Katapult Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial statements are unaudited; dollar amounts below are in millions unless noted. Katapult provides digital lease-purchase options for durable goods to non-prime U.S. consumers through merchant integrations and its Katapult Pay app.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $55.3 | $50.3 | $165.5 | $163.3 |
| Gross profit | $12.8 | $11.9 | $37.0 | $31.9 |
| Gross margin | 23.2% | 23.7% | 22.4% | 19.5% |
| Operating income (loss) | $0.7 | ($4.7) | ($4.5) | ($17.7) |
| Net loss | ($2.9) | ($9.2) | ($18.4) | ($25.6) |
| Net loss per share | ($0.71) | ($2.34) | ($4.54) | ($6.52) |
| Adjusted EBITDA (non-GAAP) | $2.0 | ($2.3) | $2.3 | ($11.7) |
Q3 revenue rose 9.8%, led by 10.6% higher rental revenue; nine-month revenue increased 1.4%. Gross profit improved in both periods, but Q3 gross margin declined 0.5 percentage points year over year, while the nine-month margin expanded 2.9 points. Management attributed gross-profit improvement primarily to fewer early buyouts and stronger collections and underwriting, partly offset year to date by higher lease-asset impairment.
Gross originations increased 12.5% in Q3 to $49.6 million and 16.0% year to date to $159.0 million. Katapult Pay generated $8.5 million and $21.9 million of originations, respectively. Wayfair represented 56% of Q3 and 54% of year-to-date originations; the top ten merchants represented 85% and 81%.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $32.2 million and restricted cash was $6.7 million, versus combined cash and restricted cash of $69.8 million at December 31, 2022. Stockholders’ deficit was $1.9 million.
- For the first nine months, operating cash use was $7.7 million, investing cash use was $0.8 million, and financing cash use was $22.5 million. The financing outflow included a $25.0 million term-loan principal repayment.
- Debt principal totaled $90.9 million: $60.9 million on the revolving line of credit (RLOC) and $30.0 million on the term loan, including capitalized PIK interest. Carrying value was $84.9 million. Both facilities mature June 4, 2025; September 30 stated rates were 13.9% on the RLOC and 17.9% on the term loan, including 4.5% PIK interest.
- The RLOC commitment was reduced from $125 million to $75 million in the March 2023 amendment. The facility has a 90% advance rate on eligible receivables, so nominal commitment less borrowings should not be treated as confirmed borrowing availability. Management said unrestricted cash and available RLOC borrowings were sufficient for the next 12 months and expects to meet longer-term needs through cash, operating cash flow and the RLOC. The filing reports covenant compliance at quarter-end; the credit agreement requires at least $10 million of unrestricted liquidity.
Changes, outlook and notable items
- Operating expenses fell 27.0% in Q3 and 16.1% year to date, reflecting expense reductions, including headcount and professional-services cuts. Year-to-date compensation includes increased stock compensation and one-time severance.
- Write-offs as a percentage of revenue rose to 9.3% in Q3 from 8.1%, and to 9.0% for nine months from 6.9%; management attributed the year-to-date increase to seasonal patterns. Nine-month lease-asset impairment was $15.4 million, compared with $11.9 million a year earlier.
- The March credit amendment extended debt maturities, raised the RLOC spread, changed the benchmark from LIBOR to SOFR and required a $25 million term-loan repayment. It also issued an 80,000-share warrant at $0.25 per share; an additional 80,000 shares may be required under specified conditions. Katapult recorded a $2.4 million debt-extinguishment loss.
- A 1-for-25 reverse stock split took effect July 27, 2023, in part to meet Nasdaq’s minimum bid-price requirement. The company reported regaining compliance in August but warned that continued listing is not assured.
- Management described the macroeconomic outlook as uncertain, citing elevated interest rates, tight lending standards and possible effects of resumed student-loan payments. It expects challenging conditions to continue into early 2024. The filing gives no numerical financial guidance.
- Disclosure controls were deemed ineffective at September 30 because two previously identified material weaknesses remained under remediation: insufficient GAAP-experienced personnel and inadequate journal-entry review and support controls. Management reported hiring a CFO and continuing remediation efforts.
- Legal matters include DCA litigation, in which a court found a triable question on damages for one alleged breach and a triable question on a termination-fee claim; Katapult appealed the former ruling. In a separate shareholder case, certain claims were dismissed, while some claims involving FinServ remain. The company recorded no loss contingency for the shareholder litigation because loss was not considered probable or reasonably estimable.
Most important facts for investors to verify
- Actual borrowing availability under the RLOC after eligible-receivables advance limits, covenant tests and other facility conditions.
- Whether operating cash use, lease impairment and write-offs improve or deteriorate as originations grow, and how collections perform.
- Wayfair and top-merchant concentration, and whether Katapult Pay and other merchant growth can reduce that dependence.
- Progress remediating the material weaknesses and the timing of effective control testing.
- Developments in the DCA and shareholder litigation, covenant compliance, and any additional warrant issuance or dilution.