Waitr Continues With Dilutive Acquisitions While Searching For A New Business Model

Summary

  • Waitr owns two food delivery platforms, Waitr and Bite Squad.
  • The company had to write down $192 million in goodwill from the investment in Bite Squad in 2019 after its stock price plummeted.
  • Although the company had shown some recovery in 2020, its 2021 sales and profitability figures are down again.
  • The company reached an agreement with Waiter.com and will have to change its name to ASAP, as well as its ticker.
  • As part of its re-branding strategy, Waitr/ASAP entered the merchant services industry with four very dilutive acquisitions.

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

The company’s stock plummeted in 2019 before and after the company had to write down $192 million in goodwill and intangibles from their acquisition of Bite Squad. The acquisition had been completed in January 2019 for $335 million.

WTRH hired a new CEO in January 2020 and started making changes: it modified its fee structure, moved from an employee to an independent collaborator workforce, and started offering other delivery services (groceries and alcohol).

The changes produced good although not great results, with the company becoming profitable and cash flow positive for the first time in 2020, mainly because of greatly reduced expenses. However, last quarter figures indicate that WTRH may not continue growing in the food delivery segment.

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

In conjunction with the rebranding, WTRH is moving towards merchant payment processing with four very dilutive and non-accretive acquisitions. This added to a plan to issue up to $50 million in new stock.

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

WTRH’s origins

Waitr started as a food delivery app in 2014, about the same time as Uber Eats and DoorDash. From its headquarters in Louisiana, it expanded rapidly to several small and mid-size cities in the US.

The company went public at the end of 2018, by reverse acquisition from the SPAC Lancadia Holdings (then trading under the symbol LDA). A few months after going public, in January 2019, WTRH completed the acquisition of Bite Squad, another food delivery app, for the whooping sum of $335 million.

A few months later, after missing earnings estimates in 2018, not providing earnings guidance for 2019, and increasing concerns about its lack of competitive strength against already giants Uber and DoorDash, the company’s stock plummeted.

After the stock had lost more than 90% of its value, WTRH recognized a non-cash impairment of the Bite Squad acquisition generated intangibles and goodwill for $192 million.

By the end of 2019, WTRH was defending itself in four separate lawsuits, according to the latest 10-K. One by Waiter.com, alleging violation of its trademark, one by WTRH’s delivery employees, for changes in their status, one by WTRH’s restaurant partners, for changes in their fees, and one by WTRH’s stockholders for delivery of false information.

A “good” 2020

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

The new CEO established several changes. Mainly, WTRH modified its fee structure, focusing only on percentage of sales, and the company also transitioned from directly employed delivery persons to independent contractors.

These changes and reductions in general expenses generated a significant improvement in the company’s financials. 2020 was the first year when WTRH showed profits and positive cash flows.

However, signs of problems were already evident then. Above all, the company had not been able to increase revenue substantially compared to 2019 figures despite the tremendous boom in food delivery generated by the pandemic’s restrictions. To provide a comparison, DoorDash’s reported revenues grew by 326% in 2020 compared to 2019.

The same warning signs were evident in WTRH’s reported key business metrics, as can be seen from the table below.

WTRH
WTRH’s key business metrics for 2018, 2019 and 2020 (WTRH’s 2020 10-K report filed with the SEC)

In 2020, WTRH also issued $48 million in shares directly in the market, and initiated other dilutive measures, like paying notes and managers’ compensation with shares. The result was that by 2020, WTRH historic shareholders had lost 40% of their base to dilution (from 76 million shares in 2019 to 125 million in 2020).

Dilution however improved WTRH’s financial position, ending the year with $84 million in cash against $100 million in 9% interest rate debt, maturing in 2023.

Back to problems in 2021

Last year, the situation did not improve at all in most of WTRH’s fronts.

Back to (very) red numbers

To begin with, revenue and profit figures have been disappointing. The company’s latest 10-Q shows a decrease in revenue and a tremendous decrease in profitability, which puts the company back in red numbers.

WTRH earned $13 million before taxes in the accumulated 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 this figure by writing off $16 million in a medical liability, because the person generating the liability died.

The company’s key business figures also show concerning signs. YoY comparisons show a significant fall in average daily orders, a trend that seems to be accelerating.

WTRH
WTRH’s comparative key business metrics for the nine month and three month periods ended September 2020 and 2021 (WTRH’s 3Q21 10-Q report filed with the SEC)

Waitr is now ASAP

WTRH also had to reach an agreement with Waiter.com, the company suing them for trademark infringement. WTRH agreed to pay $4.5 million to Waiter.com, and to change their name and ticker before June 2022. It is interesting to notice that WTRH had not recorded any contingency liability for this lawsuit until the agreement.

In connection with this agreement, WTRH has already announced it will change its brand name and stock ticker to ASAP, and that it will start concentrating on the payment merchant services segment (more on this in the next section).

Expensive acquisitions

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

We also don’t believe that WTRH’s shareholders have been offered a policy of openness with its shareholders, as it has provided little information respecting the financial condition of the companies acquired.

To begin with, the food and convenience delivery segment was already showing bad signs because of incapacity 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 revenues but $1.4 million in losses between March and September 2021.

Then WTRH continued with another millionaire acquisition, now in the payment merchant services industry. WTRH paid $16 million for three companies located in Cape Cod (collectively known as Cape Payment companies), Promerchant, Cape Cod Merchant Services and Flow Payments.

We are unable to judge these acquisitions, because WTRH has not disclosed the companies’ financials, despite having access to them. We can say that confidently for two reasons. First, it is obvious that any acquisition implies the acquiring company reviewing the acquired company’s financials. Second, in the acquisition agreements filed by WTRH with the SEC for the three companies, it specifically mentions the requirement to provide the companies’ financial statements (under the name Schedule 2.3). However, it appears these were not provided to the SEC.

Finally, WTRH announced that it had signed a letter of intent to acquire Cova, a merchant payment provider specialized in the cannabis industry, for the sum of $90 million. Again, the company did not report financial figures from Cova, but did mention that the company has 2000 client stores. We can calculate then that WTRH will pay approximately $45 thousand for each new client acquired.

Dilution continues

Part of WTRH’s acquisitions were financed with stock issuing, although a minor portion, which meant that WTRH lost $40 million in cash from the $84 million it had at the end of 2020.

Additionally, the company continued selling stocks in the market, albeit at a slower pace. WTRH also used stocks and options to pay their managers, 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 shares and newly issued shares, WTRH’s diluted shareholder base is already at 138 million shares, an increase of 10% YoY, according to the 3Q21 10-Q filed with the SEC.

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

Possible delisting from Nasdaq

Last month, WTRH reported that the Nasdaq exchange had notified the company that if its share price did not surpass 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, considering that the chances of WTRH’s stock crossing the $1 level are small, particularly if the company plans to issue $50 million more in shares this year.

Conclusion

WTRH’s core business is not improving but rather decreasing. Despite this trend, WTRH continued with one, at our understanding expensive, acquisition in the segment.

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

We also believe that with $85 million in debt maturing in 2023, $40 million in cash, a deteriorating business and the will to pursue even more expensive acquisitions, WTRH’s financial prospects are not great in the middle term either.

In our humble opinion, the company is correct in searching new avenues for growth given that it is being expelled from its core market. However, in that process finding accretive acquisitions is fundamental, and WTRH does not show signs of doing that.

Finally, the prospect of continued dilutions and a possible delisting from Nasdaq should convince the investor that it is better to stay away from WTRH, at least for the time being.

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