Katapult Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Dollar amounts below are in millions unless stated otherwise. Katapult provides e-commerce lease-purchase options to nonprime U.S. consumers. Its June 9, 2021 business combination with FinServ was accounted for as a reverse recapitalization; Legacy Katapult was the accounting acquirer.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $71.7 | $71.2 | $229.8 | $173.8 |
| Gross profit | $18.4 | $24.2 | $67.7 | $57.3 |
| Operating income (loss) | $(2.6) | $13.6 | $2.8 | $29.1 |
| Net income | $13.7 | $9.8 | $13.7 | $18.6 |
| Operating cash flow | Not presented separately for quarter | Not presented separately for quarter | $2.7 | $(6.2) |
- Q3 revenue was nearly flat (+0.7%); nine-month revenue rose 32.2%. Nine-month gross originations increased 7.9% to $189.0 million, while Q3 originations grew just 0.8% to $61.0 million.
- Margins weakened: gross margin was approximately 25.6% in Q3 versus 34.0% a year earlier, and 29.4% for the nine-month period versus 33.0%. Cost of revenue rose faster than revenue, with management citing merchant promotions and pricing concessions.
- Q3 GAAP net income included a $21.3 million noncash gain from the decrease in fair value of warrant liabilities, despite an operating loss. Company-reported adjusted EBITDA was $0.1 million and adjusted net loss was $4.5 million for Q3. For nine months, adjusted EBITDA was $18.6 million and adjusted net income was $6.2 million. These are non-GAAP measures.
- Bad debt expense increased 51.0% in Q3 to $5.9 million and 96.1% for nine months to $18.8 million. Management attributed the increase to a larger lease base and unusually low delinquencies in 2020 during pandemic-related government stimulus.
- Nine-month operating cash flow was $2.7 million, versus cash used of $6.2 million in 2020. Cash and restricted cash totaled $102.9 million at September 30, including $99.7 million unrestricted cash. Operating cash flow includes substantial lease-asset purchases; net purchases of property held for lease were $152.8 million.
- At September 30, revolving credit carrying value was $67.5 million and long-term debt carrying value was $39.6 million. Principal, including PIK interest, totaled $119.6 million. The revolving facility and term loan bear variable LIBOR-based rates and mature in 2023; the company reported covenant compliance.
- Total liabilities were $143.3 million and stockholders’ equity was $33.1 million, versus a $0.9 million stockholders’ deficit at December 31, 2020. The merger and PIPE substantially changed the capital structure; 97.5 million common shares were outstanding at quarter-end.
Changes, outlook and significant matters
- Wayfair accounted for 66% of Q3 and 63% of nine-month gross originations, down from 70% and 72%, respectively, in the comparable 2020 periods. Management cited new merchant additions and online spending trends; it onboarded 25 merchants in Q3 and 82 over nine months. Repeat customers generated more than half of Q3 originations, and their number rose 42% year over year.
- Compensation costs, including stock-based compensation and merger-related awards, and public-company, legal, technology and compliance expenses increased materially. Nine-month stock-based compensation was $12.9 million.
- The company provided no specific numerical financial guidance. Management said COVID-19-related economic impacts and uncertainty could continue through the remainder of 2021; it cautioned that favorable pandemic-era customer trends may not persist. It expects to fund operations through operating cash flows and borrowing capacity, but says additional debt or equity financing may be needed if operating cash flow is insufficient.
- Key risks include consumer spending and credit performance, merchant concentration, funding availability and restrictive debt covenants, interest-rate and LIBOR transition exposure, regulatory requirements for rental-purchase transactions, cybersecurity and platform reliability, and the ability to manage growth and costs.
- Two unreserved legal matters were disclosed: DCA litigation concerning alleged advisory and transaction fees, with the company asserting counterclaims of approximately $10.6 million; and a putative securities class action filed in August 2021 seeking unspecified damages. The company had not recorded a loss or gain contingency for either because it considered the outcome not probable or reasonably estimable.
- Disclosure controls were deemed ineffective at September 30, 2021 due to unremediated material weaknesses in GAAP expertise and oversight, lease-asset expense calculations, journal-entry review, and user access controls. Remediation was in progress, with no assurance it would be sufficient.
Important facts for investors to verify
- Whether revenue, originations and merchant diversification improve, and how much exposure to Wayfair remains.
- Whether bad debt, delinquencies, collections and lease-asset impairment develop as pandemic-related customer support recedes.
- How much reported earnings depend on noncash warrant remeasurement and stock-based or merger-related compensation; compare GAAP results with the company’s non-GAAP reconciliations.
- Whether cash generation can support lease originations, debt service and liquidity needs, and whether credit covenants remain satisfied.
- Progress remediating material weaknesses and developments in the DCA and shareholder litigation.