Company Overview
Katapult Holdings, Inc. (KPLT) is an e-commerce-focused financial technology company that provides lease-to-own (LTO) solutions to underserved U.S. consumers. The company has a unique business model that integrates with omnichannel retailers and e-commerce platforms, empowering customers to obtain everyday durable goods through flexible financing options.
Founded in 2012 and headquartered in Plano, Texas, Katapult has established itself as a leading player in the LTO industry. The company's journey has been marked by both challenges and successes, as it has navigated a dynamic market landscape and adapted its strategies to better serve its growing customer base.
Company History
Katapult Holdings, Inc. was incorporated in Delaware in 2016 and was initially headquartered in New York, New York before moving to Plano, Texas in December 2020. The company's roots trace back to 2012 when Katapult Group, Inc. (formerly known as Cognical, Inc.) was incorporated in Delaware, becoming a key subsidiary of Katapult. In 2019, another important subsidiary, Katapult SPV-1 LLC, was formed in Delaware to originate all of Katapult's leases.
Throughout its history, Katapult has faced several significant challenges. In 2020, the company identified control deficiencies that collectively constituted material weaknesses in its internal control over financial reporting. These material weaknesses remained unremediated as of September 30, 2024, and were still present at the time of filing the Q3 2024 10-Q. Furthermore, in 2023, Katapult discovered that its previously issued financial statements were materially misstated due to an overstatement of rental revenue and an understatement of sales tax payable, necessitating a restatement of its consolidated financial statements.
Despite these obstacles, Katapult has achieved notable milestones. In 2021, the company became a public entity through a business combination with FinServ Acquisition Corp., marking a significant step in its growth trajectory. The company has demonstrated consistent growth, with gross originations increasing for eight consecutive quarters as of Q3 2024. This growth has been driven by the diversification of its gross originations base, achieved through the addition of new direct and waterfall merchants and the rapid expansion of its Katapult Pay originations.
Business Transformation and Strategy
In 2020, Katapult underwent a significant transformation when it merged with FinServ Acquisition Corp., a special purpose acquisition company (SPAC), and began trading on the Nasdaq exchange as Katapult Holdings, Inc. This event provided the company with additional capital and resources to expand its reach and accelerate its growth plans.
Over the past few years, Katapult has diversified its business model by focusing on three key strategic pillars: growing its direct and waterfall merchant relationships, expanding its Katapult Pay mobile app offerings, and implementing a scalable marketing strategy. These initiatives have been instrumental in driving the company's financial and operational performance.
Growth and Performance
Katapult's gross originations, a key metric that represents the retail price of merchandise associated with lease-purchase agreements, have grown for eight consecutive quarters as of the third quarter of 2024. The company's revenue also increased by 10% year-over-year in the third quarter, demonstrating its ability to generate consistent top-line growth.
One of Katapult's notable achievements has been the expansion of its merchant partnerships. The company has successfully integrated with new merchants, both through direct integrations and waterfall relationships, diversifying its customer base and reducing its reliance on any single merchant. In the third quarter, the company's non-Wayfair gross originations, which account for 58% of its total originations, grew by more than 37% year-over-year.
Additionally, Katapult's mobile app, Katapult Pay, has become a significant growth driver for the business. In the third quarter, Katapult Pay accounted for 31% of the company's total gross originations and grew by 86.1% year-over-year. The app's ability to provide a seamless and flexible shopping experience for customers has been instrumental in driving increased user engagement and repeat business.
Marketing Initiatives
Katapult has also made strides in its marketing efforts, doubling the number of campaigns in the third quarter compared to the previous year. These initiatives, which include expanding its Google Ads presence and exploring new referral partnerships, have contributed to a 37% year-over-year increase in originations coming through the Katapult app, which represented over 53% of the company's total gross originations in the quarter.
Challenges and Opportunities
However, Katapult has not been without its challenges. The company has faced headwinds in the home furnishings category, particularly with its largest merchant partner, Wayfair. During the third quarter, Wayfair's application flow was down significantly, which impacted Katapult's overall gross originations growth. To offset this, the company has implemented strategic pricing promotions and refined its underwriting approach to maintain approval and conversion rates without compromising its risk profile.
Looking ahead, Katapult is optimistic about its prospects, especially as it navigates the upcoming holiday season. The company is leveraging its diverse merchant relationships, the power of its Katapult Pay app, and its targeted marketing efforts to provide consumers with inspiring shopping experiences and drive continued growth.
Despite the macroeconomic challenges, Katapult remains well-positioned to capitalize on the large addressable market of underserved, non-prime consumers. The company's focus on innovation, strategic partnerships, and operational efficiency has laid the foundation for long-term sustainable growth.
Financials
Katapult's financial performance in the third quarter of 2024 reflects its ability to adapt and execute its growth strategies. The company reported a 3.3% year-over-year increase in gross originations, with its non-Wayfair business growing by an impressive 37%. Revenue grew by 10% year-over-year to $60.31 million, demonstrating the company's resilience and ability to generate consistent top-line growth.
For the most recent fiscal year (2023), Katapult reported revenue of $221.59 million, with a net income of -$36.66 million. Operating cash flow (OCF) was -$17.41 million, and free cash flow (FCF) was -$18.39 million. In the most recent quarter (Q3 2024), the company reported a net income of -$8.89 million, compared to -$4.05 million in Q3 2023, primarily due to a $3.35 million litigation settlement expense. OCF and FCF for Q3 2024 were -$5.42 million and -$5.74 million, respectively, showing a decline year-over-year due to higher net losses and changes in working capital.
Katapult's adjusted EBITDA performance in the third quarter was in line with its outlook, despite the increased operating expenses related to the DCA litigation settlement. Excluding the litigation expense, the company's fixed cash operating expenses increased by a modest 8.5% compared to the prior-year period, highlighting its disciplined approach to cost management.
The company operates primarily in the United States, with rental revenue accounting for 98.8% of its total revenue. For the nine months ended September 30, 2024, rental revenue was $181.95 million out of a total revenue of $184.23 million. The remaining 1.2% of revenue, or $2.28 million, came from other sources such as the sale of property held for lease and lease agreements to third parties.
Katapult's gross profit for the nine months ended September 30, 2024, was $38.37 million, representing a gross margin of 20.8%. This was an improvement from the prior year period's gross profit of $32.81 million and 20.0% gross margin, driven by higher gross originations and stronger collection efforts.
It's worth noting that a significant portion of Katapult's gross originations are concentrated with its top merchant, Wayfair, which represented 46% of gross originations in the first nine months of 2024, down from 54% in the prior year period. The company's top ten merchants collectively accounted for 82% of gross originations during the nine-month period.
Liquidity
The company's balance sheet and liquidity position remain strong, with $30.3 million in total cash and cash equivalents, including $4.4 million in restricted cash, as of September 30, 2024. Breaking this down further, Katapult had $25.88 million in cash and cash equivalents and $4.42 million in restricted cash. Additionally, the company had $7.70 million available on its revolving line of credit.
Katapult's debt-to-equity ratio stood at -2.39 as of Q3 2024, while its current ratio and quick ratio were both 0.68. The company is actively working to refinance its existing debt, which matures in June 2025, to further strengthen its financial flexibility.
Legal and Regulatory Matters
In August 2021, a putative class action lawsuit was filed against Katapult alleging securities law violations related to the company's deSPAC transaction. This lawsuit, along with a related lawsuit in Delaware, was settled in 2024 for a total consideration of $12 million. The company has not faced any known short seller reports or CEO departures.
Industry Trends
The virtual lease-to-own industry has experienced strong growth, with a compound annual growth rate (CAGR) of approximately 15% over the past three years. Katapult has been able to capitalize on this trend, growing its gross originations for eight consecutive quarters.
Outlook and Future Prospects
Looking ahead, Katapult has provided its fourth-quarter and full-year 2024 outlook. For the fourth quarter, the company expects gross originations growth of 6% to 8%, with gross originations excluding Wayfair continuing to grow at a much faster pace than the overall business. 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 gross originations outlook to 2% to 4% growth, while reiterating its revenue growth of at least 10%. The company expects to achieve $5.5 million in positive adjusted EBITDA, which would be the first time achieving positive adjusted EBITDA since 2021.
It's important to note that in the previous quarter, Katapult had provided an outlook for Q3 2024 that assumed an improvement in the home furnishings category, particularly at their Wayfair business. However, Wayfair application flow was down meaningfully during Q3, and the home furnishings category fell short of Katapult's expectations. Despite this headwind, the company was able to drive 37% year-over-year growth in the portion of their business excluding Wayfair.
While the company faces ongoing challenges in the home furnishings category, Katapult's diversification efforts and strategic initiatives have positioned it well to navigate the current market environment. The company's focus on expanding its merchant partnerships, enhancing its Katapult Pay app, and implementing effective marketing strategies should continue to drive growth and improve its financial performance.
Conclusion
Katapult's journey has been marked by both successes and challenges, but the company's resilience and adaptability have been instrumental in its ability to serve the underserved consumer market. As it continues to execute its strategic priorities, Katapult remains well-positioned to capitalize on the significant opportunities within the lease-to-own industry and deliver long-term value for its shareholders.