Katapult Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Katapult provides e-commerce lease-purchase options to non-prime U.S. consumers. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Gross originations | $44.1 (-27.7%) | $61.0 | $137.1 (-27.5%) | $189.0 |
| Total revenue | $50.3 (-29.8%) | $71.7 | $163.3 (-29.0%) | $229.8 |
| Gross profit | $11.9 | $18.4 | $31.9 | $67.7 |
| Gross margin | 23.7% | 25.6% | 19.5% | 29.4% |
| Operating income (loss) | $(4.7) | $(2.6) | $(17.7) | $2.8 |
| Net income (loss) | $(8.2) | $13.7 | $(23.4) | $13.7 |
| Adjusted EBITDA (non-GAAP) | $(2.3) | $0.1 | $(11.7) | $18.6 |
Rental revenue was $49.3 million in Q3 and $160.1 million for the nine months; other revenue was $1.1 million and $3.2 million, respectively, primarily from sales of leased property. Adjusted gross profit was $10.5 million in Q3 and $27.2 million for the nine months. Diluted loss per share was $0.08 for Q3 and $0.24 for the nine-month period.
Comparability caution: Katapult adopted ASC 842 on January 1, 2022 and did not restate 2021. Under the new method, lease revenue is recognized when earned and cash is collected, and lease receivables and corresponding bad-debt expense are no longer recorded as before. The company estimates that, using ASC 842 for 2021, comparable revenue would have been $66.3 million for Q3 and $213.3 million for nine months; reported revenue declines on that basis would be 24.0% and 23.5%, respectively. Reported year-over-year comparisons are therefore not fully comparable.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $77.2 million, restricted cash was $4.4 million, and total assets were $131.9 million. Cash and restricted cash totaled $81.6 million, down $14.9 million from year-end 2021.
- For the first nine months, operating cash flow was negative $1.5 million, investing cash flow was negative $1.4 million, and financing cash flow was negative $12.0 million.
- Outstanding debt principal was approximately $103.4 million: $50.2 million on the revolving facility and $53.2 million on the term loan, including PIK interest. Balance-sheet carrying amounts totaled $93.1 million after debt discounts and issuance costs.
- Both facilities mature December 4, 2023 and bear variable rates linked to LIBOR. The filing reports rates of approximately 10.1% for the revolver and 10.6% for the term loan, plus applicable PIK interest. Debt and lease minimum cash obligations, including scheduled interest, totaled $122.2 million.
- The amended credit agreement sets a $15 million minimum-liquidity covenant and a TTM adjusted EBITDA minimum of negative $25 million through June 30, 2023. The company reported covenant compliance at September 30, 2022, while also disclosing that it had used the advance-rate cure mechanism three times. Management said cash on hand was sufficient for liquidity needs over the next 12 months.
Material changes, outlook, and risks
- Management attributed lower originations and revenue to inflation, supply-chain issues, weaker consumer confidence and spending, and tighter underwriting begun in late 2021. The company expects challenging macroeconomic conditions to continue into 2023. It also noted that tighter underwriting by prime lenders could potentially bring additional volume and higher-credit customers.
- Gross profit and margins fell as volume declined, lease margins weakened with customer payment patterns normalizing from 2021, and merchant promotions affected margins. The company recorded no bad-debt expense in 2022 under its new ASC 842 approach; 2021 included $5.9 million for Q3 and $18.8 million for nine months.
- Q3 net loss included a $0.4 million noncash gain from the change in warrant liability, compared with a $21.3 million gain in Q3 2021. For the nine months, the corresponding gains were $5.8 million and $24.2 million. These fair-value changes materially affected reported net income comparisons.
- Wayfair accounted for 54% of Q3 and 58% of nine-month gross originations, down from 66% and 63% in 2021. The company identifies merchant concentration, especially reliance on Wayfair, as a material business risk.
- Katapult launched a mobile app and Katapult Pay, its virtual-card product, in Q3; the filing provides no quantified outlook for their financial contribution. No specific earnings or revenue guidance is provided.
- Two material weaknesses in financial reporting controls remained outstanding, and management concluded disclosure controls were ineffective at September 30. The weaknesses concern insufficient U.S. GAAP expertise and inadequate review and support for manual journal entries.
- Pending matters include DCA litigation, in which the plaintiff stated an $18.4 million damages demand plus fees; Katapult disputes the claims and seeks approximately $10.6 million on counterclaims. The company recorded no contingency because the outcome was not considered probable or estimable. A separate securities class action alleges misleading disclosures relating to prime lenders and prior financial guidance; damages are unspecified. No loss contingency was recorded for that matter.
Most important facts for investors to verify
- Whether originations, revenue, and lease margins stabilize, taking ASC 842’s effect on comparability into account.
- Cash generation and covenant headroom, including the advance-rate cure history and refinancing or repayment plans before the December 2023 debt maturities.
- Wayfair’s share of originations and progress diversifying merchant relationships.
- Customer payment performance, impairment trends, and the effectiveness of tighter underwriting under persistent macroeconomic pressure.
- Progress remediating the two material weaknesses and developments in the DCA and securities litigation.