Katapult Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Katapult operates a digital lease-purchase platform for non-prime U.S. consumers buying durable goods through merchant partners. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Total revenue | $55.7 | $59.9; down 7.0% |
| Gross profit / gross margin | $13.5 / 24.3% | $11.8 / 19.6% |
| Operating loss | $(2.3) | $(4.8) |
| Net loss | $(9.1); $(0.09) per share | $(6.0); $(0.06) per share |
| Adjusted EBITDA (non-GAAP) | $0.6 | $(4.2) |
| Operating cash flow | $(2.9) | $3.7 |
| Cash and restricted cash | $45.0, including $40.6 unrestricted | $69.8 at Dec. 31, 2022 |
| Debt principal outstanding | $90.8 | $111.8 at Dec. 31, 2022 |
| Stockholders’ equity | $4.0 | $7.1 at Dec. 31, 2022 |
Revenue was primarily rental revenue ($54.7); other revenue was $1.0. Cost of revenue declined 12.3% to $42.2. Gross margin improved as early lease buyouts and lease depreciation declined. Operating expenses fell 4.9% to $15.8, although compensation costs rose 31.2% to $7.1, partly from higher stock compensation and one-time severance.
Net loss widened despite improved operating results. Q1 2023 included a $2.4 debt-extinguishment loss and $5.2 of interest expense and other fees, partly offset by $0.6 of interest income. Q1 2022 included a $3.1 favorable change in warrant fair value, compared with $0.1 in Q1 2023. Gross originations increased 17.3% to $54.7, but are an operating indicator, not revenue.
Material changes, liquidity and financing
- Cash, cash equivalents and restricted cash decreased $24.9 during the quarter. Financing cash outflow was $21.7, mainly reflecting repayment of $25.0 of term-loan principal; operating activities used $2.9.
- On March 6, 2023, Katapult amended its credit agreement: revolving-line and term-loan maturities were extended to June 4, 2025, and revolving commitments were reduced from $125 million to $75 million. The revolving spread rose from 7.5% to 8.5%; the term-loan spread remained 8%.
- The company reported $61.5 of revolving principal and $29.3 of term-loan principal, including PIK interest. The balance-sheet carrying value of these borrowings was $83.7, reflecting debt discounts and issuance costs. The revolving facility and term loan are variable-rate debt; the filing reported a 13.2% revolving rate and a 12.7% term-loan rate at March 31. The benchmark changed from LIBOR to term SOFR effective April 1, 2023.
- Management stated that $40.6 of unrestricted cash was sufficient for liquidity needs over the next 12 months, and expected longer-term needs to be met through cash, operating cash flow and revolving availability. Borrowing availability is subject to the borrowing base and covenants.
- The company reported compliance with its credit covenants at March 31. The credit agreement includes minimum liquidity, EBITDA, tangible-net-worth and advance-rate requirements, as well as restrictive covenants.
Outlook, risks and unusual items
- Management said challenging macroeconomic conditions were expected to extend further into 2023. Inflation, weaker consumer confidence and spending, supply-chain issues, the March banking turmoil and recession concerns were cited as pressures. The company tightened underwriting beginning in Q4 2021 and continued doing so in Q1 2023.
- Management attributed higher gross originations to tax-season wallet capture, direct-merchant growth and the Katapult Pay mobile app, launched in Q3 2022. Katapult Pay generated approximately $5.7 of Q1 gross originations. No quantified financial guidance was provided.
- Merchant concentration remains material: Wayfair accounted for 51% of Q1 gross originations, down from 58%; the top ten merchants accounted for 79%, versus 81%. Weaker merchant sales, customer payment performance and changes in underwriting outcomes could affect revenue and lease impairments.
- Two material weaknesses in internal control over financial reporting remained unremediated, involving insufficient U.S. GAAP expertise and inadequate journal-entry review controls. Management concluded disclosure controls were ineffective as of March 31 and described remediation efforts, including hiring a CFO and working with external advisers.
- Pending matters include DCA litigation, in which the plaintiff stated a damages demand of $18.4 plus fees, and a securities class action seeking unspecified damages. The company recorded no contingency for either matter because loss was not considered probable or reasonably estimable.
- On April 21, 2023, Nasdaq notified the company that its common-stock bid price had been below $1 for 30 consecutive business days. The notice was a deficiency, not an immediate delisting; the company had until October 18, 2023 to regain compliance, subject to Nasdaq rules. A reverse stock split was identified as a possible option.
- The March credit amendment included a warrant for up to 2.0 million shares at $0.01 per share; another warrant for up to 2.0 million shares may be required under specified conditions. These create potential dilution. A prior-period error correction increased Q1 2022 interest expense by $0.481 million and reduced the related debt discount.
Most important facts for investors to verify
- Whether the improved gross margin and positive adjusted EBITDA are sustainable alongside declining revenue and negative operating cash flow.
- Cash runway and actual revolving availability after borrowing-base limits, covenant requirements, interest costs and the amended $75 million commitment.
- Customer payment and impairment trends, including write-offs as a percentage of revenue, which increased to 8.4% from 6.3%.
- Wayfair and top-merchant concentration, and whether Katapult Pay and other merchants can diversify originations.
- Progress in remediating material weaknesses, outcomes of the pending litigation and Nasdaq bid-price compliance.
- Potential warrant dilution and the effect of floating-rate debt and the SOFR transition on future interest expense.
- The non-GAAP adjusted EBITDA reconciliation: verify the treatment and presentation of leased-asset impairment adjustments against the GAAP statements and related notes.