Katapult Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. Katapult provides e-commerce lease-purchase options to non-prime U.S. consumers.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $54.6 | $53.0 | $110.2 | $112.9 |
| Gross profit | $10.7 | $8.2 | $24.2 | $20.0 |
| Gross margin | 19.6% | 15.4% | 22.0% | 17.7% |
| Operating loss | $(3.0) | $(8.2) | $(5.2) | $(13.0) |
| Net loss | $(6.4) | $(10.3) | $(15.5) | $(16.4) |
| Adjusted EBITDA (non-GAAP) | $(0.3) | $(5.3) | $0.3 | $(9.4) |
Q2 revenue rose 2.9% year over year, while first-half revenue declined 2.4%. Q2 rental revenue increased 3.8%; first-half rental revenue fell 2.0%. Gross profit improved in both periods despite lower first-half revenue. Management attributed improvement principally to lower early buyouts and depreciation, stronger collections and underwriting performance; higher impairment expense partly offset the first-half improvement. Net loss per share was $(1.57) in Q2 and $(3.86) for the first half, versus $(2.64) and $(4.18), respectively, in 2022.
Cash, debt and liquidity
- Cash and cash equivalents were $38.2 million at June 30, down from $65.4 million at December 31, 2022; restricted cash was $3.3 million. Combined cash and restricted cash was $41.6 million.
- First-half cash used in operating activities was $8.6 million, compared with $1.8 million in 2022. Investing activities used $0.5 million and financing activities used $19.2 million, including the $25 million term-loan repayment. Total cash, cash equivalents and restricted cash declined $28.3 million.
- Debt principal outstanding was $93.7 million: $64.1 million under the revolving line of credit (RLOC) and $29.7 million under the term loan, including capitalized PIK interest. Carrying value was $87.2 million. June 30 cash interest rates were 13.8% on the RLOC and 13.3% on the term loan, plus applicable PIK interest.
- A March 2023 credit amendment extended both facilities’ maturity to June 4, 2025, reduced RLOC commitments from $125 million to $75 million, increased the RLOC spread, and required a $25 million term-loan principal repayment. The company reported compliance with covenants at June 30. It must maintain at least $10 million in unrestricted cash under its liquidity covenant.
- Management stated that unrestricted cash and available RLOC borrowings should be sufficient for liquidity needs over the next 12 months. The filing does not clearly quantify actual borrowing availability under the RLOC borrowing base.
Business trends, outlook and material risks
- Gross originations increased 18.0% in Q2 to $54.7 million and 17.6% in the first half to $109.4 million. Katapult Pay generated $7.6 million of Q2 and $13.4 million of first-half originations. Gross originations are a volume measure, not revenue.
- Wayfair represented 56% of Q2 and 53% of first-half originations. The top ten merchants represented approximately 82% and 81%, respectively, leaving significant merchant concentration despite year-over-year reductions in Wayfair’s share.
- Write-offs as a percentage of revenue increased to 9.2% in Q2 and 8.8% for the first half, from 6.4% in each 2022 comparable period. First-half property impairment expense rose to $10.5 million from $7.5 million.
- Management cited inflation, elevated interest rates, tight lending standards, uncertain consumer spending and potential effects from resumed student-loan payments. It expects a challenging macroeconomic environment to continue into the second half of 2023. The filing provides no specific financial guidance.
- The company effected a 1-for-25 reverse stock split on July 27, 2023, primarily to address Nasdaq’s minimum bid-price requirement. It had received a deficiency notice, with an October 18, 2023 deadline to regain compliance; the filing cautions that the split may not ensure continued compliance.
- Disclosure controls were deemed ineffective as of June 30 due to two unremediated material weaknesses: insufficient GAAP accounting expertise and inadequate journal-entry review and support controls. Management described remediation work and the hiring of a CFO but gave no assurance the weaknesses would be fully remediated.
- Pending matters include DCA litigation, in which the plaintiff reported a damages demand of $18.4 million plus fees, and securities/shareholder litigation. The company has not accrued a loss because it determined losses were not probable or reasonably estimable. The company intends to defend the claims.
Most important facts for investors to verify
- Whether originations and collections can continue to support revenue while write-offs and impairment remain elevated.
- Actual RLOC availability, covenant headroom and ability to maintain the $10 million minimum-liquidity requirement amid high interest costs and operating cash use.
- Progress diversifying originations away from Wayfair and the largest merchant group.
- Nasdaq bid-price compliance following the reverse split and any resulting dilution from lender warrants or other equity awards.
- Remediation of internal-control material weaknesses and developments in the DCA and shareholder litigation.
- Reconcile the lender-warrant terms: the filing describes post-split exercise pricing and share counts in different sections, so the operative agreement and any contingent additional warrant issuance should be checked.