Business model

Waitr continues dilutive acquisitions and search for new business model

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Waitr Holdings (WTRH) runs two food delivery apps, Waitr and Bite Squad, similar to DoorDash and Uber Eats.

Shares of the company fell in 2019 before and after the company had to write down $192 million in goodwill and intangible assets following its acquisition of Bite Squad. The acquisition was completed in January 2019 for $335 million.

WTRH hired a new CEO in January 2020 and started making changes: he changed his pricing structure, went from employee to freelancer and started offering other delivery services (groceries and alcohol) .

The changes produced good, but not great results, with the business becoming profitable and cash flow positive for the first time in 2020, mainly due to significantly reduced expenses. However, last quarter figures indicate that WTRH may not continue to grow in the food delivery segment.

Additionally, WTRH reached a settlement with Waiter.com Inc, which had sued WTRH for trademark infringement. As a result of the agreement, WTRH will pay $4.5 million to Waiter.com and change its name to ASAP.

Along with the rebranding, WTRH is moving into merchant payment processing with four highly dilutive, non-accelerative acquisitions. This is in addition to a plan to issue up to $50 million in new stock.

The icing on the cake is that if WTRH’s stock price doesn’t reach $1 by July 2022, it could be delisted from the Nasdaq.

The origins of WTRH

Waitr started as a food delivery app in 2014, around the same time as Uber Eats and DoorDash. From its headquarters in Louisiana, it quickly expanded to several small and medium-sized cities in the United States.

The company went public in late 2018, through a reverse acquisition from SPAC Lancadia Holdings (then trading under the ticker symbol LDA). A few months after its IPO, in January 2019, WTRH completed the acquisition of Bite Squad, another food delivery app, for the colossal sum of $335 million.

A few months later, after missing earnings estimates in 2018, failing to provide earnings guidance for 2019 and growing concern over its lack of competitiveness against giants Uber and DoorDash, shares of the company fell.

After the stock lost more than 90% of its value, WTRH recognized a non-cash impairment from the Bite Squad acquisition that generated $192 million in intangible assets and goodwill.

At the end of 2019, WTRH was defending itself in four separate lawsuits, according to the latest 10-K. One by Waiter.com, alleging trademark infringement, one by WTRH delivery employees, for status changes, one by WTRH partner restaurants, for price changes, and one by WTRH shareholders for delivering false information.

A “good” year 2020

In January 2020, the company hired a new CEO, Carl Grimstad, hoping to achieve a turnaround.

The new CEO introduced several changes. Primarily, WTRH changed its pricing structure, focusing solely on percentage of sales, and the company also transitioned from directly employed delivery people to independent contractors.

These changes and overhead reductions generated a significant improvement in the company’s finances. 2020 was the first year that WTRH recorded positive earnings and cash flow.

However, signs of trouble were already evident at the time. Crucially, the company had been unable to substantially increase its revenue over 2019 figures despite the tremendous boom in food delivery generated by pandemic restrictions. By comparison, DoorDash’s reported revenue grew 326% in 2020 compared to 2019.

The same warning signs were evident in WTRH’s leading trading indicators, as shown in the chart below.

WTRH

WTRH Key Business Indicators for 2018, 2019 and 2020 (WTRH 2020 10-K Report SEC Filed)

In 2020, WTRH also issued $48 million of shares directly to the market and initiated other dilutive measures, such as ticket payments and equity-based executive compensation. The result was that by 2020, historical WTRH shareholders had lost 40% of their base to dilution (from 76 million shares in 2019 to 125 million in 2020).

The dilution did, however, improve WTRH’s financial position, ending the year with $84 million in cash versus $100 million in 9% interest rate debt, maturing in 2023.

Back to problems in 2021

Last year, the situation did not improve at all on most fronts of WTRH.

Back to (very) red numbers

For starters, the revenue and profit numbers were disappointing. The company’s latest 10-Q shows declining revenue and a huge drop in profitability, putting the company back in the red.

WTRH earned $13 million before tax in the cumulative nine months of 2020, but lost $14 million in the same period of 2021, a difference of $27 million. According to the latest 10-Q, the company improved that figure by reversing $16 million in medical liability because the person causing the liability died.

The key figures for the company’s activity also show worrying signs. Year-on-year comparisons show a significant decline in average daily orders, a trend that appears to be accelerating.

WTRH

WTRH’s Comparative Key Business Indicators for the Nine-Month and Three-Month Periods Ending September 2020 and 2021 (WTRH’s 3Q21 10-Q Report filed with the SEC)

Waitr is now ASAP

WTRH also had to settle with Waiter.com, with the company suing them for trademark infringement. WTRH agreed to pay $4.5 million to Waiter.com and change its name and ticker by June 2022. Interestingly, WTRH had not registered any potential liability for this lawsuit until the agreement .

As part of this deal, WTRH has already announced that it will change its brand name and ticker symbol to ASAP, and start focusing on the payment merchant services segment (more on this in the section next).

Expensive acquisitions

Although WTRH’s situation was not ideal and changes to its business model were necessary, we believe that the acquisitions the company completed in 2021 go in the opposite direction and expose the company to another massive impairment. in the future.

We also do not believe that WTRH shareholders were offered an open door policy with its shareholders, as it provided little information regarding the financial condition of the acquired companies.

For starters, the convenience and food delivery segment was already showing bad signs due to its inability to compete with giants like DoorDash or Uber. However, WTRH decided to make a new acquisition in this segment, Delivery Dudes, a local delivery app operating in South Florida, and pay $25 million for it. Delivery Dudes generated $6.8 million in revenue but $1.4 million in losses between March and September 2021.

Then WTRH followed up with another millionaire acquisition, now in the merchant payment services business. WTRH paid $16 million for three Cape Cod-based companies (collectively called the Cape Payment Companies), Promerchant, Cape Cod Merchant Services and Flow Payments.

We are unable to judge these acquisitions, as WTRH has not disclosed the companies’ financial statements, although they have access to them. We can say this with confidence for two reasons. First, it is obvious that any acquisition involves the acquiring company reviewing the financial statements of the acquired company. Second, in the acquisition agreements filed by WTRH with the SEC for all three companies, there is specific reference to the requirement to provide the companies’ financial statements (as Schedule 2.3). However, it appears that these were not provided to the SEC.

Finally, WTRH announced that it has signed a letter of intent to acquire Cova, a merchant payment provider specializing in the cannabis industry, for $90 million. Again, the company did not release Cova’s financial numbers, but did mention that the company has 2,000 customer stores. We can then calculate that WTRH will pay approximately $45,000 for each new customer acquired.

The dilution continues

A portion of WTRH’s acquisitions was funded by issuing shares, albeit a small portion, meaning WTRH lost $40 million in cash from the $84 million it had at the end of 2020.

Additionally, the company continued to sell shares into the market, albeit at a slower pace. WTRH also used stock and options to pay its executives, amounting to $6 million in the first nine months of 2021, doubling the $3 million figure for the same period of 2020.

Adding warrants, restricted stock and newly issued stock, WTRH’s diluted shareholding already stands at 138 million shares, a 10% year-over-year increase, according to 3Q21 10-Q filing. with the SEC.

Finally, WTRH signed an agreement to issue up to $50 million of stock, which, compared to the current market capitalization of $74 million, would mean an additional 40% dilution (considering that $90 million shares are expected to be issued at current prices). The final figure, 210 million shares, would mean that the shareholder who bought the shares of WTRH at the end of 2019 would have been diluted by 65% ​​of its base.

Possible delisting from the Nasdaq

Last month, WTRH reported that the Nasdaq stock exchange advised the company that if its stock price does not rise above the $1 level for at least 10 days by July 2022, then WTRH may be delisted from Nasdaq.

We believe this is a very serious threat, given that the chances of WTRH shares breaking the $1 level are low, especially if the company plans to issue another $50 million in stock. This year.

Conclusion

The core business of WTRH is not improving but rather declining. Despite this trend, WTRH continued with what we believe was a costly acquisition in the segment.

The company has also engaged in dodgy acquisitions in a new segment, merchant payment providers. These were costly and the company did not provide enough information to make an objective assessment of the acquisitions.

We also believe that with $85 million in debt maturing in 2023, $40 million in cash, a deteriorating business, and a desire to pursue even more expensive acquisitions, WTRH’s financial outlook is also not more excellent in the medium term.

In our humble opinion, the company is right to seek new avenues of growth given that it is being pushed out of its core market. However, in this process, finding accretive acquisitions is fundamental, and WTRH shows no signs of doing so.

Finally, the prospect of further dilutions and a possible Nasdaq redemption should convince the investor that it is better to stay away from WTRH, at least for now.