Katapult Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unless otherwise noted, financial amounts below are in millions of dollars. Comparisons are with the corresponding 2020 periods. The merger-related recapitalization means comparative equity and share information was restated.
Business context
Katapult provides e-commerce point-of-sale lease-purchase options to nonprime U.S. consumers. On June 9, 2021, it completed its business combination with FinServ Acquisition Corp. The transaction was accounted for as a reverse recapitalization, with Legacy Katapult treated as the accounting acquirer.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $77.5 | $60.7 | $158.1 | $103.6 |
| Gross profit | $21.5 | $18.5 | $49.3 | $34.0 |
| Gross margin | 27.8% | 30.4% | 31.2% | 32.8% |
| Operating income (loss) | $(9.0) | $8.8 | $5.5 | $15.6 |
| Net income (loss) | $(8.1) | $5.1 | $(0.013) | $8.8 |
| Operating cash flow | Not separately presented | Not separately presented | $7.1 | $(13.1) |
Q2 revenue rose 27.6%, but gross profit increased 16.7% and gross margin contracted 2.6 percentage points. Six-month revenue increased 52.6%, while gross margin declined 1.6 points. Management attributed the margin decline to accelerated lease depreciation estimates. Q2 operating results were also affected by higher operating expenses, notably compensation and bad debt expense.
At June 30, cash was $109.8 and restricted cash was $2.6, compared with $65.6 and $4.0, respectively, at year-end 2020. Six-month operating cash flow improved by $20.2 year over year; the company also reported $105.3 of net purchases of property held for lease in operating activities. Financing cash flow was $36.3, including merger-related proceeds and revolving-credit activity.
Reported debt principal was $124.1: $73.3 outstanding on the revolving line and $50.9 on the term loan. Balance-sheet carrying values were $72.4 and $38.6, respectively, after applicable accounting adjustments. The revolving facility had a $125.0 commitment, with the lender holding an unexercised right to increase it; the term loan was drawn in full. The company reported covenant compliance at June 30. Current assets were $188.9 and current liabilities $21.9.
Material changes and unusual items
- Q2 gross originations fell 17.0% to $64.4, while six-month originations rose 11.6% to $128.2. Management noted that Q2 2020 had unusually high e-commerce activity during pandemic-related stay-at-home measures and store closures.
- Wayfair accounted for 62% of gross originations in both Q2 and the first half of 2021, versus 74% and 73%, respectively, in 2020.
- Bad debt expense increased to $8.0 in Q2 from $3.3 and to $12.9 for the first half from $6.6. Management cited a larger lease base and unusually low Q2 2020 delinquencies associated with government stimulus.
- Q2 compensation costs included $9.3 of stock-based compensation from executive restricted shares vesting in connection with the merger. Six-month professional and consulting costs included $1.2 of merger-related expenses.
- The merger and PIPE generated $401.1 of gross financing proceeds, offset by $329.6 paid to selling stockholders and $33.5 of transaction costs. The filing reports net contributions from the merger and PIPE of $38.0 before the warrant liability adjustment.
- A $3.2 Q2 and $2.8 six-month gain from changes in warrant fair value partly offset reported losses; this is a noncash valuation item.
Outlook, risks and contingencies
The filing provides no quantitative financial guidance. Management expects to fund operations through operating cash flows and existing or additional borrowing, but states further debt or equity financing may be needed if positive operating cash flow is not achieved. Management cautioned that pandemic-related demand and economic trends may not persist and that COVID-19 variants and policy changes could affect results.
Key risks include consumer credit performance, dependence on merchant partners (particularly Wayfair), access to funding and variable LIBOR-based debt costs, restrictive debt covenants, consumer-protection regulation, data security and technology reliability. The company disclosed a material weakness in internal control over financial reporting; disclosure controls were deemed ineffective at June 30, and remediation remained underway.
Daiwa Corporate Advisory LLC sued over an advisory agreement and seeks damages to be determined, including at least $0.1, plus fees and interest. Katapult disputes the claims and counterclaims for approximately $10.6. The company recorded no gain or loss contingency because the matter was not considered probable or reasonably estimable at June 30.
Most important facts for investors to verify
- Whether originations and merchant concentration continue to improve or remain heavily dependent on Wayfair.
- Trends in delinquencies, bad debt expense, collections, and lease depreciation assumptions, which affect margins and asset values.
- Cash generation after funding lease merchandise, borrowing availability, interest costs, and compliance with debt covenants.
- Progress in remediating the disclosed material weakness and establishing effective financial reporting controls.
- Developments in the DCA litigation and any resulting financial exposure.