Katapult Holdings, Inc. (KPLT) is an e-commerce-focused financial technology company that has undergone a remarkable transformation in recent years. Originally known as a provider of lease-to-own (LTO) solutions, Katapult has evolved into a multifaceted platform that offers innovative financial services to underserved, non-prime consumers across a growing range of retail verticals.

Business Overview and History

Katapult's journey began in 2012 when Katapult Group, Inc. (formerly known as Cognical, Inc.) was incorporated in Delaware and started offering lease-to-own services. The company was later incorporated in Delaware in 2016 as Katapult Holdings, Inc., initially headquartered in New York, New York. In December 2020, the company relocated its headquarters to Plano, Texas, marking a significant milestone in its growth.

In 2019, Katapult SPV-1 LLC was formed as a wholly-owned subsidiary to originate the company's lease-to-own transactions, further streamlining its operations. The company faced a challenge in 2020 when it experienced a data breach, with a data broker claiming to offer customer records from Katapult for sale on a hacker forum. Although the company determined that no confidential proprietary or personal data was compromised, this incident had the potential to impact the company's reputation.

A pivotal moment in Katapult's history came in 2021 when the company went public through a business combination with FinServ Acquisition Corp. This transaction provided Katapult with additional capital to invest in growth initiatives. However, the company faced some setbacks in 2022 and 2023 when it had to restate its previously issued financial statements due to errors related to the calculation of sales tax payable. These restatements required significant time and resources to address and had the potential to raise reputational issues for the business.

Throughout its history, Katapult has remained focused on building partnerships with omnichannel and e-commerce merchants to provide lease-to-own financing options for their customers. The company has consistently invested in developing its own technology platform, including a mobile app, to enhance the customer experience and drive growth.

Financial Performance and Ratios

Katapult's financial performance has been impressive, with the company reporting eight consecutive quarters of year-over-year gross originations growth as of the third quarter of 2024. In Q3 2024, the company's gross originations increased 3.3% to $51.2 million, with non-Wayfair gross originations growing 37% year-over-year. This diversification of the company's merchant base has been a key contributor to its sustained growth.

Revenue for the third quarter of 2024 increased 10% year-over-year to $60.3 million, outpacing the company's guidance. Gross profit for the quarter was $11.9 million, representing a gross margin of 19.8%, which is within Katapult's targeted range of 18-20% for the full year 2024. The company's disciplined approach to expense management has allowed it to deliver solid profitability, with adjusted EBITDA of $0.6 million in Q3 2024.

For the full fiscal year 2023, Katapult reported revenue of $221.6 million, with a net loss of $36.7 million. Operating cash flow for 2023 was negative $17.4 million, and free cash flow was negative $18.4 million. The company's performance in the first nine months of 2024 showed improvement, with total revenue reaching $184.2 million, a 12.3% increase year-over-year. However, Katapult still reported a net loss of $16.4 million for this period.

Liquidity

As of September 30, 2024, Katapult had total cash and cash equivalents of $30.3 million, including $25.9 million in cash and cash equivalents and $4.4 million in restricted cash. The company's total debt stood at $95.9 million, consisting of $67.1 million outstanding on its revolving line of credit and $28.8 million outstanding on its term loan. The current maturity date for the debt is June 2025, and Katapult is actively pursuing a refinancing.

Katapult's liquidity position is reflected in its financial ratios. As of Q3 2024, the company had a debt-to-equity ratio of -2.40, indicating a highly leveraged capital structure. The current ratio and quick ratio both stood at 0.68, suggesting potential challenges in meeting short-term obligations.

Diversification and Innovation

Katapult's success in diversifying its merchant partnerships and product offerings has been a key driver of its growth. In addition to its core home furnishings business, the company has made significant inroads in the automotive parts and accessories segment, which grew more than 25% year-over-year in the third quarter of 2024. The company has also launched integrations with a variety of new merchants, including BB Wheels, Extreme Customs, and Tire Agent, further expanding its reach.

The introduction of Katapult Pay has been a transformative initiative for the company. By offering customers the ability to access a broader range of durable goods through its LTO platform, Katapult has been able to drive increased customer engagement and loyalty. In the third quarter of 2024, KPay originations grew 86.1% year-over-year, representing 31% of the company's total gross originations.

Katapult has also been focused on enhancing its technological capabilities, including the recent launch of a new product-based search feature within its mobile app. This feature allows customers to search for specific products across multiple merchant sites, providing them with greater flexibility and choice in their shopping experience.

Risks and Challenges

While Katapult has demonstrated impressive growth and diversification, the company is not without its risks and challenges. A significant portion of the company's gross originations is still concentrated with a single merchant, Wayfair, which represented 42% of total gross originations in the third quarter of 2024. Any deterioration in Katapult's relationship with Wayfair or a slowdown in the home furnishings industry could have a material impact on the company's performance.

Additionally, Katapult operates in a highly competitive and rapidly evolving industry, with the potential for new entrants or technological advancements by competitors to disrupt the company's business model. The company's ability to continue innovating and adapting to changing market conditions will be crucial to its long-term success.

Regulatory and compliance risks are also a concern for Katapult, as the company's lease-to-own transactions and customer-facing operations are subject to various federal and state laws and regulations. Any adverse changes in the regulatory landscape or the company's ability to comply with applicable requirements could have a material impact on its business.

Outlook and Guidance

Despite the challenges, Katapult remains well-positioned for continued growth and profitability. The company's diversification efforts, innovative product offerings, and disciplined expense management have allowed it to deliver solid financial results in the face of macroeconomic headwinds.

For the fourth quarter of 2024, Katapult expects gross originations growth of 6% to 8%, with gross originations excluding Wayfair continuing to grow at a much faster pace than overall gross originations. Revenue growth is projected to be in the range of 5% to 7%, with roughly breakeven adjusted EBITDA.

For the full year 2024, Katapult has adjusted its outlook, now expecting gross originations to grow 2% to 4%, which is lower than previously expected. However, the company reiterates its revenue growth outlook of at least 10% and expects to deliver $5.5 million in positive adjusted EBITDA, which will be the first time achieving positive adjusted EBITDA since 2021.

It's worth noting that Katapult's Q4 outlook assumes the home furnishings category does not improve materially from Q3 performance and that there will not be any material impact from prime creditors tightening or loosening above Katapult's target market.

Conclusion

As Katapult continues to evolve beyond its lease-to-own roots, the company's ability to successfully execute on its diversification and innovation strategies will be critical to its long-term success. The company's focus on expanding its merchant partnerships, enhancing its technological capabilities, and driving customer engagement through its mobile app and Katapult Pay platform suggest a promising path forward.

While Katapult faces challenges, including its reliance on key partners like Wayfair and ongoing profitability concerns, the company's recent financial performance and strategic initiatives demonstrate its potential for growth in the dynamic e-commerce and financial technology landscape. Investors will be closely watching Katapult's progress in navigating these challenges and capitalizing on opportunities in the non-prime consumer financing market.