DEFA14A: Katapult Secures $65M, Restructures Debt, Adds Directors

Katapult Holdings, Inc. has raised $65 million through convertible preferred stock, repaid its term loan, amended its revolving credit facility, and appointed new directors to its board.

Summary

• Katapult Holdings, Inc. (KPLT) entered into Series A and Series B Investment Agreements with HHCF Series 21 Sub, LLC, raising a total of $65.0 million in gross proceeds.
• The Series A Convertible Preferred Stock issuance generated $35.0 million, used to repay the Company's term loan in full.
• The Series B Convertible Preferred Stock issuance generated $30.0 million, used to partially prepay the revolving loan, cover transaction expenses, and for general corporate purposes.
• The initial conversion price for Series A Preferred Stock is $12.32 per share, and for Series B Preferred Stock is $11.39 per share.
• Upon full conversion of both series, the Purchaser (HHCF Series 21 Sub, LLC) would beneficially own 5,474,800 shares of Common Stock, representing 54.5% of the issued and outstanding Common Stock, subject to an Ownership Limitation.
• The Company obtained a limited waiver and first amendment to its Loan Agreement, waiving existing defaults related to Minimum Trailing Three-Month Originations for periods ending August 31, 2025, September 30, 2025, and October 31, 2025.
• The Loan Agreement was amended to adjust thresholds for Minimum Three-Month Originations, increase the Minimum Liquidity financial covenant, and reduce the revolving loan advance rate from 99% to 90%.
• The Preferred Stock carries a cumulative dividend rate of 18% per annum, payable weekly, until Requisite Stockholder Approval is obtained, after which it reduces to 12% per annum, payable quarterly.
• If Requisite Stockholder Approval is not obtained by February 27, 2026, the dividend rate will increase by 1% per annum.
• Three directors (Brian Hirsch, Chris Masto, Jane J. Thompson) resigned, and three new directors (Philip Key Bartow III, Jeffrey Rubin, Derek Medlin) were appointed, with Daniel Easley to join after Requisite Stockholder Approval.
• The Purchaser has the right to nominate up to three directors to the Board, with two required to be independent, as long as it owns at least one-third of the Company's fully diluted voting equity securities.

Sentiment

Score: 4

Explanation: While the Company successfully secured significant capital and addressed immediate debt defaults, the high cost of capital (18% dividend rate) and the substantial potential dilution (54.5% ownership for the investor) indicate a financially challenging situation. The need for multiple waivers and reduced advance rates also points to underlying operational weaknesses, making the overall sentiment cautious despite the immediate relief.

Positives

• Secured $65.0 million in new capital, providing a significant liquidity injection.
• Successfully repaid the Company's term loan in full, reducing a major debt obligation.
• Obtained a waiver for past defaults on loan covenants, preventing immediate acceleration of debt.
• Amended loan agreement terms, including adjusted origination thresholds, which may provide more operational flexibility.
• Appointed new directors with extensive experience in investment management, specialty finance, and electronic payment processing, potentially strengthening board expertise and oversight.

Negatives

• The Company was in default on its loan agreement due to failure to meet Minimum Trailing Three-Month Originations for three consecutive months (August, September, October 2025).
• The new preferred stock carries a high annual dividend rate of 18%, increasing to 19% if shareholder approval for full conversion is not obtained by February 27, 2026, which could be a significant financial burden.
• The revolving loan advance rate was reduced from 99% to 90%, potentially limiting future borrowing capacity.
• The Purchaser could own 54.5% of the Company's common stock upon full conversion, indicating substantial dilution for existing shareholders and a shift in control.
• Conversion of preferred stock is limited to 19.99% of outstanding common stock until shareholder approval, creating uncertainty and potential for delayed full conversion.

Risks

• Failure to obtain Requisite Stockholder Approval by February 27, 2026, would increase the preferred stock dividend rate by 1% and maintain the 19.99% ownership limitation on conversion, impacting financial flexibility and potential for full conversion.
• The Company's ability to meet the adjusted Minimum Trailing Three-Month Net Originations and increased Minimum Liquidity financial covenants remains a challenge, as evidenced by prior defaults.
• The high dividend rate on the preferred stock could strain the Company's cash flow, especially if operational performance does not improve significantly.
• The reduction in the revolving loan advance rate could limit the Company's access to working capital if needed.
• The concentration of ownership by the Purchaser (potentially 54.5%) could lead to significant influence over corporate decisions, potentially at odds with minority shareholder interests.

Future Outlook

The Company expects to hold a shareholder meeting to obtain approval to remove the Ownership Limitation on preferred stock conversion by February 27, 2026. It will use reasonable best efforts to obtain this approval, including endorsing it in proxy materials. The Company also plans to file a registration statement covering the resale of common stock issuable upon preferred stock conversion within 45 days of the closing.

Management Comments

• The decisions of Messrs. Hirsch and Masto and Ms. Thompson to resign from the Board of Directors was not the result of any disagreement relating to the Company's operations, policies or practices.
• The Company thanks each of them for their commitment and service.

Industry Context

This filing indicates a significant recapitalization and debt restructuring for Katapult, a company operating in the lease-to-own or financial accommodation sector. The high dividend rates on the new preferred stock and the need for waivers on existing loan defaults suggest the Company has faced recent financial challenges. The changes to financial covenants and board composition reflect an effort to stabilize and potentially re-strategize in a competitive and evolving consumer finance landscape.

Comparison to Industry Standards

• The 18% (or potentially 19%) annual dividend rate on the convertible preferred stock is significantly higher than typical preferred stock dividend rates for financially stable companies, indicating a distressed financing scenario. For example, preferred stock dividends for more established companies often range from 4-8%.
• The waiver of loan defaults for Minimum Trailing Three-Month Originations suggests underperformance compared to prior internal targets and potentially industry growth rates for similar lease-to-own providers.
• The reduction in the revolving loan advance rate from 99% to 90% is a tightening of credit terms, which is generally worse than industry standards for healthy companies, reflecting increased lender caution.
• The appointment of directors with specialty finance and fintech experience (e.g., Philip Key Bartow III from Sound Point Capital, Jeffrey Rubin from The JR Group/Excel Payments) aligns with industry trends of bringing specialized expertise to boards during periods of strategic change or financial restructuring.

Management Changes

Corporate Governance

Related Party Transactions

• HHCF Series 21 Sub, LLC (the Purchaser) is a subsidiary of Hawthorn Horizon Credit Fund, LLC, which is identified as a 'Permitted Holder' in the amended Loan Agreement, indicating a pre-existing relationship or a relationship established through this transaction.
• The Director Nomination Agreement grants the Purchaser the right to nominate directors to the Company's board, establishing a direct governance link.
• Certain officers and directors of the Company entered into Support Agreements with the Purchaser, agreeing to vote their shares in favor of removing the Ownership Limitation, indicating a coordinated effort between management/board and the new investor.

Stakeholder Impact

• **Shareholders**: Face significant potential dilution (54.5% ownership by new investor upon full conversion) and subordination of common stock to new preferred stock in terms of dividends and liquidation preference. However, the capital raise and debt restructuring may prevent more severe financial distress.
• **Employees**: The appointment of Derek Medlin (President of the Company) to the board suggests continuity in operational leadership, but the overall financial restructuring could lead to future operational adjustments.
• **Creditors**: The repayment of the term loan and partial prepayment of the revolving loan improve the Company's immediate debt profile. The waiver of past defaults and amended covenants provide a clearer path forward for the remaining lenders.
• **Customers**: No direct impact mentioned, but financial stability and strategic changes could indirectly affect service quality or product offerings in the long term.
• **Suppliers**: No direct impact mentioned, but improved financial health could lead to more reliable payments and stronger relationships.

Next Steps

• Hold a shareholder meeting to obtain Requisite Stockholder Approval to remove the 19.99% Ownership Limitation on preferred stock conversion, targeted by February 27, 2026.
• File a registration statement covering the resale of common stock issuable upon conversion of the Preferred Stock within 45 days following the closing of the Preferred Stock Issuances.
• The newly appointed directors will begin their terms, with Daniel Easley's appointment effective immediately following Requisite Stockholder Approval.

Key Dates

Recommendation

The Company has secured critical funding and restructured its debt, which is a positive step away from immediate financial distress. However, the terms of the new capital, including a high dividend rate and significant potential dilution, are onerous and reflect the Company's challenging financial position. The future performance hinges on successful execution of operational improvements, meeting revised financial covenants, and obtaining shareholder approval for full preferred stock conversion. Given the high risk and uncertainty, but also the avoidance of immediate collapse, a 'hold' recommendation is appropriate for investors who are already exposed and can tolerate high risk, awaiting clearer signs of sustainable recovery and improved profitability. New investors should approach with extreme caution due to the significant risks and unfavorable terms.

Keywords

Convertible Preferred Stock, Debt Restructuring, Private Placement, Corporate Governance, SEC Filing, Financial Covenants, Shareholder Approval, Board of Directors, Liquidity, Loan Default Waiver