Katapult Holdings, Inc. annual report, FY2021

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Katapult Holdings, Inc. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; filed March 15, 2022. This is an annual report, not a standalone fourth-quarter report. Katapult provides e-commerce point-of-sale lease-purchase options to U.S. non-prime consumers. The business combination with FinServ closed June 9, 2021 and was accounted for as a reverse recapitalization.

Financial performance and liquidity

  • Revenue: $303.1 million, up 22.6% from $247.2 million in 2020. Gross originations—transaction volume, not revenue—were $248.0 million, up 4.9%.
  • Profitability: Gross profit was $89.0 million, up 11.5%; gross margin declined to 29% from 32%. Operating income fell to $1.7 million from $36.9 million. Net income was $21.2 million versus $22.5 million; diluted EPS was $0.26 versus $0.48.
  • Earnings quality: Net income included a $36.6 million noncash gain from remeasuring warrant liabilities. Adjusted EBITDA, a non-GAAP measure, was $17.3 million versus $40.2 million; adjusted gross profit was $54.1 million versus $57.3 million.
  • Credit performance and costs: Bad debt expense rose 76.2% to $28.3 million, or 9.3% of revenue versus 6.5%. Cost of revenue increased 27.9%, faster than revenue. Compensation costs rose to $26.9 million, including $13.0 million of stock-based compensation related in part to the merger.
  • Cash flow: Operating cash flow was positive $2.2 million, compared with negative $2.1 million in 2020. Investing cash outflow was $1.4 million; financing cash inflow was $26.1 million. Year-end cash was $92.5 million, plus $3.9 million restricted cash.
  • Debt and liquidity: Principal outstanding under the revolving facility and term loan totaled $113.6 million at year-end; carrying value was $101.9 million. Current assets were $164.4 million and current liabilities $16.1 million. The credit agreement requires at least $50 million of liquidity and includes other financial covenants. The company reported covenant compliance at December 31, 2021, but disclosed that it had used the advance-rate cure right twice; a March 2022 amendment increased the permitted cure count from two to five.

Material changes versus 2020

  • Revenue grew, but originations grew only 4.9%, compared with 130.5% growth in 2020. Gross profit margin and adjusted gross profit declined, while bad debt expense increased as unusually strong pandemic-era payment performance normalized.
  • Operating expenses more than doubled, led by compensation, public-company and merger-related costs, and higher bad debt expense. Operating income fell sharply despite higher revenue.
  • The June 2021 merger and PIPE raised capital and expanded the share base. Year-end common shares outstanding were 97.6 million versus 31.4 million a year earlier.
  • Underwriting tightened in late 2021 and continued into 2022, contributing to fewer approvals. Management reported gross originations trending significantly lower year over year through February 2022.

Outlook, risks and unusual items

  • Management said it expected a challenging macroeconomic environment to continue in 2022, anticipated impairment charges returning toward pre-pandemic levels, and expected its largest merchants could return to growth in the second half of 2022. These are statements of expectation, not formal financial guidance.
  • Merchant concentration is substantial: Wayfair generated 63% of 2021 gross originations, and the top ten merchants generated approximately 90%. The Wayfair agreement may be terminated by either party on 60 days’ notice.
  • Key risks include inflation and supply-chain disruption, customer payment deterioration, model performance under changing conditions, competition, regulatory change affecting lease-purchase products, data privacy and cybersecurity, and reliance on payment processors and third-party data.
  • Two securities-related cases were pending: a Daiwa advisory-fee dispute, in which Katapult asserted counterclaims, and a putative securities class action. The company recorded no loss contingency for either because loss was not considered probable or reasonably estimable.
  • Material weaknesses in internal control over financial reporting remained. The company said certain weaknesses had been remediated, but two remained; its auditor did not attest to control effectiveness. Disclosure controls and procedures were assessed as effective. The auditor issued an unqualified opinion on the financial statements.
  • Katapult adopted lease accounting standard ASC 842 on January 1, 2022. It expected the change to alter revenue recognition and eliminate lease receivables and related allowances for customer payments earned but not yet received; comparability with prior periods may therefore be affected.

Important facts for investors to verify

  1. Whether originations, delinquencies, bad debt expense, impairment, and cash collections continued to deteriorate after the 2021 year-end.
  2. Current covenant headroom, advance-rate cure usage, borrowing availability, and ability to maintain the $50 million minimum liquidity requirement.
  3. Wayfair’s current contribution and the progress of merchant diversification, given the concentration and termination terms.
  4. Whether the remaining internal-control weaknesses were remediated and whether the pending litigation produced material developments.
  5. How ASC 842 affected reported revenue, earnings, and comparability in 2022.