Katapult Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Katapult provides e-commerce point-of-sale lease-purchase options to non-prime U.S. consumers. Amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $53.0 | $77.5 | $112.9 | $158.1 |
| Gross profit | $8.2 | $21.5 | $20.0 | $49.3 |
| Gross margin | 15.4% | 27.8% | 17.7% | 31.2% |
| Operating income (loss) | $(8.2) | $(9.0) | $(13.0) | $5.5 |
| Net income (loss) | $(9.7) | $(8.1) | $(15.3) | $(0.013) |
| Adjusted EBITDA (non-GAAP) | $(5.3) | $3.9 | $(9.4) | $18.5 |
- Gross originations were $46.4 million in Q2, down 28.0%; first-half originations were $93.0 million, down 27.4%. Wayfair represented 62% of Q2 originations and 60% of first-half originations.
- Six-month operating cash flow was $(1.8) million, versus $7.1 million provided in 2021. Investing cash use was $1.0 million; financing cash use was $6.4 million. Cash and restricted cash declined $9.2 million to $87.3 million; unrestricted cash was $85.0 million at quarter-end.
- At June 30, total debt principal was approximately $108.2 million: $55.7 million under the revolving facility and $52.4 million under the term loan, including PIK interest. Balance-sheet carrying amounts were $55.2 million and $42.5 million, respectively. Both facilities mature December 4, 2023.
- Management said $85.0 million of unrestricted cash was sufficient for the next 12 months. The amended credit agreement requires minimum liquidity of $15 million. The company reported covenant compliance at quarter-end.
Material changes and comparability
- Reported Q2 revenue fell 31.5%; management calculated a 23.7% decline assuming ASC 842 had applied to Q2 2021. For the first half, the corresponding declines were 28.6% reported and 23.2% on that basis.
- ASC 842 was adopted January 1, 2022. Katapult now recognizes lease revenue when earned and cash is collected and no longer records lease receivables or related bad-debt expense. The 2021 comparative statements were not restated, so reported year-over-year comparisons are not fully comparable.
- Management attributed lower originations and revenue to inflation, supply-chain disruption, weaker consumer and merchant spending, and tighter underwriting. First-half 2021 also benefited from government stimulus and unemployment benefits. Normalization of customer payment performance and merchant promotions contributed to lower margins.
- Gross profit fell 62.0% in Q2, and gross margin declined to 15.4%. Adjusted gross profit, a non-GAAP measure, was $6.6 million in Q2 versus $12.0 million a year earlier.
- Q2 operating expenses declined 46.3%, mainly reflecting lower prior-year merger-related compensation and the absence of bad-debt expense under ASC 842; professional fees and general and administrative costs increased.
Outlook, risks, and unusual items
- No specific revenue, earnings, or origination guidance is provided in the supplied filing text. Management expected challenging macroeconomic conditions to continue through 2022 and said it was monitoring consumer and COVID-related trends.
- The May 2022 credit amendment lowered the minimum liquidity covenant from $50 million to $15 million, changed the Total Advance Rate limit to 130% through May 9, 2023 and 120% thereafter, and revised EBITDA and tangible-net-worth covenants. Katapult said it had used the Total Advance Rate cure mechanism three times; cure rights were made unlimited by the amendment.
- Key exposures include merchant concentration (Wayfair), consumer payment capacity and defaults, inflation and interest rates, competition and funding availability, and restrictive debt covenants. Debt bears variable interest linked to LIBOR; the filing discusses benchmark-replacement uncertainty.
- Two material weaknesses in internal control remained, involving insufficient U.S. GAAP expertise and inadequate journal-entry review controls. Disclosure controls and procedures were deemed ineffective as of June 30, 2022; remediation was ongoing.
- Pending matters include DCA’s contract lawsuit, in which the company disputes the claims and seeks approximately $10.6 million on counterclaims, and a shareholder securities class action seeking unspecified damages. No related contingencies were recorded because loss was not considered probable or reasonably estimable.
- The $5.4 million first-half gain from changes in warrant fair value reduced reported losses but was non-cash. The filing also reports $7.5 million of first-half impairment expense on leased property. The company maintained a full valuation allowance on deferred tax assets.
Important facts for investors to verify
- How much of the reported revenue and margin decline reflects ASC 842 presentation versus underlying operating performance; compare with management’s ASC 842-adjusted 2021 figures.
- Whether originations, customer payment performance, impairment, and margins stabilize as underwriting tightens and macroeconomic conditions evolve.
- Wayfair’s continued contribution and the pace of merchant diversification.
- Cash runway, borrowing availability, covenant headroom, and refinancing plans ahead of the December 2023 debt maturities.
- Progress in remediating internal-control weaknesses and developments in both legal proceedings.