10-Q: Katapult Holdings Reports Q1 2024 Results, Revenue Up 18.1% Amidst Restatement and Ongoing Challenges

Katapult Holdings, Inc. announced its first quarter 2024 results, showing an 18.1% increase in total revenue year-over-year, while also addressing a restatement of prior financial statements and ongoing internal control weaknesses.

Summary

• Katapult Holdings reported a net loss of $0.57 million for the first quarter of 2024, an improvement from a $10.5 million loss in the same period last year.
• Total revenue increased by 18.1% year-over-year, reaching $65.06 million, driven primarily by growth in rental revenue.
• Gross profit increased to $16.49 million, up from $11.87 million in the first quarter of 2023.
• The company's cost of revenue increased by 12.4% to $48.57 million, due to higher depreciation and impairment charges related to property held for lease.
• Operating expenses decreased by 18.5% to $12.69 million, primarily due to a reduction in professional and consulting fees and compensation costs.
• The company's gross originations, which is the retail price of merchandise associated with lease-purchase agreements, increased by 1.6% to $55.63 million.
• Wayfair represented 47% of gross originations, while Katapult Pay accounted for 26% of gross originations.
• The company restated its previously issued financial statements for the year ended December 31, 2022 and the interim periods of 2023 due to miscalculations of sales tax payable and depreciation expense.
• The company has identified material weaknesses in its internal control over financial reporting and is working to remediate them.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the revenue growth and improved profitability, but tempered by the restatement, ongoing internal control weaknesses, and reliance on a single merchant. The company is showing signs of improvement but faces significant challenges.

Positives

• The company experienced a significant increase in revenue and gross profit compared to the same period last year.
• Operating expenses decreased, indicating improved cost management.
• The company is seeing growth in its Katapult Pay product.
• The company has taken steps to address its debt obligations through refinancing.
• The net loss improved significantly compared to the same period last year.

Negatives

• The company reported a net loss for the quarter, although it was significantly reduced from the previous year.
• The company's cost of revenue increased, offsetting some of the revenue gains.
• The company has identified material weaknesses in its internal control over financial reporting.
• The company had to restate its prior financial statements due to accounting errors.
• The company is reliant on a single merchant, Wayfair, for a significant portion of its gross originations.

Risks

• The company is heavily reliant on a single merchant, Wayfair, for a significant portion of its gross originations, which exposes it to risks associated with that merchant's performance.
• The company's success depends on consumers making payments on their leases when due, and factors affecting consumer spending are not under its control.
• The company's proprietary algorithms and decisioning tools may not accurately predict customer behavior due to unexpected changes in consumer spending patterns.
• The company has substantial indebtedness, which may reduce its ability to withstand adverse developments or business conditions.
• The company is subject to stringent and changing laws and regulations related to data privacy and security.
• The company has identified material weaknesses in its internal control over financial reporting, which could affect its ability to accurately report financial results.
• The company is subject to legal proceedings from time to time which seek material damages or otherwise may have a material adverse effect on our business.
• The company has a history of operating losses and may not be profitable in the future.

Future Outlook

The company believes its total cash and available borrowings under its revolving line of credit are sufficient to meet its liquidity needs for the next 12 months. The company expects to meet longer-term cash requirements through a combination of available cash on hand, cash flows generated from operations, and availability under its revolving line of credit.

Management Comments

• Management believes that adjusted EBITDA provides a meaningful understanding of our operating performance.
• Management believes that fixed cash operating expenses provides a meaningful understanding of controllable ongoing expenses.

Industry Context

The company operates in the competitive virtual lease-to-own market, facing competition from various businesses, including other lease-to-own providers, e-commerce retailers, and consumer finance companies. The company's performance is influenced by broader economic conditions, consumer spending patterns, and the availability of credit.

Comparison to Industry Standards

• The company's revenue growth of 18.1% is a positive sign, but it is important to compare this to the growth rates of other companies in the virtual lease-to-own space, such as Affirm, Upstart, or Progressive Leasing, to assess its relative performance.
• The company's gross profit margin of 25.3% is a key metric to compare against industry averages and competitors to determine its profitability and efficiency.
• The company's reliance on Wayfair for 47% of its gross originations is a significant concentration risk, and it is important to compare this to the diversification strategies of other companies in the industry.
• The company's ongoing material weaknesses in internal control over financial reporting are a concern and should be compared to the internal control practices of other public companies in the financial technology sector.
• The company's debt levels and compliance with financial covenants should be compared to industry benchmarks to assess its financial stability and risk profile.

Legal Proceedings

• The company is involved in ongoing litigation with Daiwa Corporate Advisory LLC (DCA) regarding a breach of contract.
• The company is involved in a putative class action lawsuit, McIntosh v. Katapult Holdings, Inc., et al, alleging violations of securities laws.
• The company has reached a settlement in principle in both the New York and Delaware class action lawsuits and has accrued a contingent liability of $12 million.

Stakeholder Impact

• Shareholders may be concerned about the restatement of prior financial statements and the ongoing material weaknesses in internal control over financial reporting.
• Employees may be affected by the company's cost management efforts and any potential changes in operations.
• Customers may be affected by any changes in the company's products and services or its ability to provide a reliable platform.
• Merchants may be affected by the company's ability to attract and retain customers and its overall financial stability.
• Creditors may be concerned about the company's debt levels and its ability to comply with financial covenants.

Next Steps

• The company will continue to implement new controls and processes to remediate the material weaknesses in its internal control over financial reporting.
• The company will continue to focus on growing its business, including through the launch of new product offerings and expanding its customer base.
• The company will continue to monitor and manage its debt obligations and compliance with financial covenants.
• The company will continue to monitor and respond to changes in the regulatory environment.

Key Dates

Keywords

lease-to-own, e-commerce, financial technology, non-prime consumers, rental revenue, gross originations, debt refinancing, internal control, restatement, Katapult Pay