Katapult Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Katapult provides e-commerce point-of-sale lease-purchase options to U.S. consumers. Dollar amounts below are in millions unless otherwise stated.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Total revenue | $59.9 | $80.6 | Down 25.7% as reported |
| Gross profit / margin | $11.8 / 19.6% | $27.8 / 34.4% | Gross profit down 57.6% |
| Operating expenses | $16.6 | $13.3 | Up 24.3% |
| Operating income (loss) | $(4.8) | $14.4 | Turned to operating loss |
| Net income (loss) | $(5.6) | $8.1 | Basic and diluted loss per share: $(0.06) |
| Adjusted EBITDA (non-GAAP) | $(4.2) | $14.6 | Down from prior-year profit |
| Operating cash flow | $3.7 | $7.3 | Positive, but lower year over year |
| Cash and restricted cash at quarter-end | $86.2 | — | Includes $80.6 unrestricted cash and $5.6 restricted cash |
| Debt principal outstanding | $100.8 | — | $48.7 revolving credit and $52.1 term loan including PIK |
Investing activities used $0.6 million; financing activities used $13.4 million, principally for $13.2 million of revolving-credit repayments. Cash and restricted cash decreased $10.2 million during the quarter. Total liabilities were $109.9 million and stockholders’ equity was $34.2 million at March 31, 2022. Debt carrying value was $89.7 million; the filing estimates its fair value at $108.8 million.
Comparability and material changes
- Katapult adopted ASC 842 on January 1, 2022. It now recognizes lease revenue when earned and cash is collected, rather than on an accrual basis, and no longer reports customer lease receivables or related bad-debt expense. The company did not restate 2021, so reported revenue and other line items are not directly comparable. On an ASC 842 basis, management estimates Q1 2021 revenue would have been $77.6 million and pretax income $11.7 million; against that revenue benchmark, Q1 2022 revenue declined 22.8%.
- Gross originations fell 26.8% to $46.7 million. Wayfair accounted for 58% of originations, compared with 63% a year earlier. Management attributed lower volume largely to the prior-year stimulus-driven spending comparison, lower Wayfair originations, and tighter underwriting.
- Professional and consulting fees rose 114.3% to $3.3 million; technology and data analytics expense rose 55.6% to $2.4 million; compensation costs rose 108.2% to $5.4 million; and general and administrative expense rose 221.6% to $3.8 million. The filing cites public-company, legal, accounting, SOX-compliance, staffing, insurance, marketing, and technology costs.
- The quarter included a $3.1 million gain from a decrease in warrant-liability fair value, versus a $0.4 million loss in Q1 2021. This non-operating valuation change partly offset the operating loss.
Outlook, risks, and unusual items
- The filing gives no formal revenue or earnings guidance. Management expects challenging macroeconomic conditions to continue in 2022, but anticipates the largest merchant partners could return to growth in the second half of 2022. It also expects impairment charges to rise toward pre-pandemic levels.
- Management identifies inflation, supply-chain disruption, consumer payment capacity, changing consumer spending, and tighter underwriting as pressures on originations and lease performance. It notes that prime lenders tightening underwriting could potentially bring additional volume and higher-credit customers.
- Wayfair concentration remains significant. The company also highlights reliance on merchant and platform partners, competition, consumer-credit and payment performance, technology and cybersecurity, regulation of lease-purchase products, and access to capital.
- At March 31, the company reported compliance with its credit covenants, after exercising the Total Advance Rate cure right three times as of the filing date. Its credit facility and term loan mature December 4, 2023, and carry floating-rate exposure. The company said $80.6 million of unrestricted cash was sufficient for liquidity needs over the next 12 months, while noting that future needs depend on operating cash flow and financing availability.
- On May 9, 2022, after quarter-end, the company amended its credit agreement. Among other changes, minimum liquidity was reduced from $50 million to $15 million, the TTM Adjusted EBITDA covenant was revised, and the Total Advance Rate terms changed. The term-loan PIK rate increased from 3% to 4.5% when liquidity is above $50 million or 6% when below that threshold.
- Disclosure controls were deemed ineffective because material weaknesses in financial-reporting controls remained under remediation, including insufficient U.S. GAAP expertise and inadequate journal-entry review controls.
- Two disclosed lawsuits remained unresolved: DCA’s advisory-fee dispute, for which Katapult seeks approximately $10.6 million in counterclaim damages, and a putative securities class action. The company recorded no contingency for either, stating loss was not probable or reasonably estimable.
Important facts for investors to verify
- Track revenue and gross originations using the ASC 842-adjusted comparison, and monitor whether merchant diversification reduces Wayfair concentration.
- Assess cash generation, unrestricted liquidity, debt service and refinancing needs ahead of the December 2023 debt maturities, including the effects of the May 2022 covenant amendments and higher PIK interest.
- Monitor gross margin, lease impairment, customer payment performance, underwriting changes, and whether operating expenses decline relative to revenue.
- Review progress in remediating material weaknesses and any future updates on the DCA and securities litigation.