods that can get them into debt or hurt their credit scores. Sezzle provides a flexible, reliable, transparent, and secure alternative to the incumbent payment options, traditionally available to everyday consumers.

Sezzle provides a payments platform, known as the Sezzle Platform, that facilitates fast, easy payments between merchants (sometimes referred to as “retail merchants”) and those merchants’ customers (sometimes referred to as “consumers” or “end-customers”). Sezzle’s payment product is a short-term, interest-free installment plan that delivers to consumers both a budgeting and financing value proposition. The Sezzle Platform allows consumers to make online purchases and effectively split the payment for the purchase with our base product over four equal, interest-free payments over six weeks. The consumer makes the first payment at the time of checkout and makes the subsequent payments fortnightly (every two weeks). The purchase price is paid to merchants by Sezzle (minus the Merchant Fee) in advance of the collection of the purchase price installments by Sezzle from the consumer. Sezzle offers the payment product in online stores and a select number of brick-and-mortar merchants.

History

Sezzle founders created the Sezzle Platform after observing an increasing trend in the United States of a lack of availability of credit for consumers (particularly younger consumers). A 2018 Bankrate study found that only 33% of persons aged 18-29 owned a credit card in the United States. A separate 2017 study on millennial credit by TransUnion found a 22% decline in credit card adoption when it compared millennials to Generation X at that same age. In addition, Sezzle’s founders also felt that traditional short-term consumer finance products were not consumer-friendly and were not effectively structured and designed to facilitate digital commerce. It was understood that technology could have a significant impact by filling both of these gaps by providing access to a platform which: (i) allows consumers to access a flexible, online “pay-by-installment” payment option; (ii) facilitates consumer access to the additional purchasing power sought in a simple, digital way; and (iii) provides an easy-to-use system for first-time credit users, which works without the need for prior credit data. With this in mind, the founders founded Sezzle in 2016, and the Sezzle Platform was launched in August 2017. Since launching, the Company’s activities have principally involved raising money to develop its software, products and services (including the Sezzle Platform).

Organizational Structure

Consistent with the Company’s ethos—to financially empower the next generation—Sezzle is incorporated in Delaware as a public benefit corporation (“PBC”). PBCs are a relatively new class of corporations that are intended to produce a public benefit and to operate in a responsible and sustainable manner. Under Delaware law, PBCs are required to identify in their certificate of incorporation the public benefit or benefits they will promote, and their directors have a duty to manage the affairs of the corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct and the specific public benefit or public benefits identified in the PBC’s certificate of incorporation. See “DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED. — Public Benefit Corporation Status.”

On March 22, 2021, Sezzle became certified as a B Corporation by B Lab, a global nonprofit, and thereby joined a movement of innovative socially-conscious brands. Meeting rigorous environmental and social standards for transparency, accountability and commitment to improved performance, Sezzle became the first and only Buy-Now-Pay-Later company to earn such a title. As a certified Delaware public benefit corporation, Sezzle commits to pursuing opportunities for positive change in the community and the planet. Sezzle’s management team and fiduciary board strongly believe that the Company’s long-standing commitment to financial education and helping young adults with their approach to personal finances, as well as creating alternative means for consumers to purchase items they need without incurring high-interest finance charges, benefit the community and serve as a public good. Accordingly, Article II of Sezzle’s Third Amended Certificate of Incorporation directs that, “[i]n pursuing any business, trade, or activity which may lawfully be conducted by [Sezzle], [Sezzle] shall promote a specific public benefit of having a material positive effect (or reduction of negative effects) on consumer empowerment, education, and transparency in [Sezzle’s] local, national, and global communities.” See “DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED. — Public Benefit Corporation Status.”

Being a PBC offers advantages to Sezzle, including:

Sezzle is referred to as a “foreign company” in Australia, under the Corporations Act, under the name “Sezzle Inc.” (ARBN 633 327 358).

Business Model

The Sezzle Platform

The Sezzle Platform allows consumers to pay for products purchased online with interest-free installments over a short duration. This assists consumers by providing a flexible payment option and enables consumers to budget for purchases over time, and provides merchants with a tool to increase sales, increase average order values, and reduce cart/checkout abandonment. Merchants benefit from providing the Sezzle Platform to its consumers because: (i) a proportion of consumers may be more inclined to make a purchase and/or increase the value of their purchase because of affordability and flexibility afforded by the Sezzle Platform; and (ii) Sezzle pays the merchant the entire purchase price upfront (minus Sezzle processing fees) and assumes all costs and risks associated with consumer payment processing, fraud, and non-payment.

The Sezzle Platform is easy to use for both merchants and consumers. First, the Sezzle Platform is integrated into the website of the merchant. Sezzle provides technical integration and onboarding services to the merchant and remains on-call to provide technical support during the initial integration of the merchant. Once integrated, merchants promote Sezzle to their shoppers on product and cart pages to improve sales conversion. The Sezzle Platform is presented alongside other payment options on the merchant’s “Checkout” page. The consumer selects Sezzle as its payment option and (if a first-time customer with Sezzle) creates an account. By selecting Sezzle, the consumer agrees to pay one-fourth the purchase price and each installment as they are due over the following six weeks. The consumer inputs their information including the payment information that the consumer wishes to use for future installment payments. The Sezzle Platform assesses the transaction in real-time and either confirms that the order is successful or declines the order. If the order is successful, the merchant ships the items on the same timeline they would be shipped if the consumer had used a credit or debit card as opposed to Sezzle. The consumer will receive a notification via email and SMS two days prior to the date the installment payment is automatically debited by the Sezzle Platform. If the consumer has the Sezzle iOS or Android app installed, they will receive push-notification reminders as well. The consumer is able to review and manage their Sezzle account via the Sezzle Platform’s online customer portal. Consumers are entitled to adjust their repayment schedule once per order without incurring fees.

Merchants

Sezzle does not focus on promoting its services to consumers. Instead, the Sezzle Platform is utilized by merchants on their website as a services and sales incentive to consumers. Merchants turn to Sezzle to increase sales by tapping into Sezzle’s existing consumer base, improving conversion rates, raising spend per transaction, increasing purchase frequency, and reducing return rates, all without any credit risk to the merchant. Sezzle is a high-growth, networked platform that benefits from a symbiotic and mutually beneficial relationship between merchants and consumers. Merchant fees (“Merchant Fees”) are generated on each individual, approved order placed by a consumer through the Sezzle Platform. The fee is predominantly based on a percentage of the consumer order value plus a fixed transaction fee.

In order to utilize the Sezzle Platform, merchants must complete an online application form via the Company’s website, or by directly contacting a Sezzle sales representative. The application form requires the merchant to provide the Company with certain information including the details concerning the merchant’s business type, the merchant’s principal contact information, bank account details and appropriate identification items. Each merchant applying also agrees to be bound by the Sezzle Merchant Agreement. The Sezzle Merchant Agreement provides (among other things): (i) the merchant will accept installment payments for any sales transaction for goods or services processed through merchant’s existing processor on the Sezzle Platform; (ii) the merchant will treat Sezzle orders in the same manner as any other order using a different payment tender type; in particular, the merchant agrees to have a public returns policy and to process returns on sales utilizing the Sezzle Platform in accordance with the merchant’s published standard policy, and not to apply any surcharge on a Sezzle order; (iii) the merchant will incur Merchant Fees in respect of sales utilizing the Sezzle Platform; and (iv) the merchant agrees to be a party to the Sezzle dispute process, where Sezzle can award a consumer a reversal of payment on a valid dispute.

Sezzle’s Technology

A critical component to the Sezzle business model is the ability to effectively manage the repayment risk of providing consumers with the capacity to pay over time. To that end, in-house full time Sezzle engineers built and continue to maintain the following Sezzle Platform systems, which address these risks: (i) Sezzle Application Layer; (ii) Sezzle Fraud Detection System; (iii) Sezzle Underwriting Engine; and (iv) Sezzle Payment Collection System.

The Sezzle Application Layer, in conjunction with the Sezzle Fraud Detection System and Sezzle Underwriting Engine, allows Sezzle to determine whether or not Sezzle should provide a consumer with an installment plan. The Sezzle Application Layer consists of the Sezzle Checkout, Sezzle Merchant Dashboard, and Sezzle Shopping Dashboard. The Sezzle Checkout is a web application used in the consumer checkout process, which includes views for consumer sign-up, approval/denial, and payment method management when placing new orders with merchants. The Sezzle Merchant Dashboard is a web portal used for onboarding merchants and for Active Merchants to manage their Sezzle orders and accounts. The Sezzle Shopping Dashboard is a web portal used by Active Consumers to manage orders, payment methods and payment rescheduling. The Sezzle Application Layer also includes a Sezzle App (available on iOS and Android), built for mobile management of the consumer’s account and for future offline payments.

The Sezzle Fraud Detection System is a proprietary system developed by the Company’s data sciences team, which utilizes numerous data points from a transaction to identify the likelihood of a fraudulent attempt within the Company’s systems. Consumer interactions with the Sezzle Platform are recorded and analyzed along with data points on the consumer and order itself. This data passes through the Sezzle Fraud Detection System, which scores the likelihood of fraud occurring in the transaction.

The Sezzle Underwriting Engine then assigns a score to each new consumer that passes through the Sezzle Fraud Detection System. Sezzle’s view is that its product enables the democratization of credit, so unless Sezzle believes there is fraud involved, it gives every consumer access to an amount of credit. Based on data obtained from traditional and non-traditional sources, along with the order data and retailer data, Sezzle is able to give some shoppers a higher initial limit than others. These additional data points allow Sezzle to optimize its initial credit limits for users, enhancing the effectiveness of the Sezzle Platform for its merchants. As consumers use the Sezzle Platform, Sezzle’s system learns from the behavior of the individual consumers and adapts the consumer’s limit to the appropriate level based on the consumer’s success level within the Sezzle Platform.

Once a consumer passes through the Sezzle Fraud Detection System and the Sezzle Underwriting Engine and the order is placed, the Sezzle Payment Collection System is responsible for the collection of the outstanding payments. Payments are automatically scheduled to process on the card used for the initial consumer’s payment, though consumers can change this if need be. If a payment fails on the scheduled due date, Sezzle will automatically reschedule their outstanding payments rather than waiting for the consumer to resolve the payment failure. When a payment fails, the Company notifies the consumer, and reschedules the payment as well as all subsequent payments automatically. The due date of a failed payment is moved to the previously scheduled due date of the next payment and the rest of the payments shift accordingly. This allows Sezzle to take advantage of any previous rescheduling performed by the consumer and may help prevent continued failure by ensuring that payments do not become tightly grouped. If a consumer becomes delinquent such that Sezzle determines that it is unlikely to collect outstanding payments, the Company may attempt a less flexible payment schedule and/or attempt to charge another card on file.

Customer Support

Sezzle has an experienced multilingual support team that strives to respond to all concerns, feedback and queries in a personable yet effective manner. This includes, but is not limited to, general questions regarding the Sezzle Platform applicable terms and conditions, technical issues and account set up. If a matter is not resolved to the satisfaction of the customer, the matter will be promptly escalated by the support team to a supervisor on staff. The supervisor will then: (i) explicate the matter, providing a clear path for successful resolution to the support agent; or (ii) expediently resolve the matter with the customer directly, through the customer’s preferred contact method.

Income Generation and Funding of the Business

Sezzle’s main source of income, Sezzle Income, is based on three key transactions: (i) Merchant Fees; (ii) Reschedule Fees; and (iii) Loan Origination Costs.

Firstly, Merchant Fees are charged to merchants in exchange for Sezzle’s processing services. These fees are derived from the underlying sales passing through the Sezzle Platform and are generated on each discrete, approved order placed by a consumer. Merchant Fees are predominantly based on a percentage of the consumer order value plus a fixed fee per sale. Sezzle pays the merchant the value of the underlying sale less the Merchant Fees. For the years ended December 31, 2020 and 2019, Merchant Fees as a percentage of total Underlying Merchant Sales were 5.6% and 5.3%, respectively (unaudited). Sezzle does not charge interest, finance charges or initiation fees for extending credit to its consumers and has no current plans to offer any interest or fee-bearing product to consumers.

Secondly, Reschedule Fees are applied to consumers in cases where the consumer requests to reschedule the dates on which installment payments become payable. The Sezzle Platform permits consumers to reschedule an installment date on one occasion per order without incurring Reschedule Fees. However, a Reschedule Fee of $5.00 is payable in respect of additional reschedules (and the reschedule is dependent upon the consumer agreeing to the payment of the applicable Reschedule Fee). Additionally, Sezzle has a hardship and fee forgiveness program which, dependent on the consumer’s situation and at the discretion of customer support, allows consumers to have additional fees waived.

Loan Origination Costs are incurred by Sezzle in assessing whether to approve or not approve consumer funding through the Sezzle Platform. Only direct Loan Origination Costs on approved funding are included in the determination of Sezzle Income. Merchant Fees and Reschedule Fees, net of Loan Origination Costs, collectively “Sezzle Income”, are initially deferred in the Company’s consolidated balance sheets and then recognized in the Company’s consolidated statements of operations over the average duration of the underlying installment payment receivables, using the effective interest rate methods.

In addition, Account Reactivation Fees (which are recognized as consumer Other Income in Sezzle’s financial performance) are applied in cases where a consumer’s payment fails in the automated payment process. Account Reactivation Fees are waived if the consumer corrects the failure in the first 48 hours after a payment default. However, if the default is not corrected in this 48-hour period, the consumer’s account is deactivated, and they have to pay an Account Reactivation Fee that fee must be paid before the consumer is able to use the Sezzle Platform again.

Sezzle’s business of funding purchases by consumers requires funding capital to enable Sezzle to pay merchants in advance of collection of the purchase price installments from those consumers. To fund these capital requirements, Sezzle has relied upon, to date: (i) equity capital, (ii) merchant accounts payables, and (iii) debt financing provided under a Revolving Credit and Security Agreement (the “Credit Agreement”) executed on February 10, 2021 between Sezzle Funding SPE II, LLC (as borrower) and the senior lender, Goldman Sachs Bank USA, and the mezzanine lender, Bastion Funding IV LLC (the “Lenders”). The Credit Agreement provides Sezzle Funding SPE II, LLC with a revolving credit facility of up to $250,000,000, with a maturity date of June 12, 2023.

International Operations

We have operated in the United States since our inception. We began operations in Canada in 2019, and currently more than 1,000 merchant retailers throughout Canada offer Sezzle’s solutions. In 2020, we began offering our services in India on an exploratory basis. We are also exploring expansion into other foreign markets, including Europe, as part of our growth strategy.

Intellectual Property

Sezzle’s core intellectual property asset is the Sezzle Platform and the accumulation of transaction data, rules and consumer insights generated from consumers using the Sezzle Platform. Sezzle’s intellectual property is protected under the laws of the United States and Canada relating to copyright, trademarks, and contractual confidentiality obligations. Sezzle does not currently hold any patents but continues to consider the most effective methods of protecting its intellectual property.

Sezzle also holds a registered domain name and registered trademarks, which are used for its business in the United States and Canada. However, expansion into certain markets outside the United States and Canada mark risk conflicts with registered trademarks or another unrelated company with a similar name, and in that case Sezzle may have to consider rebranding its offering in those new markets.

Industry& Competitors

The consumer finance landscape continues to evolve in response to changing consumer preferences and the way consumers choose to access credit. The broader consumer finance sector is highly competitive and populated by large, well-resourced participants. The point-of-sale financing market in which Sezzle operates includes several types of products. “Buy-now, pay-later” products, such as the Sezzle Platform, facilitate consumer purchases from retail merchants on installment plans. Credit card providers offer products that allow customers to pay for purchases on pre-existing credit cards in installments, with such loans held on the balance sheet of bank partners (e.g. Visa, Mastercard, American Express). Banks offer products that allow customers to pay for products in installments instead of allowing the purchase to be held fully on a revolving credit line (e.g. JP Morgan Chase). Other products offer customers a line of revolving credit, allowing purchasers to be made online without using a credit card (e.g. PayPal Credit).

Sezzle considers its main competitors to be other “buy-now, pay-later” service providers. In the U.S. market, this includes Affirm, Afterpay, Klarna, PayPal Credit, and QuadPay. Sezzle has also observed that PayBright and Afterpay operate in the Canadian market. Sezzle aims to differentiate its business to consumers by providing a product that is simple to understand and customer friendly. This includes allowing the customer to shift their repayment schedule once per order for free, and waiving Account Reactivation Fees where the consumer corrects a failed payment within 48 hours.

Government Regulation

The “buy-now, pay-later” segment of the point-of-sale financing market in which Sezzle operates is a developing field. The Company is subject to a range of legal and industry compliance requirements that are constantly changing. This includes privacy laws, consumer protections laws and contractual conditions.

There has recently been an increased focus and scrutiny by regulators in various jurisdictions in respect to “buy-now, pay-later” arrangements. There is potential that the Company may become subject to additional legal or regulatory requirements if its business, operations, strategy or geographic reach expand in the future, or if the regulations change in respect to the jurisdictions in which it operates. This may potentially include credit licensing, financial services licensing, or other licensing or regulatory requirements or similar limitations on the conduct of business. There is a risk that additional or changed legal, regulatory and industry compliance standards, may make it uneconomic for the Company to continue to operate, or to expand in accordance with its strategy. This may materially and adversely impact the Company’s income and profitability, including by preventing its business from reaching sufficient scale.

There is also a risk that if the Company fails to comply with these laws, regulations and industry compliance standards, this may result in significantly increased compliance costs, cessation of certain business activities or the ability to conduct business, litigation or regulatory enquiry or investigation and significant reputational damage.

Sezzle’s business is subject to investigation by regulators, enforcement agencies and offices of state attorneys general, which could lead to enforcement actions, fines and penalties, and qualification to conduct business or the assertion of private claims and lawsuits against Sezzle. The US Federal Trade Commission and the US Consumer Financial Protection Bureau have the authority to investigate consumer complaints against Sezzle, to conduct inquiries at their own insistence and to recommend enforcement actions and seek monetary penalties.

As our operations expand into India and possibly other international markets outside of North America, we will be subject to additional government regulations that could be more restrictive than current governmental regulations and that will involve additional regulatory compliance costs and risks. Changes in the regulatory environment and violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws may negatively impact our business. We are subject to regulations relating to our corporate conduct and the conduct of our business, including securities laws, consumer protection laws, trade regulations, advertising regulations, privacy and cybersecurity laws, wage and hour regulations, anti-money laundering and anti-corruption legislation. Certain jurisdictions have taken aggressive stances with respect to such matters and have implemented new initiatives and reforms, including more stringent regulations, disclosure and compliance requirements. The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Anti-Money Laundering (AML) Laws and related Know-Your-Customer (KYC) laws in other jurisdictions generally require companies to conduct necessary due diligence to prevent and protect against money laundering. Various regulatory agencies demand licensing or other controls in order to operate in the market; such requirements vary country by country and are fact dependent

Employees

As of March 17, 2021, Sezzle had approximately 179 full-time equivalent employees, spanning five countries (United States (including Puerto Rico), Canada, Germany, India and Lithuania) across the operations, sales and marketing and platform development teams. No employees are subject to any collective bargaining agreements at this time.

Human Capital

Sezzle is committed to empowering the next generation through its most valuable resource, people. In order to hire, retain and ensure our employees thrive, we are refining current practices and implementing several new strategies. Sezzle currently has approximately 180 employees, which includes approximately 30 interns.

Sezzle’s personnel expenses for 2020 were $108,245 (excluding equity based compensation) per full time equivalent employee, and our 2020 income per full time equivalent employee was $372,640. As we are currently growing globally, we would expect the cost per employee to grow and the revenue per employee to slow until the hiring spree has stabilized. Material changes in our operations, specifically in the area of People Operations (as described below), should reduce long term costs.

In light of our commitment to our employees, Sezzle is currently in the process of upgrading our Human Resources Information Systems (HRIS) to ensure state-of-the-art management, operation and oversight of our workforce. Our goals in this upgrade are to:

We have recently updated our Diversity Policy and Ethics Policy to renew and refine our commitment to derive strength from a diverse workforce. Our new HRIS system will allow for more accurate measurement and accountability on the diversity front. Sezzle has an active Diversity, Equity and Inclusion group to further ensure communication throughout the organization on issues impacting minorities. Employees are encouraged to participate in Company and community activities to secure an improved quality of life for ourselves, our co-workers and the community.

In addition to updating Sezzle’s People Operations’ Policies, Sezzle has also updated its Legal Policies, Finance Policies and Information Technology Policies. These foundational changes have prompted a new training regime for the employees whereby each quarter employees will receive training on a different department’s policies. Employees sign off on the policies upon hire and upon completion of the required training. In addition to the industry standard training, Sezzle offers a wide and diverse set of training and informational sessions to better educate its employees on the basics of Sezzle, the market, the industry as a whole, various departments roles and responsibilities.

To hold ourselves to a high standard of employee safety, Sezzle has Workplace Safety and Workplace Expectations Policies. That said, the recent COVID-19 pandemic has shifted us to a primarily remote workforce. From an employee health and wellness perspective, we do not count COVID-19–related sick days against an employee’s sick leave. Any employees who elect to come to the office must abide by COVID-19 restrictions such as social distancing, wearing a mask and obtaining permission to bring guests/visitors. We restrict the number of employees who may be present in the workplace at one time. Cleaning of the workplace has been increased in frequency and depth.

In an effort to give our employees a voice, Sezzle conducts frequent employee surveys. Every month, Sezzle issues a survey to measure overall employee happiness. Each monthly survey also includes an additional rotating topic of: Autonomy/Ownership; Management/Team Work; Benefits; Morale/Retention; Learning/Growth; and Recognition/Performance. (Therefore, these latter topics are measured twice a year). Sezzle averages a 93% overall happiness rating by its employees from January 2020 through February 2021 with monthly figures being 90%, 93%, 92%, 96%, 93%, 94%, 92%, 97%, 95%, 95%, 96%, 89%, 82% and 92%, respectively. For 2020, the figures in the other categories were: Autonomy/Ownership 92%; Management/Teamwork 89%; Benefits 78%; Morale/Retention 86%; Learning/Growth 72%; and Recognition/Performance 72%.

Furthermore, Sezzle recently conducted an Inclusivity and Belonging Survey of the 97 employees who took the survey: 81% agreed that Sezzle is committed to Diversity and Inclusion; 16% were neutral; and less than one percent disagreed. 91% of those who responded felt included in the Company.

Sezzle embraces change and the opportunity it brings. We are focused on acting openly, equitably and consistently in our pursuit of uncompromising quality. To meet this goal, we are committed to recruiting, developing, rewarding and retaining our global workforce.

Our business faces many risks. We believe the risks described below are the material risks that we currently face. However, the risks described below are not the only risks that we face. Additional unknown risks or risks that we currently consider immaterial may also impair our business operations. If any of such events or circumstances occurs, our business, financial condition or results of operations could suffer, and the trading price of our securities could decline significantly. You should consider the specific risk factors discussed below, together with the cautionary statements under the caption “Forward-Looking Statements” and the other information and documents that we file from time to time with the SEC.

Risks Related to Our Business

We are an early-stage financial technology company with a limited operating history and investing in us involves risks associated with other early-stage companies.

The Company is an early stage financial technology company with limited trading history. Since launching the Sezzle Platform in August 2017, Sezzle’s activities have principally involved raising money to develop its software, products and services (including the Sezzle Platform). Like many early stage companies, the Company has incurred losses since its inception. The reported cumulative losses up to December 31, 2020 are approximately $51.8 million. Given the Company’s limited trading history, it is difficult to make an evaluation of Company’s business or its prospects and there is a significant risk that the Company is not able to continue its growth at current rate, if at all, or successfully execute on its business plan and strategies.

Our business depends on our ability to increase transaction volumes and to expand our brand and product offerings to increase our consumer and merchant bases, and any failure to do so may have a material adverse effect on our business operations.

The Company is currently in the early stages of establishing its presence in the US and Canadian markets, and its ability to profitably scale its business is reliant on increasing its transaction volumes and its customer and merchant base to increase income and profits. Data from increasing transaction volumes will also better optimize the Company’s systems and ability to make real-time consumers repayment capability decisions. Optimizing repayment capacity decisions of our current and future consumer base may reduce our expenses and increase Sezzle Income by providing optimal credit limits to qualified consumers.

The Company considers that establishing, expanding and maintaining the Company’s brand is important to growing its merchant and consumer bases. Failure to expand in this way may materially and adversely impact the Company’s ability to achieve economies of scale and to optimize its systems and may therefore adversely impact the Company’s ability to improve its future profitability. optimize

The Company’s growth strategy may also include the introduction of new services or technologies. There is a risk that expansion initiatives may result in additional costs and risks or may not deliver the outcomes intended. The Company’s growth strategy depends on increasingly expanding its consumer and merchant bases, which may not occur as intended for a variety of reasons.

Our Net Transaction Margin is currently a positive percentage, and we will not become profitable unless we can maintain and/or increase a positive Net Transaction Margin.

The Company’s current Net Transaction Margin, or the amount of money that the Company earns for each transaction divided by the total transaction amount, is currently a positive percentage. The Company’s strategy to maintain the Net Transaction Margin as a positive percentage, and to grow that percentage, depends upon the Company effectively managing transaction processing costs, Loan Origination Costs and uncollectible accounts expenses, while efficiently utilizing external debt funding. There is a risk that this strategy may not eventuate as intended, which may adversely impact the Company’s ability to improve its future profitability.

The loss of key partners and merchant relationships would adversely affect our business.

The Company depends on continued relationships with its current significant merchants and partners that assist in obtaining and maintaining our relationships with merchants. There can be no guarantee that these relationships will continue or, if they do continue, that these relationships will continue to be successful. The Company’s contracts with merchants can be terminated for convenience on relatively short notice by either party, and so the Company does not have long-term contracted income. There is a risk that the Company may lose merchants for a variety of reasons, including a failure to meet key contractual or commercial requirements, or merchants shifting to in-house solutions (including providing a service competitive to us) or competitor service providers. The Company also faces the risk that its key partners could become competitors of our business after our key partners determine how we have implemented our model to provide our services.

Although the Company does not currently depend on any one merchant for more than approximately 2.0% of Sezzle Income (for the year ended December 31, 2020), the Company’s business is still at a relatively early stage and merchant income is not as diversified as it might be for a more mature business. The loss of even a small number of the Company’s key merchants may materially and adversely impact the Company’s income and profitability and increase marketing expenses to sign up new merchants to replace those lost. Depending on the reason for the loss of a key merchant, it may also have a negative impact on the Company’s reputation with other merchants and with consumers.

There is also a risk that new agreements formed with merchants in the future may be less favorable to the Company, including in relation to pricing and other key terms, due to unanticipated changes in the market in which the Company operates.

Exposure to consumer bad debts will adversely impact our financial success.

The Company’s profitability depends on its ability to put in place and optimize its systems and processes to make predominantly accurate, real-time decisions in connection with the consumer transaction approval process. Consumer non-payment is a major component of the Company’s expenses at present, and the Company is currently exposed to consumer bad debts as a normal part of its operations. However, excessive exposure to bad debts through customers failing to meet their repayments to the Company will materially and adversely impact the Company’s profitability.

The Company also has exposure, although much more limited, to the potential insolvency of merchants to which the Company has advanced funds. Exposure occurs in the period of time between the advance of funds to a merchant for a customer’s purchase of goods, and the retail merchant shipping the goods to the consumer (at which point the Company is entitled to payment from the consumer). However, this period of risk is typically only a few days.

We intend to grow our business and will require additional capital to do so.

As the Company’s current business grows and new lines of business are developed, the Company will require additional funding to support the provision of installments plans to consumers and working capital. Although the Directors believe that the Company has sufficient working capital and capacity to carry out its business objectives for the foreseeable future, there can be no assurance that such goals can be met without further financing or, if new funding is necessary, that financing can be obtained on favorable terms or at all. Further, if additional funds are raised by issuing equity securities, this may result in dilution for some or all of our stockholders.

The Company intends to rely on a combination of fund options including equity, and its current credit facility to finance its operations. An inability to raise capital (through the issue of common stock and CDIs) or secure funding or drawdown on finance facilities, or any increase in the cost of such funding, may adversely impact the performance and financial position of the Company. Failure by the Company or its affiliates to meet financial covenants under its credit agreement, or the occurrence of other specified events, may lead to an event of default under the finance facilities. In an event of default, there may be a requirement to make repayments in advance of the relevant maturity dates and/or termination of the credit facility. An event of default and the requirement to make early repayments and/or the termination of the facility may adversely impact the financial performance and position of the Company and its ability to operate in the ordinary course of business.

On February 10, 2021, Sezzle entered into an agreement with Goldman Sachs Bank USA (the ‘Class A’ senior lender) and Bastion Funding IV LLC (the ‘Class B’ mezzanine lender) for a US$250,000,000 receivables funding facility. The funding facility has a maturity date of June 12, 2023 (a 28-month term from the agreement date). The agreement is secured by the Company’s consumer notes receivable it chooses to pledge and is subject to covenants. Fifty percent of the total available funding facility (US$125,000,000) is committed while the remaining fifty percent is available to the Company for expanding its funding capacity. The funding facility carries an interest rate of LIBOR+3.375% and LIBOR+10.689% (the LIBOR floor rate is set at 0.25%) for funds borrowed from the Class A and Class B lender, respectively. In the event of a prepayment due to a broadly marketed and distributed securitization transaction with a party external to the agreement, an exit fee of 0.75% of such prepaid balance will be due to the lender upon such transaction. Additionally, the Company paid a US$1,000,000 termination fee to exit the previous Loan Agreement with the Syndicate.

We face competition and may lose our first-to-market advantage in the “buy-now, pay later” space.

The Company considers it has a competitive advantage in being one of the first to provide an interest-free, “buy-now, pay later” service to the U.S. and Canadian online retail market. However, there is always a risk of new entrants in the market, which may disrupt the Company’s business and market share. Existing competitors as well as new competitors entering the industry, may engage in aggressive customer acquisition campaigns, develop superior technology offerings or consolidate with other entities to deliver enhanced scale benefits. These competitors may also be better capitalized than us. Such competitive pressures may materially erode the Company’s market share and income and may materially and adversely impact the Company’s income and profitability. A general increase in competition may also require the Company to increase marketing expenditure or offer lower fees to merchants, which would decrease profitability even if the Company’s market share does not decrease.

Any failure or disruption of technology systems we use would have a material adverse effect on our operations.

The Company depends on the constant real-time performance, reliability and availability of its technology system and third-party technology and communication networks (including the systems of third-party ecommerce networks). There is a risk that these systems may fail to perform as expected or be adversely impacted by a number of factors, some of which may be outside the control of the Company, including damage, equipment faults, power failure, fire, natural disasters, computer viruses and external malicious interventions such as hacking, cyber-attacks or denial-of-service attacks. Events of that nature may cause part or all of the Company’s technology system and/or the communication networks used by the Company to become unavailable. The Company’s operational processes and contingency plans may not adequately address every potential event. This may disrupt transaction flow and adversely impact the Company’s financial performance and reputation.

There is a risk that repeated failures to keep the Company’s technology available may result in a decline in consumer and merchant numbers or merchants terminating their contracts with the Company. This may materially and adversely impact the Company’s financial performance, including a reduction in Sezzle Income from completed transactions and an increase in the costs associated with servicing consumers through the disruption, as well as negatively impacting the Company’s reputation.

We rely on the accuracy of third-party data, and inaccuracies in such data will lead to reduced Sezzle Income.

The Company purchases data from third parties that is critical to the Company’s assessment of the creditworthiness of consumers before they are either approved or denied funding for their purchase from a merchant. The Company is reliant on these third parties to ensure that the data they provide is accurate. Inaccurate data could cause the Company to not approve transactions that otherwise would have been approved, or vice versa, meaning the Company either loses incomes, or earns income that may lead to a higher incidence of bad debts.

Any inability to retain our employees or recruit additional employees could adversely impact the Company’s income and profitability.

The Company’s ability to effectively execute its growth strategy depends upon the performance and expertise of its staff. The Company relies on experienced managerial and highly qualified technical staff to develop and operate its technology and to direct operational staff to manage the operational, sales, compliance and other functions of its business.

There is a risk that the Company may not be able to attract and retain key staff or be able to find effective replacements in a timely manner. The loss of staff, or any delay in their replacement, could impact the Company’s ability to operate its business and achieve its growth strategies, including through the development of new systems and technology. There is a risk that the Company may not be able to recruit suitably qualified and talented staff in a timeframe that meets the growth objectives of the Company. This may result in delays in the integration of new systems, development of technology and general business expansion, which may adversely impact the Company’s income and profitability.

There is also a risk that the Company will be unable to retain existing staff, or recruit new staff, on terms of retention that are as attractive to the Company as past agreements. This would adversely impact employment costs and profitability.

Failure to effectively manage growth will adversely affect our financial results.

Sezzle has experienced a period of considerable growth income, employee numbers and customers. A continuation of this growth in the future could place additional pressure on current management, operational and finance resources, and on the infrastructure supporting the Sezzle Platform. Failure to appropriately manage this growth could result in failure to retain existing consumers and attract new consumers, which could adversely affect Sezzle’s operating and financial performance.

The Company operates in the “buy-now, pay-later” industry, which may become subject to increased legal scrutiny and the costs to maintain compliance with laws, regulations, and industry standards may be significant.

The Company is subject to a range of legal compliance requirements that change periodically. This includes privacy laws, consumer protection laws and contractual conditions. There has recently been an increased focus and scrutiny by regulators in various jurisdictions in respect to “buy-now, pay-later” arrangements. There is potential that the Company may become subject to additional legal or regulatory requirements if its business, operations, strategy or geographic reach expand in the future, or if the regulations change in respect to the jurisdiction in which it operates. This may potentially include credit licensing, financial services licensing, or other licensing or regulatory requirements or similar limitations on the conduct of business. There is a risk that additional or changed legal, regulatory and industry compliance standards may make it uneconomic for the Company to continue to operate, or to expand in accordance with its strategy. This may materially and adversely impact the Company’s income and profitability, including by preventing its business from reaching sufficient scale.

There is also a risk that if the Company fails to comply with these laws, regulations and industry compliance standards, this may result in significantly increased compliance costs, cessation of certain business activities or the ability to conduct business, litigation or regulatory enquiry or investigation and significant reputational damage.

Sezzle’s business is subject to investigation by regulators, enforcement agencies and offices of state attorneys general, which could lead to enforcement actions, fines and penalties, and qualification to conduct business or the assertion of private claims and lawsuits with Sezzle. The U.S. Federal Trade Commission and the U.S. Consumer Financial Protection Bureau have the authority to investigate consumer complaints against Sezzle, to conduct inquiries at their own insistence and to recommend enforcement actions and seek monetary penalties.

There are a number of risks associated with international expansion of our operations that could adversely affect our business, including additional regulatory risks.

We are offering our services in India, and exploring expansion into other foreign markets, including Europe, as part of our growth strategy. Our ability to grow in international markets and our future results could be adversely affected by a number of factors, including:

In particular, as we expand, changes in the regulatory environment and violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws may negatively impact our business. We are subject to regulations relating to our corporate conduct and the conduct of our business, including securities laws, consumer protection laws, trade regulations, advertising regulations, privacy and cybersecurity laws, wage and hour regulations, anti-money laundering and anti-corruption legislation. Certain jurisdictions have taken aggressive stances with respect to such matters and have implemented new initiatives and reforms, including more stringent regulations, disclosure and compliance requirements.

The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with all anti-bribery laws. However, we operate in certain countries that are recognized as having governmental and commercial corruption. Our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or third-party intermediaries. Violations of these anti-bribery laws may result in criminal or civil sanctions, which could have a material adverse effect on our business and results of operations.

Anti-Money Laundering (AML) laws and related Know-Your-Customer (KYC) requirements generally require companies to conduct necessary due diligence to prevent and protect against money laundering. Enforcement of applicable AML laws could result in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with all applicable AML laws. However, we operate in certain jurisdictions that may be at higher risk of money laundering activities. Our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or third-party intermediaries. Violations of AML laws may result in criminal or civil sanctions, which could have a material adverse effect on our business and results of operations.

Various regulatory agencies demand licensing or other controls in order to operate in each market; such requirements vary country by country and are fact dependent. Our innovative approach to the market makes interpretations in regulatory requirements speculative. Local authorities may determine that the nature of our offerings may require different licenses or requirements than the licenses that we have obtained or secured. Any delays in securing the necessary licenses or obtaining the necessary approvals could delay our expansion into foreign markets, which would adversely affect our anticipated growth. Further, any violations of the regulations around licensing may result in criminal or civil sanctions, which could have material adverse effects in our operations.

Data security breaches could occur and materially adversely impact the financial performance and prospects of the Company

Through the ordinary course of business, the Company collects a wide range of confidential information. Cyber-attacks may compromise or breach the Sezzle Platform and the protections we use to try to protect confidential information. These risks also reside with third parties service providers we engage. The Company’s business could be materially impacted by security breaches of the data and information of merchants and consumers data and information, either by unauthorized access, theft, destruction, loss of information or misappropriation or release of confidential data.

These events may cause significant disruption to the business and operations. This may also expose the Company to reputational damage, legal claims, termination of the Company’s contracts with merchants, and regulatory scrutiny and fines, any of which could materially adversely impact the financial performance and prospects of the Company. In addition, any security or data issues experienced by other software companies or third party service providers could adversely impact our potential consumers’ trust in providing the Company access to their personal data generally, which could adversely affect the Company’s ability to provide its services generally.

Activities of fraudulent parties may result in the Company suffering losses due to fraud, causing a materially adverse impact to the Company’s reputation and operations.

The Company is exposed to risks imposed by fraudulent conduct, including the risks associated with consumers attempting to circumvent the Company’s system and repayment capability assessments. There is a risk that the Company may be unsuccessful in defeating fraud attempts, resulting in a higher than budgeted cost of fraud and consumer non-payment.

The Company guarantees payment to merchants and accepts the responsibility associated with minimizing fraudulent activity and bears all costs associated with such fraudulent activity. Fraudulent activity may result in the Company suffering losses due to fraud, causing a materially adverse impact to the Company’s reputation and heaving to bear certain costs to rectify and safeguard business operations and the Company’s systems against fraudulent activity.

Our efforts to protect our intellectual property rights may not be sufficient.

The Company’s business depends on its ability to commercially exploit its technology and intellectual property rights, including its technological systems and data processing algorithms. The Company relies on laws relating to trade secrets, copyright and trademarks to assist in protecting its proprietary rights. However, there is a risk that unauthorized use or copying of the Company’s software, data, specialized technology or platforms will occur. In addition, there is a risk that the validity, ownership or authorized use of intellectual property rights relevant to the Company’s business may be successfully challenged by third parties. This could involve significant expense and potentially the inability to use the intellectual property rights in question, and if an alternative cost-effective solution was not available, it may materially adversely impact the Company’s financial position and performance. Such disputes may also temporarily adversely impact the Company’s financial position and performance. Such disputes may also temporarily adversely impact the Company’s ability to integrate new systems, which may adversely impact the Company’s income and profitability.

There is also a risk that the Company will be unable to register or otherwise protect new intellectual property rights it develops in the future, or which is developed on its behalf by contractors. In addition, competitors may be able to work around any of the intellectual property rights used by the Company, or independently develop technologies, or competing payment products or services that are not protected by the Company’s intellectual property rights. The Company’s competitors may then be able to offer identical or very similar services or services that are otherwise competitive against those provided by the Company, which could adversely affect the Company’s business.

Our success depends upon successful integration with merchants.

The Company uses and relies on integration with third-party systems and platforms, particularly websites and other systems of its merchants. The success of the Company’s services, and its ability to attract additional consumers and merchants, depends on the ability of its technology and systems to integrate into, and operate with, these various third-party systems and platforms. In addition, as these systems and platforms are regularly updated, it is possible that when such updates occur it could cause the Company’s services to not operate as efficiently as previously. This will require the Company to change the way its system operates, which may take time and expense to remedy.

If we cannot keep our products up to date with current technological changes, our income and profitability may be materially and adversely affected.

The Company participates in a competitive technological environment. Technology systems are continuing to develop and are subject to rapid change, while business practices continue to evolve. The Company’s success will in part depend on its ability to offer services and systems that remain current with the continuing changes in technology, evolving industry standards and changing consumer preferences. There is a risk that the Company will not be successful in addressing these developments in a timely matter, or that expenses will be greater than expected. In addition, there is risk that new products or technologies (or alternative systems) developed by third parties will supersede the Company’s technology. This may materially and adversely impact the Company’s income and profitability.

Any actual or alleged violation of third-party intellectual property rights would adversely impact our operations, reputation and financial performance.

There is a risk that third parties may allege that the Company’s solutions use intellectual property derived by them or from their products without their consent or permission. The Company may be subject of claims that could result in disputes or litigation and this could require us to incur significant expenses even if the Company is able to successfully defend or settle such claims. If the Company is found to have infringed the third-party’s intellectual property rights, this may result in the Company being required to pay monetary compensation to the third party or take other actions that may cause disruption to its service delivery model and increase its costs. This in turn could have an adverse impact on the Company’s operations, reputation and financial performance.

Our technology utilizes open source software, and parties may allege that we are required to make available any modifications and derivatives that we have created using such software.

Some of the Company’s systems incorporate and are dependent on the use and development of “open source” software. Open source software is generally licensed under open source licenses, which may include a requirement that the Company make available, or grant licenses to, any modifications or derivatives works created using the open source software. If an author or other third party that uses or distributes such open software were to allege that the Company had not complied with the legal terms and conditions of one or more of these licenses, the Company could incur significant legal expenses defending against such allegations and could be subject to significant damages.

Unanticipated transaction volumes may adversely impact the Company’s financial performance.

Continued increases in transaction volumes may require the Company to expand and adapt its network infrastructure to avoid interruptions to the Company’s systems and technology. Any unanticipated transaction volumes may cause interruptions to the Company’s systems and technology, reduce the number of completed transactions, increase expenses, and reduce the level of customer service, and these factors may potentially adversely impact the Company’s financial performance.

Our success depends upon continued availability and use of the internet.

The Company depends on the ability of its merchants and consumers to access the internet. Should access to the internet be disrupted or restricted, usage of the Company’s services may be adversely impacted.

Any failures or disruptions to payment gateways will impact our financial performance.

The Company relies on online payment gateways, banking and financial institutions for the validation of bank cards, settlement and collection of payments. Any failures or disruptions to such platforms and technology may impact the financial performance of the Company.

Any factors that diminish the Company’s reputation could result in customers, consumers or other parties ceasing to do business with the Company, impede its ability to successfully provide its goods and services, negatively affect its future business strategy and materially and adversely impact the Company’s financial position and performance.

Maintaining the strength of the Company’s reputation is important to retaining and increasing its consumer base and its merchant base, maintaining its relationship with partner companies and other service providers and successfully implementing the Company’s business strategy. There is a risk that unforeseen issues or events may adversely impact the Company’s reputation. This may adversely impact the future growth and profitability of the Company. The Company’s reputation is also closely linked to the timely and accurate provision of services to consumers. There is a risk that the Company’s actions and the actions of the Company’s suppliers and merchants may adversely impact the Company’s reputation.

Our success is subject to macro-economic conditions.

The Company’s 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’ retailers’ focus and investment in outsourcing solutions. This may subsequently impact the Company’s 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 the Company’s services and bad debts might increase.

The COVID 19 pandemic may adversely affect our business.

Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of the COVID-19 respiratory illness first identified in Wuhan, Hubei Province, China. At this time our financial results have not been adversely affected by the COVID-19 pandemic, but as the pandemic is ongoing, we believe that it could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could adversely affect consumer spending, demand for our merchants’ goods, our ability to collect outstanding payments owed by the consumers and thereby our operating results, all of which may have a material adverse effect on our business.

The Company may become subject to expensive and time-consuming litigation, which could materially and adversely impact the Company’s operating and financial performance.

The Company may be subject to litigation and other claims and disputes in the course of its business, including contractual disputes, employment disputes, indemnity claims, and occupational and personal claims. Litigation is expensive and diverts time and energy away from the Company’s business. Even if the Company is ultimately successful, there is a risk that such litigation, claims and disputes could materially and adversely impact the Company’s operating and financial performance due to the cost of settling such claims and a diversion of our employees’ time, and affect the Company’s reputation.

We may not have any insurance, or have inadequate insurance, to cover losses and liabilities.

The Company plans to maintain insurance as it considers appropriate for its needs. However, the Company will not be insured against all risks, either because appropriate coverage is not available or because the Directors consider the applicable premiums to be excessive in relation to the perceived benefits that would accrue. Accordingly, the Company may not be fully insured against all losses and liabilities that could unintentionally arise from its operations. If the Company incurs uninsured losses or liabilities, the value of the Company’s assets may be at risk.

Risks Related to Ownership of our Stock

The existing major shareholders of the Company own a large percentage of the stock of the Company and can exert significant influence over the Company.

The existing major shareholders of the Company, particularly Charlie Youakim and to a lesser extent, Paul Paradis, together hold 50.02% of the total CDIs outstanding as of March 17, 2021, and can exert significant influence over the Company, including in relation to the election of directors, the appointment of new management and the potential outcome of matters submitted to the vote of shareholders. As a result, other shareholders will have minimal control and influence over any matters submitted to our shareholders. There is a risk that the interests of these existing major shareholders may be different from those of other shareholders.

A large number of shares are held in escrow, and the retention of such shares, and actual or perceived large sales upon their release, may adversely affect the liquidity of the market for the Company’s shares or the market value of the Company’s shares.

As of March 17, 2021, a total of 94,016,911 shares/CDIs, representing 47.71% of the currently outstanding shares of common stock remain subject to escrow restrictions under restriction agreements required by the Australian Securities Exchange (ASX) in connection with the Company’s initial public offering in July 2019. In addition, options to purchase an aggregate of 2,166,667 shares/CDIs, of which 1,118,809 shares/CDIs that are exercisable or will become exercisable within 60 days after March 17, 2021, are subject to the escrow restrictions. See “Item 4. Security Ownership of Certain Beneficial Owners and Management – Escrow Arrangements.” These shares include a significant number of shares held by the major shareholders of the Company. All of such securities will be released from such restrictions on July 30, 2021. Until expiration of the escrow period, the holders of the escrowed securities cannot transfer their respective securities without the approval of the ASX. The retention of such escrowed securities through the end of the escrow period may cause or contribute to limited liquidity in the market for the Company’s shares, which could affect the market price at which other shareholders are able to sell. There is also a risk that a significant sale of CDIs or shares by existing shareholders after the end of the escrow period, or the perception that such a sale might occur, could adversely affect the market price of the stock.

We are an “emerging growth company,” and the reduced public company reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We qualify as an “emerging growth company,” as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These provisions include, but are not limited to: being permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure; an exemption from compliance with the management’s assessment of our internal controls over financial reporting pursuant to Section 404(a) of the Sarbanes-Oxley Act; an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act; not being required to comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; reduced disclosure obligations regarding executive compensation arrangements in our periodic reports, registration statements and proxy statements; and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved by stockholders. In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We intend to take advantage of the exemptions discussed above. As a result, the information we provide will be different than the information that is available with respect to other public companies. In this Form 10, we have not included all of the executive compensation-related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and the market price of our common stock may be more volatile.

We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year following the fifth anniversary of the date of our first sale of our common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), (ii) the first fiscal year after our annual gross revenues exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding three-year period, issued more than $1.00 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

We will incur increased costs and are subject to additional regulations and requirements as a public company, which will lower our profits and may make it more difficult to run our business.

As a public company, we incur significant legal, accounting and other expenses that are not incurred by a private company, including costs associated with public company reporting requirements. We also have incurred and will continue to incur costs associated with the Sarbanes-Oxley Act, and related rules implemented by the Securities and Exchange Commission (the “SEC”) and the Australian Securities Exchange (“ASX”). The expenses generally incurred by public companies for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock on the ASX or other exchange on which our securities may be traded, fines, sanctions and other regulatory action and potentially civil litigation.

Risks Relating to Our Existence as a Public Benefit Corporation

We operate as a Delaware public benefit corporation (“PBC”). As a PBC, we cannot provide any assurance that we will achieve our public benefit purpose.

As a PBC, we are required to produce a public benefit or benefits and to operate in a responsible and sustainable manner, balancing our stockholders’ pecuniary interests, the best interests of those materially affected by our conduct, and the public benefit or benefits identified by our Amended Charter. There is no assurance that we will achieve our public benefit purpose or that the expected positive impact from being a PBC will be realized, which could have a material adverse effect on our reputation, which in turn may have a material adverse effect on our business, results of operations and financial condition. See “DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED — Public Benefit Corporation Status.”

As a PBC, we are required to publicly disclose a report at least biennially on our overall public benefit performance and on our assessment of our success in achieving our specific public benefit purpose. As we changed our Company charter to become a public benefit corporation in June 2020, we have not yet produced such a report. We intend to include this information in Sezzle’s Annual Report, but if we are not timely or are unable to provide this report, or if the report is not viewed favorably by parties doing business with us or regulators or others reviewing our credentials, our reputation and status as a public benefit corporation may be harmed.

As a PBC, our focus on a specific public benefit purpose and producing a positive effect for society may negatively impact our financial performance.

Unlike traditional corporations, which have a fiduciary duty to focus exclusively on maximizing stockholder value, our directors have a fiduciary duty to consider not only the stockholders’ interests, but also the Company’s specific public benefit and the interests of other stakeholders affected by our actions. See “DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED — Public Benefit Corporation Status.” Therefore, we may take actions that we believe will be in the best interests of those stakeholders materially affected by our specific benefit purpose, even if those actions do not maximize our financial results. While we intend for this public benefit designation and obligation to provide an overall net benefit to us and our customers, it could instead cause us to make decisions and take actions without seeking to maximize the income generated from our business, and hence available for distribution to our stockholders. Our pursuit of longer-term or non-pecuniary benefits may not materialize within the timeframe we expect, or at all, yet may have an immediate negative effect on any amounts available for distribution to our stockholders. Accordingly, being a PBC and complying with our related obligations could have a material adverse effect on our business, results of operations and financial condition, which in turn could cause our stock price to decline.

As a PBC, we may be less attractive as a takeover target than a traditional company because our directors have a fiduciary duty to consider not only the stockholders’ financial interests, but also the Company’s specific public benefit and the interests of other stakeholders affected by our actions and, therefore, our stockholders’ ability to realize a return on their investments through an acquisition may be limited. Under Delaware law, a PBC cannot merge or consolidate with another entity if, as a result of such merger or consolidation, the surviving entity’s charter “does not contain the identical provisions identifying the public benefit or public benefits,” unless the transaction receives approval from two-thirds of the target public benefit corporation’s outstanding voting shares. Additionally, PBCs may also not be attractive targets for activists or hedge fund investors because new directors would still have to consider and give appropriate weight to the public benefit along with shareholder value, and shareholders committed to the public benefit can enforce this through derivative suits. Further, by requiring that board of directors of PBCs consider additional constituencies other than maximizing shareholder value, Delaware public benefit corporation law could potentially make it easier for a board to reject a hostile bid, even where the takeover would provide the greatest short-term financial yield to investors.

Our directors have a fiduciary duty to consider not only our stockholders’ interests, but also our specific public benefit and the interests of other stakeholders affected by our actions. If a conflict between such interests arises, there is no guarantee such a conflict would be resolved in favor of our stockholders.

While directors of traditional corporations are required to make decisions they believe to be in the best interests of their stockholders, directors of a PBC have a fiduciary duty to consider not only the stockholders’ interests, but also the Company’s specific public benefit and the interests of other stakeholders affected by the Company’s actions. Under Delaware law, directors are shielded from liability for breach of these obligations if they make informed and disinterested decisions that serve a rational purpose. Thus, unlike traditional corporations which must focus exclusively on stockholder value, our directors are not merely permitted, but obligated, to consider our specific public benefit and the interests of other stakeholders. See “DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED — Public Benefit Corporation Status.” In the event of a conflict between the interests of our stockholders and the interests of our specific public benefit or our other stakeholders, our directors must only make informed and disinterested decisions that serve a rational purpose; thus, there is no guarantee such a conflict would be resolved in favor of our stockholders, which could have a material adverse effect on our business, results of operations and financial condition, which in turn could cause our stock price to decline.

As a Delaware PBC, we may be subject to increased derivative litigation concerning our duty to balance stockholder and public benefit interest, the occurrence of which may have an adverse impact on our financial condition and results of operations.

Stockholders of a Delaware PBC (if they, individually or collectively, own at least two percent of the Company’s outstanding shares) are entitled to file a derivative lawsuit claiming the directors failed to balance stockholder and public benefit interests. This potential liability does not exist for traditional corporations. Therefore, we may be subject to the possibility of increased derivative litigation, which would require the attention our management, and, as a result, may adversely impact our management’s ability to effectively execute our strategy. Additionally, any such derivative litigation may be costly, which may have an adverse impact on our financial condition and results of operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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 registration statement. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Forward-Looking Statements” and “Risk Factors” sections of this registration statement 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

Sezzle is a technology-enabled payments company based in the United States, with operations in the United States, Canada, and startup operations in India and Europe. The Company offers its payment solution at online stores and a select number of brick-and-mortar retail locations, connecting consumers with merchants via a proprietary payments solution that instantly extends credit at point-of-sale, allowing consumers to purchase and receive the items that they need now while paying over time in interest-free installments.

Merchants turn to Sezzle to increase sales by tapping into Sezzle’s existing user base, improve conversion rates, raise spend per transaction, increase purchase frequency, and reduce return rates, all without bearing any credit risk. Sezzle is a high-growth, networked platform that benefits from a symbiotic and mutually beneficial relationship between merchants and consumers.

The Company’s core product allows consumers to make online purchases and effectively split the payment for the purchase over four equal, interest-free payments over six weeks. The consumer makes the first payment at the time of checkout and makes the subsequent payments every two weeks thereafter. The purchase price, less processing fees, is paid to merchants by Sezzle in advance of the collection of the purchase price installments by Sezzle from the consumer.

The Company is headquartered in Minneapolis, Minnesota. Sezzle is a Delaware Public Benefit Corporation.

KEY OPERATING METRICS (NON-GAAP)

The following discussion of our results of operations includes references to and analysis of EBIT, EBITDA, Gross Margin, and Net Transaction Margin, which are financial measures not recognized in accordance with accounting principles generally accepted in the United States of America (GAAP). These non-GAAP financial measures are used by management to evaluate the Company’s operating performance and make strategic decisions, including those related to operating expenses and allocation of internal resources, used by investors to understand and evaluate our operating performance, especially against competitors in our industry, and lenders to measure our ability to incur and service debt. These measures are not intended to serve as an alternative to U.S. GAAP measures of performance and may not be comparable to similarly titled measures presented by other companies. A reconciliation of these non-GAAP measures to their most directly comparable measure under U.S. GAAP is included below.

Sezzle’s management uses a variety of non-GAAP key operating metrics to analyze the Company’s performance. These non-GAAP operating metrics include: (i) volume of Active Merchants and Active Consumers; (ii) Underlying Merchant Sales (UMS); (iii) Net Transaction Margin; (iv) EBITDA; and (v) EBIT.

The Company’s key operating metrics continue to show signs of rapid growth during the financial year due to the continued success of onboarding and retaining Active Merchants and Active Consumers. A summary of the key operating metric results (non-GAAP) as of and for the years ended is shown below:

Active Merchants and Active Consumers (non-GAAP Metrics)

Active Merchants is defined as merchants who have had transactions with Sezzle in the last 12 months. As of the year ended December 31, 2020, Active Merchants increased by 167% to 26,690 compared to the year ended December 31, 2019. Active Consumers is defined as end users who have used Sezzle within the last two months. Active Consumers increased by 144% to 2,231,089 as of the year ended December 31, 2020.

Underlying Merchant Sales (UMS) (non-GAAP Metrics)

Underlying Merchant Sales (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. For the year ended December 31, 2020, UMS totaled US$856.4 million compared to US$244.1 million in the prior comparative period, representing an increase of 251% year over year. The growth in UMS is driven by the Company’s continued improvements in growing its Active Merchant and Active Consumer base, year over year.

The Company’s NTM for the year ended December 31, 2020 improved by 1.2%, as a percentage of UMS, compared to the year ended December 31, 2019, driven primarily by improved efficiencies in Sezzle income, reductions in processing costs, and overall improvements in collections on consumer notes receivable. Summarized below, Net Transaction Margin for the years ended December 31, 2020 and 2019 is as follows:

Sezzle income relative to UMS was 5.8% and 5.5% for the years ended December 31, 2020 and 2019, respectively. The 0.3pp improvement in Sezzle income relative to UMS is due to lower promotional rates and efficiencies in direct loan origination costs, partially offset by the onboarding of large enterprise merchants.

Cost of income relative to UMS was (2.6%) and (3.1%) for the years ended December 31, 2020 and 2019, respectively. The 0.5pp improvement was primarily driven by reductions in fees incurred for processing payments of consumer transactions.

During the year ended December 31, 2020 the Company had improved collections on consumer notes receivable as a result of building its repeat usage and Active Consumer bases, along with refinements in the Company’s underwriting processes. In the first half of the year, the various stimulus measures enacted by the U.S. government pertaining to the Coronavirus Aid, Relief, and Economic Securities Act (CARES Act) contributed to the Company’s improved collections, in addition to underwriting changes made in anticipation of the COVID-19 impact. In the second half of the year, Sezzle saw higher loss rates on consumer notes receivables primarily due to seasonality and universe expansion testing.

Account reactivation fee income as a percentage of UMS remained relatively flat year over year.

As a percentage of Total income, Account Reactivation Fees were 15.5% and 15.7% for the years ended December 31, 2020 and 2019, respectively. The 0.2pp reduction, as a percentage of Total income, was a result of improved collections on consumer notes receivable and the expansion of the Company’s fee forgiveness and payment flexibility programs offered to consumers as a response to COVID-19.

RESULTS OF OPERATIONS

A summary of Sezzle’s financial results for the years ended December 31, 2020 and 2019 is as follows:

Total Income

Sezzle income totaled US$49.7 million for the year ended December 31, 2020, compared to US$13.3 million for the year ended December 31, 2019, an increase of 273% year over year driven by growth in Underlying Merchant Sales throughout the United States and Canada, including the addition of a number of enterprise merchants. Merchant fees and consumer reschedule fees, less direct financing origination costs, collectively comprise Sezzle income and are initially recorded as a deduction from notes receivable in the consolidated balance sheets. Deferred fees and expenses are recognized in the consolidated statements of operations over the average duration of the underlying notes receivable. Together, total consumer reschedule fees and note origination costs were US$1.9 million, or 3.9% of total Sezzle income recognized during the year ended December 31, 2020 compared to US$0.4 million and 2.6% of Sezzle income during the year ended December 31, 2019, driven by an improvement in note origination costs year over year.

Account reactivation fee income was US$9.1 million for the year ended December 31, 2020, compared to US$2.5 million for the year ended December 31, 2019. Account reactivation fee income made up 15.5% of Total income for the year ended December 31, 2020, compared to 15.7% for the year ended December 31, 2019. The relative reduction in this metric was driven by improvement in the Company’s collections of consumer notes receivable, as well as an expansion of fee forgiveness and payment flexibility programs offered to consumers as a response to COVID-19. We expect trends in Total income to move in line with future changes in Active Merchants, Active Consumers, and UMS on a go forward basis.

Cost of Income

Cost of income primarily comprises payment processing costs paid to third-party payment processors, consumer communication costs, and merchant affiliate program and partnership fees. Payment processing costs as a percentage of UMS were 2.0% and 2.4% for the years ended December 31, 2020 and 2019, respectively. The 2020 results included the full benefit of Sezzle’s change in card processing service providers, executed in April 2019, as well as 0.1pp year over year reduction, as a percentage of UMS, in consumer communication expenses. As a percentage of UMS, short-term referral fee costs stipulated by agreements with partners and merchants of Sezzle remained consistent year over year. Gross margin increased by 10.2 percentage points to 61.7% for the year ended December 31, 2020, compared to 51.5% for the year ended December 31, 2019 as a result of the events mentioned above. The activity recorded through cost of income for the year ended December 31, 2020 was consistent with the Company’s expectations.

Selling, General, and Administrative Expenses

Overall, selling, general, and administrative expenses increased 239% year over year as a result of the Company’s continued investment in its personnel, marketing, and other various third party service provider and professional service expenses. Selling, general, and administrative expenses for the years ended December 31, 2020 and 2019 were comprised of the following:

Compensation related expenses increased to US$17.1 million for the year ended December 31, 2020, from US$7.4 million for the year ended December 31, 2019. Sezzle continued to invest in its employees throughout 2019 and 2020. Total employees were 279 as of December 31, 2020, compared to 122 as of December 31, 2019.

Stock and incentive–based compensation expenses increased to US$13.6 million for the year ended December 31, 2020, from US$1.2 million for the year ended December 31, 2019, due to the increase in number of employees, increase in fair value of awards issued in 2020 (driven by the appreciation of the Company’s share price), as well as the introduction of new incentive plans. In 2020, Sezzle introduced new short-term and long-term stock based incentive programs to attract, motivate and retain talented employees. The expenses for the new incentive plans totaled US$8.1 million for the year ended December 31, 2020.

Third-party service provider costs consisted primarily of costs incurred to obtain data used in underwriting consumers and fraud prevention. These costs increased to US$2.5 million for the year ended December 31, 2020, compared to US$1.3 million for the year ended December 31, 2019, driven by growth in Active Consumers.

Marketing, advertising, and tradeshow costs increased to US$4.3 million for the year ended December 31, 2020, compared to US$0.8 million for the year ended December 31, 2019, as a result of the Company’s increased initiatives to co-market the Sezzle brand with its merchants.

Professional services included legal, consultation, recruiting, financial audit, and tax compliance related costs. Costs increased by US$1.6 million year over year as a result of costs associated with the Company’s status of being publicly listed on the ASX, as well as additional financial statement audit, tax, and legal costs.

Other selling, general, and administrative expenses increased US$2.8 million year over year primarily due to implementation incentives entered into with merchants during 2020.

Selling, general, and administrative expenses as a percent of UMS decreased to 5.2% for the year ended December 31, 2020 from 5.4% for the year ended December 31, 2019, primarily related to reductions in costs in response to COVID-19. Most notably, the Company rolled out a work-from-home program for its employees beginning in mid-March 2020. In addition, the Company implemented restrictions in travel and attendance of group events, including industry-related conferences. These COVID-19 related measures resulted in lower than anticipated operating expenses, offset against expenses related to the Company’s new short and long–term incentive plans, for the year ended December 31, 2020. We expect our future selling, general, and administrative expenses to continue to increase as a result of the Company’s planned efforts to continue to invest in its people as well as future growth and expansion opportunities.

Provision for Uncollectible Accounts

Provisions for uncollectible accounts on the notes receivable were calculated on an expected loss basis. The total provision for uncollectible accounts was US$19.6 million or 2.3% of UMS for the year ended December 31, 2020, compared to US$6.2 million or 2.6% of UMS for the year ended December 31, 2019. For the 2020 year, overall the Company saw improved loss rates driven by several factors, including increased repeat usage among consumers, continuous improvements in Sezzle’s proprietary underwriting processes, tightening of credit to consumers as an initial respond to COVID-19, and overall improved collections driven in part by U.S. government stimulus offered to many of Sezzle’s consumers through the CARES Act. These improvements are offset by higher loss rates as a result of universe expansion testing of its underwriting processes and seasonality of loss rate patterns noted in the second half of 2020.

Net Interest Expense

Net interest expense was US$4.3 million for the year ended December 31, 2020, driven by the Company’s continued utilization of both its revolving line of credit and its Merchant Interest Program to facilitate the growth in UMS and related consumer notes receivable, consistent with the Company’s growth in 2020.

Interest expense on the beneficial conversion feature was incurred on the Company’s Initial Public Offering date and resulted from the conversion of US$5.8 million of notes issued in the first half of 2019.

Income Taxes

The Company’s effective income tax rate for the year ended December 31, 2020 was 0.1%, consistent with the prior year and 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, 2020. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections for future growth. On the basis of this evaluation, a full valuation allowance is recorded against the Company’s net deferred tax assets as of December 31, 2020.

Other Comprehensive Income

The Company has US$0.5 million of foreign currency translation adjustments recorded within other comprehensive income for the year ended December 31, 2020 as a result of the financial statements of the Company’s non-U.S. subsidiaries being translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The Company expects to record foreign currency translation adjustments in future years and changes will be dependent on fluctuations in foreign currencies of countries in which the Company has operations.

Financial Position Activity

Sezzle’s total assets increased to US$174.1 million as of December 31, 2020 from US$64.5 million as of December 31, 2019. The year over year growth of US$109.6 million was primarily driven by increases in both cash and cash equivalents and consumer notes receivable.

Sezzle’s consumer notes receivables before expected losses and deferred net loan origination fees increased to US$95.4 million as of December 31, 2020 compared to US$29.7 million as of December 31, 2019, an increase of 221%, driven by increases in UMS and Active Consumers. Sezzle’s notes receivable had a weighted average days outstanding of 34 days, consistent with the prior year’s duration.

Merchant accounts payable increased to US$60.9 million as of December 31, 2020 compared to US$13.3 million as of December 31, 2019. The increase was related to the growth in Underlying Merchant Sales and Active Merchants during 2020, in addition to increased merchant participation in the Merchant Interest Program, a program Sezzle offers its merchants whereby merchants may defer payment from the Company in exchange for interest.

Line of credit, net of unamortized debt issuance costs, increased to US$39.8 million compared to US$20.9 million in the prior year. The year over year increase is due to the Company’s further utilization of its revolving line of credit in order to support the overall growth in UMS.

In aggregate, total liabilities increased to US$114.2 million as of December 31, 2020 compared to US$37.2 million in the prior year primarily as a result of the increases in merchant accounts payable and line of credit, net discussed above, as well as increases in short and long term incentive plan compensation accruals and other general accrued liabilities.

Stockholders’ equity increased to US$60.0 million as of December 31, 2020 from US$27.3 million as of December 31, 2019, primarily as a result of the proceeds from the Company’s capital raise in the third quarter of 2020.

Capital Management

To help manage the increase in UMS, Sezzle signed an agreement with the Syndicate to increase its debt facility to US$100 million in November 2019. As of December 31, 2020, Sezzle had drawn US$40.0 million from its revolving line of credit and had US$23.9 million in additional borrowing capacity.

On July 15, 2020, Sezzle raised US$55,316,546 of proceeds via an institutional placement. On August 10, 2020, the Company raised an additional US$5,140,710 of proceeds via a Securities Purchase Plan offered to existing investors. The total costs of the capital raise were US$2,484,504, resulting in overall net proceeds of US$57,972,752. In exchange for the capital raise, Sezzle issued 16,289,935 Chess Depository Interests (CDIs) at a price of A$5.30 (approximately US$3.82). The issued CDIs are equivalent to common shares on a 1:1 basis.

Liquidity and Capital Resources

Sezzle incurred net losses from operating activities for the years ended December 31, 2020 and 2019. For the years ended December 31, 2020 and 2019 Sezzle incurred a net loss of US$32.4 million and US$13.1 million, respectively. As of December 31, 2020, Sezzle had cash and cash equivalents of US$84.3 million and working capital of US$104.6 million.

We believe our existing cash, cash equivalents, and restricted cash, along with cash flow from operations, will be sufficient to meet our working capital and investment requirements beyond the next 12 months.

Operating Activities

Net cash used for operating activities was US$24.8 million and US$19.9 million for the years ended December 31, 2020 and 2019, respectively. Net cash used for operating activities for the year ended December 31, 2020 is comprised of Sezzle’s net losses totaling US$32.4 million, non-cash adjustments of US$30.2 million, and changes in operating assets and liabilities of (US$22.6) million. Significant non-cash adjustments includes provisions for uncollectible notes and other receivables of US$22.3 million and equity based compensation totaling US$7.0 million. Significant changes in operating assets and liabilities includes increases in consumer notes receivable of US$75.0 million, due to increased Active Consumers and UMS, and increases in merchant accounts payable of US$47.5 million, due to increased Active Merchants and their participation in the Merchant Interest Program. Net cash used for operating activities for the year ended December 31, 2019 was primarily driven by increases in notes receivable due from consumers.

Investing Activities

Net cash used for investing activities during the year ended December 31, 2020 increased slightly to US$0.7 million, compared to US$0.5 million during the year ended December 31, 2019. 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 provided by financing activities during the year ended December 31, 2020 was US$77.6 million, compared to US$50.0 million during the year ended December 31, 2019. The increase was related to the Company’s capital raise, as well as additional funds drawn on the Company’s line of credit facility.

Critical Accounting Policies and Estimates

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

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

Off Balance Sheet Arrangements

Sezzle does 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, Sezzle is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in those types of relationships. Sezzle enters into guarantees in the ordinary course of business related to the guarantee of its performance and the performance of its subsidiaries.

On November 30, 2019, we entered into an agreement with McKesson Building, LLC, as landlord for the lease of approximately 14,740 square feet located at 251 N 1st Ave N, Suite 200, Minneapolis, MN 55401 that we occupy and use for our principal place of business in the United States. The term of the lease expires on June 30, 2022. We believe that these premises are suitable and adequate for our needs now and for the foreseeable future.

On November 30, 2019, we entered into an agreement with McKesson Building, LLC, as landlord for the lease of approximately 14,929 square feet located at 251 N 1st Ave N, Suite 400, Minneapolis, MN 55401. The term of the lease expires on June 30, 2022. On July 21, 2020, Sezzle exercised its right to terminate the lease effective June 30, 2021. Due to COVID-19, we never occupied this space.

In addition to the leases noted above, during the year 2019, the Company entered into two new operating leases for corporate office spaces, one within the United States and one in Canada. Total lease expense incurred for the year ended December 31, 2020 and 2019 was US$513,248 and US$348,246, respectively, and is recorded within selling, general, and administrative expenses on the consolidated statements of operations. Additionally, total cash paid for rent for the years ended December 31, 2020 and 2019 was US$558,631 and US$350,722, respectively.

The following table sets forth, as of March 17, 2021, information regarding beneficial ownership of shares of our common stock, including common stock held as CDIs, by the following:

Beneficial ownership is determined according to the rules of the SEC. Beneficial ownership generally includes voting or investment power of a security and includes shares underlying options that are currently exercisable or exercisable within 60 days of March 17, 2021. The officers, directors and principal stockholders supplied the information for this table. Except as otherwise indicated, we believe that the beneficial owners of the CDIs and common stock listed below, based on the information given to us by each of them, have sole investment and voting power with respect to their shares, except where community property laws may apply.

Percentage of ownership is based on 197,070,685 shares of our common stock, or common stock equivalent CDIs, outstanding on March 17, 2021. Unless otherwise indicated, we deem shares subject to options that are exercisable within 60 days of March 17, 2021 to be outstanding and beneficially owned by the person holding the options for the purpose of computing percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the ownership percentage of any other person. CDIs represent one share of our common stock.

Unless otherwise indicated on the table, the address of each of the individuals named below is: c/o Sezzle Inc., 251 1^st Ave N, Suite 200, Minneapolis, MN 55401, USA.

Escrow Arrangements

In connection with the Company’s initial public offering, as of March 17, 2021, the holders of 94,016,911 shares/CDIs, representing 47.71% of the currently outstanding shares of common stock, remain subject to restriction agreements with respect to their shares (including in the form of CDIs), pursuant to the listing rules of the ASX. In addition, options to purchase an aggregate of 2,166,667 shares/CDIs, of which 1,111,809 shares/CDIs that are exercisable or will become exercisable within 60 days after March 17, 2021, are subject to the escrow restrictions. The restriction agreements restrict the ability of the holder from disposing of, creating any security interest in, or transferring effective ownership or control of the securities until July 31, 2021. ASX may consent to the removal of the restrictions prior to July 31, 2021, subject to the satisfaction of certain conditions, to enable escrowed securities to be transferred or cancelled in connection with a merger or other specified transactions.

Charles (“Charlie”) Youakim – Executive Chairman and Chief Executive Officer

Charlie is a co-founder, Executive Chairman, and Chief Executive Officer of Sezzle. Charlie is a serial technology entrepreneur with nearly ten years of experience in growing fintech companies from inception to large-scale businesses. Charlies began his career as an engineer and software developer. After successfully advancing in his early career, he returned to business school where he was able to focus on expanding his knowledge of finance, marketing, and business strategy.

In 2010, after completing business school, Charlie founded his first payments company, Passport Labs, Inc. (“Passport”). Passport became a leader in software and payments for the transportation industry. At Passport, Charlie led the construction and the original technology and led the company as it disrupted the industry through the introduction of white label systems and payment wallets. Passport is the technology behind enterprise transportation installations like ParkChicago, ParkBoston, and the GreenP in Toronto.

Charlie co-founded Sezzle in 2016 and also planned much of the business’ technology architecture. Charlie has a degree in Mechanical Engineering from the University of Minnesota and an MBA from the Carlson School of Management at the University of Minnesota. Charlie does not currently hold any other directorships.

Paul Paradis – Executive Director and President

Paul is co-founder, Executive Director, and President at Sezzle. Paul has extensive experience in sales and marketing. He began his career in sales with the Minnesota Timberwolves. He left the Timberwolves to attain his MBA from the Carlson School of Management at the University of Minnesota, where he focused on marketing and strategy. After graduating from the Carlson School of Management, Paul spent six years leading sales and marketing at Dashe & Thomson and the Abreon Group, which are boutique management consultancies focus on IT transportation adoption. Paul left the Abreon Group in 2016 when he co-founded Sezzle. At Sezzle, Paul oversees sales, marketing, partnerships, and merchant development.

Paul has a BA in Political Science from Davidson College and an MBA from the University of Minnesota. Paul does not currently hold any other directorships.

Paul Lahiff – Independent Non-Executive Director

Paul Lahiff was previously Chief Executive Officer of Mortgage Choice and prior to this, Chief Executive Officer of Permanent Trustee and Heritage Bank. He also held senior management roles for Westpac Banking Corporation in Sydney and London. He previously held Board roles with Sunsuper, Thorn Group, New Payments Platform Australia and Cancer Council NSW. Paul holds a BSC degree from the University of Sydney, is a graduate of the Australian Institute of Company Directors. Paul is a Non-Executive Director of AUB Holdings and NESS Superannuation. Paul is a Senior Non-Executive Director at 86400.

Kathleen Pierce-Gilmore – Independent Non-Executive Director

Kathleen has been a payments and fintech executive for 20+ years across firms, including American Express, Capital One, PayPal, and most recently startup companies Raise Marketplace and Flexa Technologies. She has held leadership positions from leading Strategy to COO, President, and CEO roles. In addition to her deep expertise in customer experience, consumer lending, product development, and P&L management, she has also led businesses on the merchant side of the payments ecosystem. She is currently the Head of Global Payments at Silicon Valley Bank.

Kathleen graduated with a BA from the Integrated Sciences Program at Northwestern University and has recently completed the Non-Executive Director Diploma program through the Financial Times. Kathleen also serves as a Director for Tala.

Paul Purcell – Independent Non-Executive Director

Paul Purcell has invested in financial services companies (public and private markets) for nearly 20 years. He retains a specific specialization in emerging financial innovation as well as non-bank financial services. He has been the Chief Investment Officer of Jupiter Management since January 1, 2019 and prior to assuming that position led the sourcing and origination of investments at Continental Investors. Paul is a frequent panelist at industry conferences and has published several articles on the trends and developments in the emerging commerce and financial services marketplaces.

Before joining Continental Investors, Paul was a co-founder of Continental Advisors, a manager of two sector-based hedge funds. He was also Manager of Internet marketing at the Chicago Board Options Exchange (CBOE), a department he helped found.

Paul is a graduate of the University of San Diego where he is a member of the Board of Trustees. He currently serves on the Board of Directors of Align Income Share Funding, Listo!, Veritec Solutions, Drizly, Winestyr Pearachute, Intuition LLC, CarHop, and What’s Next Media.

Mike Cutter – Independent Non-Executive Director

Mike has more than 33 years’ experience in a wide range of financial services businesses in Australia, New Zealand, Asia and Europe.

Most recently he served as the Group Managing Director for the information services business Equifax ANZ. Prior that he held various CEO, CRO, Product and Operations roles with GE, ANZ, Wesfarmers, Halifax/BankOne and NAB.

Mike is a Graduate of the Australian Institute of Company Directors (GAICD) and a Senior Fellow of the Financial Services Institute of Australia and has previously served on the Board of Directors of the Women’s Cancer Foundation, Ovarian Cancer Institute, the Australian Finance Congress, the National Insurance Brokers Association and the Australian Retail Credit Association.

In addition to his role with Sezzle, Mike is currently a Board Advisor to PNO Insurance. Mike has a BSc (Hons) from Hertfordshire University.

Executive Officers

Set forth below is biographical information for our Executive Officer, other than Messrs. Youakim and Paradis:

Karen Hartje — Chief Financial Officer

Karen is the Chief Financial Officer at Sezzle. Before her role with Sezzle, Karen occupied finance and credit management roles at Bluestem Brands, a retail finance company that was a reboot of Fingerhut Direct Marketing. Bluestem Brands generated well over US$1 billion in retail sales. Karen was on the founding team of Bluestem Brands, where she led the finance department reporting to the President of Bluestem Brands. During her tenure, Karen led financial planning and analysis, management of credit policies, and forecasting. Bluestem Brands was acquired in 2014. After the acquisition, Karen left Bluestem Brands to pursue her own financial consulting business.

Karen started her career with KPMG and has held senior leadership positions at US Bank and Lenders Trust.

A graduate of the University of Minnesota, Karen has a degree in accounting as well as her CPA (expired).

Our named executive officers for the fiscal year ended 2020 were: Charles Youakim, Paul Paradis, and Karen Hartje. Details of their employment arrangements are as follows:

Charlie Youakim

Charlie serves as Executive Chairman and Chief Executive Officer. Charlie’s agreement commenced June 21, 2019, and he receives an annual US$250,000 salary. He is entitled to participate in the Short-Term Incentive Plan (STIP) and Long-Term Incentive Plan (LTIP) and is entitled to severance upon termination of employment in some circumstances as described below. His employment may be terminated: (i) at an time upon mutual written agreement of the parties; (ii) by the Company immediately and without prior notice for cause; (iii) immediately upon Charlie’s death or disability; (iv) by the Company other than for cause with advance written notice of at least 12 months; or (v) by Charlie, other than due to Charlie’s death or disability, with advance written notice of at least 12 months.

Paul Paradis

Paul serves as Executive Director and President. Paul’s agreement commenced on June 21, 2019, and he receives an annual salary of US$250,000. He is entitled to participate in the STIP and LTIP and is entitled to severance upon termination of employment in some circumstances as described below. His employment may be terminated: (i) at an time upon mutual written agreement of the parties; (ii) by the Company immediately and without prior notice for cause; (iii) immediately upon Paul’s death or disability; (iv) by the Company other than for cause with advance written notice of at least 12 months; or (v) by Paul, other than due to Paul’s death or disability, with advance written notice of at least 12 months.

Karen Hartje

Karen serves as Chief Financial Officer. Her agreement commenced June 21, 2019, and she receives an annual base salary of US$250,000. She is entitled to participate in the STIP and LTIP and is entitled to severance upon termination of employment in some circumstances as described below. Her employment may be terminated: (i) at an time upon mutual written agreement of the parties; (ii) by the Company immediately and without prior notice for cause; (iii) immediately upon Karen’s death or disability; (iv) by the Company other than for cause with advance written notice of at least 6 months; or (v) by Karen, other than due to Karen’s death or disability, with advance written notice of at least 6 months.

Remuneration Philosophy

The performance of Sezzle depends upon the Company’s ability to attract and retain key management personnel. To prosper, the Company must attract, motivate, and retain highly skilled directors and executives. To that end, Sezzle embraces the following principles in its remuneration framework:

For 2020, the Remuneration and Nomination Committee of the Board (the “Committee”) has approved the short-term and long-term compensation programs for key management personnel as described below.

Short-Term Incentive Plan (STIP)

Executive officers and other key personnel are entitled to participate in the STIP, which provides an annual bonus opportunity based on a STIP %, representing the employee’s bonus potential. The payout is based on a combination of the Company Performance Score (CPS) and individual performance. CPS is determined each year by metrics within four weighted categories: Growth (50%), Stakeholder Satisfaction (20%), Optimization (15%), Innovation (15%), with the metrics including Revenue, Underlying Merchant Sales, Active Customers, Stakeholder Satisfaction and Net Transaction Margin. Individual performance is based on outcomes achieved by the employee and how those outcomes are achieved (i.e., exemplifying Sezzle’s values).

Each executive officer named above is participating in the STIP for the year ending December 31, 2020. Short Term Incentives awarded are settled as Restricted Stock Units (RSUs) in the Company that vest immediately upon the grant date to reflect goals met in the prior year. The RSUs awarded are, at a maximum, 50% of the base salary for the executive in question. Payout for each individual depends on achievement of the goals for corporate and individual performance. For Messrs. Youakim and Paradis, the grants of the RSUs are subject to prior shareholder approval.

Long-Term Incentive Plan (LTIP)

The use of long-term incentive awards (LTIs) is to reward senior executives in a manner that aligns remuneration with the creation of shareholder wealth. As such, LTI grants go to certain executives who influence the generation of shareholder wealth and thus have a direct impact on the Company’s performance against the relevant long-term performance hurdle. The formal LTIP comprises grants of market priced stock options under the 2019 Equity Incentive Plan, with vesting subject to formal long-term performance hurdles tested over three years, and subject to continued employment for a three-year period.

LTIs issued are subject to vesting conditions comprising both performance and time-based hurdles, and both hurdles must be satisfied for vesting to occur. Stock options will automatically vest in full upon certain circumstances including a sale, merger, or consolidation. Grants must be exercised within 10 years of the beginning of the performance period or they will lapse. Unvested options will automatically lapse.

The three-year performance period for vesting of the initial grants is from January 1, 2020 through December 31, 2022. Subject to the satisfaction of the performance hurdles and continued employment, options issued under the LTIP will vest and become capable of exercise three years from the beginning of the performance period. Performance for vesting purposes for each of the three years within the performance period will be tested against Comparative Total Shareholder Return (TSR). For each year, the Comparative TSR encompasses share price appreciation, measured against the S&P/ASX All Technology Index (excluding materials and energy companies). For comparative purposes, Sezzle’s Volume Weighted Average Price (VWAP) over a 30-day period up to the end of the relevant performance period will be used and compared to the average S&P/ASX All Technology Index price over that same period.

The shares vesting for each year in the performance period are determined as follows based on TSR for the year:

The Board has the discretion to amend the Comparative TSR performance condition at any time during the relevant performance period applicable to those LTI grants if the Board believes it is appropriate to do so to reflect the Company’s circumstances.

On May 22, 2020, each of Mr. Youakim, Mr. Paradis and Ms. Hartje, the executive officers of the Company, received an option from the LTIP to purchase 1,171,875 shares at an exercise price of US$1.37 (using a conversion rate of A$1.53 to US$1.00) per share, based on the closing sale price of CDIs on the ASX on May 21, 2020 (the “LTIP Options”). The amount of shares subject of the LTIP Options were calculated so that the Monte Carlo value of each Option was equal to 300% of the individual’s salary in effect at the time (i.e., 100% for each of the three years in the performance period). Subsequently, on October 22, 2020, the LTIP Options to Messrs. Youakim and Paradis were rescinded in exchange for a promise by the Company to provide to each such executive officer with comparable compensation through payments in cash and/or the issuance of incentive compensation, subject to any required stockholder approvals. As of March 26, 2021, no comparable compensation has been issued.

Clawback Policy

All compensation under the STIP and LTIP are subject to the provisions of the 2019 Incentive Plan, which gives the Board discretion to reduce an incentive payment based on conduct that is inconsistent with the Company’s values, irrespective of performance. Any conduct that is inconsistent with the Company’s values can fully nullify all performance awards. This clawback can be applied at the full discretion of the Board.