Edwin Tan
Waiter Holdings (NASDAQ:WTRH), soon to be renamed ASAP, is a company in the app delivery and in the merchant payment businesses. In February this year I analyzed the company quite negatively and issued a hold rating. Since then, the stock has fell 60%.
In this review I find that WTRH has repaid some debts and reduced its leverage, albeit by significant dilution of shareholders. The company has continued losing clients on a YoY and on a QoQ basis. In 1Q22, the company recognized $68 million in additional goodwill impairment. In this article I also include an industry analysis section, missing in the previous article.
On the positive side, the company called off an expensive acquisition of a cannabis industry related payment company. The carried three acquisitions on this segment show promising growth, but are still small compared to the company’s losses.
In my opinion, WTRH is still not a buy at all, with the possibility of continued dilution for current shareholders, and the enhanced risk of delisting from Nasdaq.
Note: Unless otherwise stated, all information has been obtained from WTRH’s filings with the SEC.
WTRH’s results in 1H22
For a more detailed analysis of WTRH’s previous history and risks, please read my previous article from February. In that article I commented that WTRH had been losing customers and revenues since 2020, which added to millionaire goodwill impairments from bad acquisitions, compounded for the stock falling significantly.
An unprofitable growth company that does not grow has a harder time accessing the debt markets, and therefore WTRH has been forced into issuing an enormous amount of shares to pay for its operating expenses, and for additional acquisitions. The December 2018 investor in the company has been diluted almost 95%. The December 2020 investor has been diluted almost 50%.
Continued operating metrics deterioration
For 1H22, the situation has not changed significantly in many aspects.
The company is still losing customers and revenues, with the latter somewhat less affected by the upward impulse of food inflation. Active users fell 30%, purchases 50%, and gross sales 40% on a YoY basis, comparing 1H22 with 1H21. The numbers have also been falling steadily at the QoQ level.
These drops in revenues, coupled with increasing SG&A, have increased WTRH’s operating losses. While the company lost $600 thousand on 1H21, it lost $15 million at the operating level on 1H22, without considering $68 million in goodwill impairment for the current half.
In August 2021, WTRH acquired three Cape Cod payment companies, whose business is signing up other businesses for third party payment processing systems, and gaining a commission on payments processed. This decision is related to WTRH’s current CEO coming from a payment processing company. In terms of strategy, it is not very off considering that the company already has contact with small businesses.
The payment business is growing, from about $3.5 million in revenues in 2H21 to about $5.3 million in 1H22. WTRH does not disclose segment figures at the operating level so we do not know if these revenue increases are helping the bottom line or not. The segment is still 10% of the company’s revenue though, so it is not having a tremendous effect.
Financial improvement paid by dilution
Probably unable to access the debt markets, WTRH has been paying for operational expenses issuing shares, at lower and lower prices.
Fortunately, it has used some of the proceeds to repay debts with a related party. It has also converted about $7.5 million of debts into shares at an average share price close to $0.25.
This has resulted in the company reducing its term loan program from $35 million in December 2021, to about $7.5 million by August 2022. The company still has a Notes program for $50 million, with an average 5% fixed rate, maturing in May 2024.
Dilution and share price collapse imply an additional risk because WTRH may be delisted from Nasdaq. The market had already issued a first warning, according to which WTRH’s stock should trade above $1 for 10 days before July 2022. That was not achieved, and Nasdaq decided to downgrade the company’s shares to its lowest tiered market (from Global Market to Capital Market), and to extend the deadline to January 2023.
The problem facing WTRH is that it needs to obtain capital to keep running, because it is cash deficient at the operational and investing level. The company has a renewed $50 million ATM program, that would imply an additional 50% dilution, doubling the company’s shares outstanding as of this point. To raise $50 million, at current share prices close to $0.2, the company would need to issue 250 million additional shares, while WTRH currently has 200 million shares outstanding.
Interestingly, WTRH’s shareholders voted against a share reverse split in June. This seemed the only way out of WTRH’s conundrum and I do not understand the logic behind rejecting it. The Board posted a new share reverse split proposal for the shareholder meeting in October.
Industry analysis
I have got used to including an industry analysis on my company evaluations, something I did not do by the time I wrote the February article on WTRH.
In my opinion, WTRH’s position on the two industries where it competes is not good. Additionally, the industries dynamics do not prevent significant competition among firms.
In the delivery app industry, WTRH has to fight with giants like Uber Eats (UBER) or DoorDash (DASH). The network effects behind these apps are significant, which generates a winner takes all environment. If rivalry, coupled with an economic downturn, pushes these companies into a price war, WTRH does not have the size to compete.
For WTRH’s customers, the restaurants or any business that needs delivery, the difference between the apps is commissions and the customer base that they offer. WTRH could compete on the basis of lower commissions, but it has to dilute its fixed costs on a smaller base than bigger competitors. In terms of customer base, or national presence, WTRH cannot compete with its rivals. Its customer base is therefore shrinking.
In terms of suppliers, WTRH needs highly qualified IT technicians to run its systems, and it has to contract with delivery collaborators that could find more employment in bigger apps.
In the payment business the situation is similar. WTRH works as a salesman for the payment processors. Indeed, if it grew its merchant base significantly, it could ask payment processors for higher fees, but that is not the case yet. Given that onboarding businesses is a selling operation, with all the infrastructure provided by the payment processors, becoming an onboarder has very low barriers to entry.
One way forward for WTRH is to find a niche on these two markets. I do not know exactly which one that would be, but maybe the delivery apps, or other payment onboarding competitors do not operate in some geographical areas, or with a special type of customer.
In the meantime, I find that WTRH is having a bad time competing in these two markets. The company does not have a significant moat and the app delivery industry at least is prone to rivalry, given that fixed costs dominate over variable ones. The effect is already clear in the delivery app market, where WTRH is losing customers and revenue. In the payments onboarding market, the company is growing but it does not show any particular advantage yet.
Conclusions
WTRH is an easy no-go, as it was in February. In my previous article, I received a lot of critics from bulls on the stock. I guess I have been vindicated by time and the markets.
The situation has deteriorated even more at the operating level, and has improved marginally at the financial level. The time frame for WTRH to improve is getting shorter.
If I had to bet, I think the company will end up being acquired, after even more dilution, by one of its biggest competitors. The management will receive big bonuses, and shareholders will receive pennies on the dollar.
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