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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____  to _____
Commission file number 001-39116
Katapult Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware81-4424170
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
5204 Tennyson Parkway, Suite 500
Plano, TX
75024
(Address of principal executive offices)
(Zip Code)
(833) 528-2785
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per shareKPLTThe Nasdaq Stock Market LLC
Redeemable WarrantsKPLTWThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer
Accelerated filer
x
Non-accelerated filer
Smaller reporting company
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes   No  
The number of shares of the registrant’s common stock outstanding as of May 6, 2022 was 98,126,012.




Page
Part II - Other Information




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this report, including statements regarding our opportunity, our future results of operations and financial condition, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as “anticipate,” “assume” “believe,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will,” “would,” or the negative of these terms or other similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

• execution of our business strategy, including launching new product offerings and expanding information and technology capabilities;
• our market opportunity and our ability to acquire new customers and retain existing customers;
• general economic conditions in the markets where we operate, the cyclical nature of consumer spending, and seasonal sales and spending patterns of customers;
• failure to realize the anticipated benefits of the business combination with FinServ Acquisition Corp.;
• factors affecting consumer spending that are not under our control, including, among others, levels of employment, disposable consumer income, prevailing interest rates, consumer debt and availability of credit, pandemics (such as COVID-19), consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security;
• risks relating to uncertainty of our estimates of market opportunity and forecasts of market growth;
• risks related to the concentration of a significant portion of our business with a single merchant partner, or type of merchant or industry;
• the effects of competition on our future business;
• meeting future liquidity requirements and complying with restrictive covenants related to long-term indebtedness;
• the impact of unstable market and economic conditions such as rising inflation and interest rates and the conflict involving Russia and Ukraine on our business;
• the impact of the COVID-19 pandemic and its effect on our business;
• reliability of our platform and effectiveness of our risk model;
• protection of confidential, proprietary or sensitive information, including confidential information about consumers, and privacy or data breaches, including by cyber-attacks or similar disruptions;
• ability to attract and retain employees, executive officers or directors;
• effectively respond to general economic and business conditions;
• obtain additional capital, including equity or debt financing;
• enhance future operating and financial results;
• anticipate rapid technological changes;
• comply with laws and regulations applicable to our business, including laws and regulations related to rental purchase transactions;
• stay abreast of modified or new laws and regulations applying to our business, including rental purchase transactions and privacy regulations;
• maintain relationships with merchant partners;
• respond to uncertainties associated with product and service developments and market acceptance;
• anticipate the impact of new U.S. federal income tax law;
• identified material weaknesses in our internal control over financial reporting which, if not remediated, could affect the reliability of our condensed consolidated financial statements;
• successfully defend litigation;
• litigation, regulatory matters, complaints, adverse publicity and/or misconduct by employees, vendors and/or service providers; and
• other events or factors, including those resulting from civil unrest, war, foreign invasions (including the conflict involving Russia and Ukraine), terrorism, or public health crises, or responses to such events.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this Form 10-Q. Other sections of this Form 10-Q may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for



our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, events, or circumstances. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report or to conform these statements to actual results or to changes in our expectations. You should read this Form 10-Q and the documents that we have filed as exhibits to this report with the understanding that our actual future results, levels of activity, performance, and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (ir.katapultholdings.com), our filings with the Securities and Exchange Commission, webcasts, press releases and conference calls. We use these mediums, including our website, to communicate with investors and the general public about our company, our products, and other issues. It is possible that the information that we make available on our website may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website. The contents of our website are not incorporated into this filing. We have included our investor relations website address only as an inactive textual reference and do not intend it to be an active link to our website.







KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share amounts)
March 31,December 31,
20222021
ASSETS(Unaudited)
Current assets:
Cash$80,625 $92,494 
Restricted cash5,577 3,937 
Accounts receivable, net of allowance for doubtful accounts of $6,248 at December 31, 2021
 2,007 
Property held for lease, net of accumulated depreciation and impairment (Note 3)52,288 61,752 
Prepaid expenses and other current assets2,400 4,249 
Total current assets140,890 164,439 
Property and equipment, net (Note 4)669 576 
Security deposits91 91 
Capitalized software and intangible assets, net (Note 5)1,452 1,056 
Right-of-use assets (Note 13)1,050 — 
Total assets$144,152 $166,162 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$2,430 $2,029 
Accrued liabilities (Note 6)10,369 11,959 
Unearned revenue2,036 2,135 
Lease liabilities426 — 
Total current liabilities15,261 16,123 
Revolving line of credit (Note 7)48,105 61,238 
Long term debt (Note 8)41,586 40,661 
Other liabilities4,252 7,341 
Lease liabilities, non-current715 — 
Total liabilities109,919 125,363 
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value-- 250,000,000 shares authorized; 98,126,012 and 97,574,171 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
10 10 
Additional paid-in capital78,586 77,632 
Accumulated deficit(44,363)(36,843)
Total stockholders' equity34,233 40,799 
Total liabilities and stockholders' equity$144,152 $166,162 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1


KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(amounts in thousands, except share and per share amounts)
Three Months Ended March 31,
20222021
Revenue
Rental revenue$59,830 $80,625 
Other revenue47 10 
Total revenue59,877 80,635 
Cost of revenue48,113 52,882 
Gross profit11,764 27,753 
Operating expenses:
Servicing costs1,207 1,138 
Underwriting fees488 467 
Professional and consulting fees3,288 1,534 
Technology and data analytics2,410 1,549 
Bad debt expense 4,887 
Compensation costs5,377 2,582 
General and administrative3,805 1,183 
Total operating expenses16,575 13,340 
(Loss) income from operations(4,811)14,413 
Interest expense and other fees(3,801)(4,140)
Change in fair value of warrant liability3,089 (358)
(Loss) income before provision for income taxes(5,523)9,915 
Provision for income taxes35 1,825 
$(5,558)$8,090 
Net (loss) income per share:
Basic$(0.06)$0.26 
Diluted$(0.06)$0.15 
Weighted average shares used in computing net (loss) income per share:
Basic97,873,452 31,558,754 
Diluted97,873,452 52,322,573 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(amounts in thousands, except share and per share amounts)

Redeemable Convertible Preferred StockCommon StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders' Equity (Deficit)
SharesAmountSharesAmount
Balances at December 31, 2021 $ 97,574,171 $10 $77,632 $(36,843)$40,799 
Impact of ASC 842 adoption— — — — (1,962)(1,962)
Stock options exercised— — 275,435 — 60 — 60 
Vesting of restricted stock units— — 378,425 — — — — 
Repurchases of restricted stock for payroll tax withholding— — (102,019)— (195)— (195)
Stock-based compensation expense— — — — 1,089 — 1,089 
Net (loss)— — — — — (5,558)(5,558)
Balances at March 31, 2022 $ 98,126,012 $10 $78,586 $(44,363)$34,233 


Redeemable Convertible Preferred StockCommon StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders' Deficit
SharesAmountSharesAmount
Balances at December 31, 2020  31,432,477 $3 $57,097 $(58,049)$(949)
Stock options exercised— — 257,444 — 84 — 84 
Stock-based compensation expense— — — — 80 — 80 
Net income— — — — — 8,090 8,090 
Balances at March 31, 2021 $ 31,689,921 $3 $57,261 $(49,959)$7,305 







The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3


KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
Three Months Ended March 31,
20222021
Cash flows from operating activities:
Net (loss) income$(5,558)$8,090 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization32,740 36,062 
Net book value of property buyouts10,020 10,586 
Impairment expense3,224 3,800 
Bad debt expense 4,887 
Change in fair value of warrant liability(3,089)358 
Stock-based compensation1,089 80 
Amortization of debt discount537 697 
Amortization of debt issuance costs91 89 
Accrued PIK interest388 377 
Amortization of right-of-use assets89 — 
Change in operating assets and liabilities:
Accounts receivable (4,594)
Property held for lease(36,398)(51,253)
Prepaid expenses and other current assets1,849 (2,025)
Accounts payable401 518 
Accrued liabilities(1,444)(794)
Lease liabilities(99)— 
Unearned revenues(99)380 
Net cash provided by operating activities3,741 7,258 
Cash flows from investing activities:
Purchases of property and equipment(139)(103)
Additions to capitalized software(472)(166)
Net cash used in investing activities(611)(269)
Cash flows from financing activities:
Proceeds from revolving line of credit, net of deferred financing costs 542 
Principal repayments of revolving line of credit(13,224)(6,547)
Proceeds from exercise of stock options60 84 
Repurchases of restricted stock(195) 
Net cash used in financing activities(13,359)(5,921)
Net (decrease) increase in cash and restricted cash(10,229)1,068 
Cash and restricted cash at beginning of period96,431 69,597 
Cash and restricted cash at end of period$86,202 $70,665 
Supplemental disclosure of cash flow information:
Cash paid for interest$2,588 $2,949 
Right-of-use assets obtained in exchange for operating lease liabilities
$1,139 $ 
Cash paid for operating leases
$126 $ 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Katapult Holdings, Inc. (“Katapult” or the “Company”), is an e-commerce focused financial technology company offering e-commerce point-of-sale (“POS”) lease-purchase options for non-prime US consumers. Katapult’s fully-digital technology platform provides non-prime consumers with a flexible lease purchase option to enable them to obtain durable goods from Katapult’s network of e-commerce retailers. Katapult's end-to-end technology platform provides seamless integration with merchants.

On June 9, 2021 (the “Closing Date”), Katapult (formerly known as FinServ Acquisition Corp. or “FinServ”), consummated the previously announced merger pursuant to that certain Agreement and Plan of Merger, dated December 18, 2020 (the “Merger Agreement”), by and among FinServ Keys Merger Sub 1, Inc. (“Merger Sub 1”), a wholly owned subsidiary of FinServ, Keys Merger Sub 2, LLC (“Merger Sub 2”), the entity formerly known as Katapult Holdings, Inc. (formerly known as Cognical Holdings, Inc.), a Delaware corporation (“Legacy Katapult”), and Orlando Zayas, in his capacity as the representative of all pre-closing stockholders. Pursuant to the terms of the Merger Agreement, a business combination between Legacy Katapult and FinServ was effected on June 9, 2021 through the merger of Merger Sub 1 with and into Legacy Katapult, with Legacy Katapult surviving the merger as a wholly owned subsidiary of FinServ (the “First Merger”), followed immediately by the merger of the resulting company with and into Merger Sub 2, with Merger Sub 2 surviving the merger as a wholly owned subsidiary of FinServ (the “Second Merger” and collectively with the First Merger and the other transactions contemplated by the Merger Agreement, the “Merger”). References to “the Company” are to Katapult following the Merger and Legacy Katapult prior to the Merger. On the Closing Date, a number of investors purchased from the Company an aggregate of 15,000,000 shares of Company common stock for a purchase price of $10.00 per share and an aggregate purchase price of $150,000 (the "PIPE Investment" or “PIPE”), pursuant to separate subscription agreements. The PIPE was consummated concurrently with the Merger.

On the Closing Date, and in connection with the closing of the Merger, FinServ changed its name to Katapult Holdings, Inc. Legacy Katapult was deemed the accounting acquirer in the Merger based on an analysis of the criteria outlined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. This determination was primarily based on Legacy Katapult’s stockholders prior to the Merger having had a majority of the voting rights in the combined company, Legacy Katapult’s operations represented the ongoing operations of the combined company, Legacy Katapult and its former owners had the right to appoint a majority of the directors in the combined company, and Legacy Katapult's senior management represented the senior management of the combined company. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Legacy Katapult issuing stock for the net assets of FinServ, accompanied by a recapitalization. The net assets of FinServ are stated at historical cost, with no goodwill or other intangible assets recorded.

In accordance with guidance applicable to these circumstances, the equity structure has been restated in all comparative periods up to the Closing Date, to reflect the number of shares of the Company's common stock, $0.0001 par value per share, issued to Legacy Katapult's stockholders in connection with the recapitalization transaction. As such, the shares and corresponding capital amounts and earnings per share related to Legacy Katapult redeemable convertible preferred stock and Legacy Katapult common stock prior to the Merger have been retroactively restated as shares reflecting the exchange ratio established in the Merger Agreement.

Subsidiaries

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries which are Katapult Intermediate Holdings, LLC (formerly known as Keys Merger Sub 2, LLC), Katapult Group, Inc. (formerly known as Cognical, Inc.) and Katapult SPV-1 LLC, and the Company's former subsidiaries, Cognical SPV-3 LLC, and Cognical SPV-4 LLC. Cognical SPV-3 LLC originated all of the Company’s lease agreements with its customers and owned all of the leased property through April 2019. Katapult SPV-1 LLC has originated all of the Company’s lease agreements thereafter. Cognical SPV-4 LLC has halted the origination of new leases on behalf of a third-party merchant, however the Company serviced activity from existing leases of Cognical SPV-4 LLC through November 2020. Cognical SPV-3 LLC and Cognical SPV-4 LLC were liquidated in December 2020.

5

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
Legacy Katapult was incorporated in Delaware in 2016 and changed its headquarters from New York, New York to Plano, Texas in December 2020. Katapult Group, Inc. was incorporated in the state of Delaware in 2012. Katapult SPV-1 LLC is a Delaware limited liability company formed in Delaware in 2019.
Basis of Presentation— The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements include the accounts of Katapult Holdings, Inc. and its wholly owned subsidiaries. In the opinion of management, all adjustments, of a normal recurring nature, considered necessary for a fair presentation have been included in these condensed consolidated financial statements.
All intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

Risks and Uncertainties— The Company is subject to a number of risks including, but not limited to, the need for successful development of our growth strategies, the need for additional capital (or financing) to fund operating losses, competition from substitute products and services from larger companies, protection of proprietary technology, patent litigation, dependence on key individuals, and risks associated with changes in information technology.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates— The preparation of the condensed consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of income and expense during the reporting period. The most significant estimates relate to the selection of useful lives of property and equipment, the selection of useful lives for property held for lease and the related depreciation method, determination of fair value of stock option grants, the fair value of the private warrants, and the valuation allowance associated with deferred tax assets. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from those estimates.

Segment Information— Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the chief executive officer. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, the Company has one operating segment, and therefore, one reportable segment.

Cash— As of March 31, 2022 and December 31, 2021, cash consists primarily of checking and savings deposits. The Company does not hold any cash equivalents, which would consist of highly liquid investments with original maturities of three months or less at the time of purchase.

Restricted Cash— The Company classifies all cash whose use is limited by contractual provisions as restricted cash. Restricted cash as of March 31, 2022 and December 31, 2021 consists primarily of cash advanced from the lines of credit in Katapult SPV-1 LLC, which were established pursuant to various agreements for the purpose of funding and servicing originated leases. All of the Company’s restricted cash is classified as current due to its short-term nature.

The reconciliation of cash and restricted cash is as follows:

March 31,March 31,
20222021
Cash$80,625 $67,788 
Restricted cash5,577 2,877 
Total cash and restricted cash$86,202 $70,665 


Accounts Receivable, Net of Allowance for Doubtful Accounts— In the first quarter of 2022, the Company adopted Accounting Standards Codification 842 Leases (“ASC 842”). Commencing with the three months ended March 31, 2022, the
6

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
Company recognizes revenue from customers when the revenue is earned and cash is collected. In addition, the Company no longer records accounts receivable arising from lease receivables due from customers or any corresponding allowance for doubtful accounts. For the periods prior to adoption of ASC 842, including the three months ended March 31, 2021, the Company recognized revenue from customers on an accrual basis of accounting. The Company does not require any security or collateral to support its receivables.

A rollforward of the allowance for doubtful accounts is as follows:

Balance at beginning of periodCharged to cost and expenses, net of recoveriesWrite-offsBalance at end of period
Three months ended March 31, 2021$4,372 $4,887 $(5,648)$3,611 


Property Held for Lease, Net of Accumulated Depreciation and Impairment— Property held for lease consists of furniture, consumer electronics, appliances, and other durable goods offered for lease-purchase in the normal course of business. Such property is provided to consumers pursuant to a lease-purchase agreement with a minimum term; typically one week, two weeks, or one month. The renewal periods of the initial lease term of the agreement are typically 10, 12 or 18 months. Consumers may terminate a lease agreement at any time without penalty. The average consumer continues to lease the property for 7 months because the consumer either exercises the buyout (early purchase) options or terminates the lease purchase agreement prior to the end of the 10, 12 or 18 month renewal periods. As a result, property held for lease is classified as a current asset on the condensed consolidated balance sheets.

Property held for lease is carried at net book value. Depreciation for property held for lease is determined using the     income forecasting method and is included within cost of revenue. Under the income forecasting method, property held for lease is depreciated in the proportion of rents received to total expected rents received based on historical data, which is an activity-based method similar to the units of production method. The Company provides for impairment for the undepreciated balance of the property held for lease assuming no salvage value with a corresponding charge to cost of revenue. Impairment expense includes expense related to property identified as impaired based on historical data, including default trends, such that the recorded amount closely approximates actual impairment expense incurred during the period. The Company derecognizes the undepreciated net book value of property buyouts as buyouts occur with a corresponding charge to cost of revenue. The Company periodically evaluates fully depreciated property held for lease, net. When it is determined there is no future economic benefit, the cost of the assets are written off and the related accumulated depreciation is reversed.

Property and Equipment, NetProperty and equipment other than property held for lease are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method and are recorded in general and administrative expense over the estimated useful lives of the assets. The estimated useful lives of property and equipment are described below:
Property and EquipmentUseful Life
Computer, office and other equipment5 years
Computer software3 years
Furniture and fixtures7 years
Leasehold improvements Shorter of estimated useful life or remaining lease term

Capitalized Software— Starting January 1, 2020 the Company began capitalizing certain development costs incurred in connection with its internal use software. Costs incurred in the preliminary stages of development are expensed as incurred. Capitalization of costs begins when the preliminary project stage is completed, and it is probable that the project will be completed and used for its intended function. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional features and functionality. Maintenance costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years. Capitalized software cost is included within the Capitalized software and intangible assets, net line item of the condensed consolidated balance sheets. Amortization of capitalized software is included in general and administrative on the condensed consolidated statements of operations and comprehensive income (loss).

Debt Issuance Costs— Costs incurred in connection with the issuance of the Company’s line of credit and long-term debt have been recorded as a direct reduction against the debt and amortized over the life of the associated debt as a component of interest
7

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
expense. The amortization of the long-term debt issuance costs utilizes the effective interest method, and the amortization of the line of credit debt issuance costs utilizes the straight-line method, which is not materially different compared to the effective interest method. The amortization of debt issuance costs is recorded and included in interest expense and other fees on the condensed consolidated statement of operations and comprehensive (loss) income.

Impairment of Long-Lived Assets— The Company assesses long-lived assets for impairment in accordance with the provisions of ASC 360, Property, Plant and Equipment. Long-lived assets, such as intangible assets and property and equipment, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. The amount of impairment loss, if any, is measured as the difference between the carrying value of the asset and its estimated fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairment charges have been recorded during the three months ended March 31, 2022 or 2021.

Rental Revenue— Property held for lease is leased to customers pursuant to lease purchase agreements with an initial term: typically one week, two weeks, or one month, with non-refundable lease payments. Generally, the customer has the right to acquire title either through a 90-day promotional pricing option, an early purchase option (buyout) available prior to completion of the full agreement, or by completing all lease renewal payments, generally 10 to 18 months. On any current lease, customers have the option to terminate the agreement at any time without penalty in accordance with lease terms. Accordingly, lease purchase agreements are accounted for as operating leases with lease revenues recognized in the month they are earned and cash is collected. Amounts received from customers who elect early purchase options (buyouts) are included in rental revenue. Lease payments received prior to their due dates are deferred and recorded as unearned revenue and are recognized as rental revenue in the month in which the revenue is earned. Rental revenue also includes agreed-upon charges assessed to customer lease applications. Payments are received upon submission of the applications and execution of the lease purchase agreements. Services are considered to be rendered and revenue earned over the initial lease term. The Company also may assess fees for missed or late payments, which are recognized as revenue in the billing period in which they are assessed if collectability is reasonably assured. Revenues from leases are reported net of sales taxes.

Other Revenue— Other revenue consists of revenue from merchant partnerships, and infrequent sales of property formerly on lease when customers terminate a lease and elect to return the property to the Company rather than the Company’s retail partners.

Stock-Based Compensation— The Company measures and records compensation expense related to stock-based awards based on the fair value of those awards as determined on the date of the grant. The Company recognizes stock-based compensation expense over the requisite service period of the individual grant, generally equal to the vesting period and uses the straight-line method to recognize stock-based compensation. The Company uses the Black-Scholes-Merton (“Black-Scholes”) option-pricing model to determine the estimated fair value of stock option awards. The Black-Scholes option-pricing model requires estimates of highly subjective assumptions, which affect the fair value of each stock option. Forfeitures are accounted for as they are incurred.

The Company calculates the fair value of stock options granted to employees by using the following assumptions:

Expected Volatility—The Company estimates volatility for stock option grants by evaluating the average historical volatility of a peer group of companies for the period immediately preceding the stock option grant for a term that is approximately equal to the stock options’ expected term.

Expected Term—The expected term of the Company’s stock options represents the period that the stock-based awards are expected to be outstanding. The Company has elected to use the midpoint of the stock options vesting term and contractual expiration period to compute the expected term, as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.

Risk-Free Interest Rate—The risk-free interest rate is based on the implied yield currently available on US Treasury zero-coupon issues with a term that is equal to the stock options’ expected term at the grant date.

Dividend Yield—The Company has not declared or paid dividends to date and does not anticipate declaring dividends. As such, the dividend yield has been estimated to be zero.

Income Taxes—The Company accounts for income taxes under the asset and liability method pursuant to ASC 740, Income Taxes. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of
8

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that the Company would be able to realize deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to unrecognized tax benefits in the income tax expense line in the accompanying condensed consolidated statement of operations and comprehensive income. As of March 31, 2022 and December 31, 2021, no accrued interest or penalties are included on the related tax liability line in the condensed consolidated balance sheets.

Net Income (Loss) Per ShareThe Company calculates basic and diluted net income (loss) per share attributable to common stockholders using the two-class method required for companies with participating securities.

Under the two-class method, basic net income (loss) per share available to stockholders is calculated by dividing the net income (loss) available to stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share available to stockholders is computed by giving effect to all potentially dilutive common stock equivalents outstanding for the period. In periods in which the Company reports a net loss available to stockholders, diluted net loss per share available to stockholders would be the same as basic net loss per share available to stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

Fair Value Measurements- Fair value accounting is applied for all assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis (at least annually). Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company follows the established framework for measuring fair value.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3—Inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is significant to the fair value measurement in its entirety.

The Company’s financial instruments consist of accounts receivable (through December 31, 2021), accounts payable, accrued expenses, warrant liability, revolving line of credit, and long-term debt. Accounts receivable, accounts payable and accrued expenses are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. The condensed consolidated financial statements also include fair value level 3 measurements of private common
9

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
stock warrants. The Company uses a third-party valuation firm to determine the fair value of certain of the Company's financial instruments. Refer to Note 14 for discussion of fair value measurements.

Concentrations of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company’s cash balances exceed those that are federally insured. To date, the Company has not recognized any losses caused by uninsured balances.

Significant customers are those which represent more than 10% of the Company’s total revenue or gross accounts receivable balance at each balance sheet date. During the three months ended March 31, 2022 and 2021, the Company did not have any customers that accounted for 10% or more of total revenue. As of December 31, 2021, the Company also did not have any customers that accounted for 10% or more of outstanding gross accounts receivable.

A significant portion of the Company’s transaction volume is with a limited number of merchants, including most significantly, Wayfair Inc.

Recently Adopted Accounting Pronouncements— In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU is effective for all entities beginning as of its date of effectiveness, March 12, 2020. This ASU did not have a material impact on our condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles of ASC 740, Income Taxes. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective, or prospective basis. The Company adopted this standard on January 1, 2021, and the adoption did not have a material impact on the condensed consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), as amended (“ASU 2016-02”). Under ASU 2016-02, adoption requires the use of a modified retrospective transition method to measure leases at the beginning of the earliest period presented in the condensed consolidated financial statements. In July 2018, the FASB issued ASU 2018-11 Leases, allowing companies to apply a transition method for adoption of the new standard as of the adoption date, with recognition of any cumulative-effects as adjustments to the opening balance of retained earnings in the period of adoption. We have elected the transition method under ASU 2018-11 upon adoption of the new standard. The Company's lease-to-own agreements which comprise the majority of our annual revenue fall within the scope of ASU 2016-02 under lessor accounting. As a result, the Company recognizes revenue from customers when the revenue is earned and cash is collected. The Company no longer records accounts receivable arising from lease receivables due from customers incurred during the normal course of business for lease payments earned but not yet received from the customer or any corresponding allowance for doubtful accounts.

Under ASU 2016-02 lessees are required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-of-use asset (“ROU”), which is an asset that represents the lessee’s right to control the use of an identified asset for the lease term, at the commencement date for all leases with a term greater than one year. As a lessee, the Company recognizes a ROU and lease liability for these operating lease contracts within the condensed consolidated balance sheet. In the first quarter of 2022, the Company recorded a $1,240 lease liability and a $1,139 ROU asset. The Company is also affected by the requirement under the new standard to determine whether impairment indicators exist for the ROU asset at the asset or asset group level. If impairment indicators exist, a recoverability test is performed to determine whether an impairment loss exists. In accordance with the transition guidance for the new standard the Company is required to determine if an impairment loss exists immediately prior to the date of adoption. The Company does not believe any impairment indicators exist as it relates to our operating leases. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) – Effective Dates for Certain Entities (“ASU 2020-05”), which defers the effective date of ASU 2016-02 for private entities to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company adopted the new standard on January 1, 2022, in accordance with adoption dates provided by the FASB applicable to us under our emerging growth company status.

Recent Accounting Pronouncements Not Yet Adopted — The Company has reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a material impact to its condensed consolidated financial statements.
10

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
3.PROPERTY HELD FOR LEASE, NET
Property held for lease, net consists of the following:
March 31,December 31,
20222021
Property held for lease$208,832 $220,259 
Less: accumulated depreciation(156,544)(158,507)
Property held for lease, net$52,288 $61,752 
Total depreciation expense related to property held for lease, net for the three months ended March 31, 2022 and 2021, was $32,618 and $36,014, respectively.
Net book value of property buyouts for the three months ended March 31, 2022 and 2021, was $10,020 and $10,586, respectively.
Total impairment charges related to property held for lease, net for the three months ended March 31, 2022 and 2021, was $3,224 and $3,800, respectively.
Depreciation expense, net book value of property buyouts and impairment charges are included within cost of revenue in the condensed consolidated statement of operations and comprehensive income (loss).
All property held for lease, net is on-lease as of March 31, 2022 and December 31, 2021.
4.PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
March 31,December 31,
20222021
Computer, office and other equipment$783 $659 
Computer software80 80 
Furniture and fixtures100 100 
Leasehold improvements252 238 
1,215 1,077 
Less: accumulated depreciation(546)(501)
Property and equipment, net$669 $576 
Total depreciation expense related to property and equipment, net was $45 and $30 for the three months ended March 31, 2022 and 2021, respectively.
5.CAPITALIZED SOFTWARE AND INTANGIBLE ASSETS, NET
Capitalized software and intangible assets, net consists of the following:
March 31,December 31,
20222021
Capitalized software$1,725 $1,254 
Domain name16 16 
1,741 1,270 
Less: accumulated amortization(289)(214)
Capitalized software and intangible assets, net$1,452 $1,056 
11

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
Total amortization expense for capitalized software and intangible assets was $75 and $18 for the three months ended March 31, 2022 and 2021, respectively.
The following table summarizes estimated future amortization expense of capitalized software and intangible assets, net for the years ending December 31:
2022 (remaining nine months)$441 
2023487 
2024382 
202557 
$1,367 
As of March 31, 2022 and December 31, 2021, $69 and $10 of capitalized software was not yet placed in service, respectively.
6.ACCRUED LIABILITIES
Accrued liabilities consists of the following:
March 31,December 31,
20222021
Bonus accrual$641 $1,807 
Sales tax payable5,077 5,445 
Unfunded lease payable1,872 2,697 
Interest payable61 91 
Other accrued liabilities2,718 1,919 
Total accrued liabilities$10,369 $11,959 
7.LINE OF CREDIT

On May 14, 2019, the Company entered into a Loan and Security Agreement (as amended the “credit agreement”) with respect to a revolving line of credit facility (the “RLOC”), with an initial commitment amount of $50,000, with the lenders having the right to increase to a maximum of $150,000 commitment over time. The RLOC is subject to certain covenants and originally had an 85% advance rate on eligible accounts receivable, which was increased to 90% during March 2020. As of March 31, 2022, total borrowings outstanding on the RLOC were $48,734 less issuance costs of $628, netting to a total of $48,105. As of December 31, 2021, the total outstanding on the RLOC was $61,958 less issuance costs of $720, netting a total of $61,238. The issuance costs are amortized over the life of the facility and included in interest expense. The annual interest rate on the principal was LIBOR plus 11% per annum through July 2020. Beginning in August 2020, the interest rate stepped down to LIBOR plus 7.5% per annum. There is a 2% floor on LIBOR. On September 28, 2020, the lender exercised their right to increase the maximum commitment to a total of $125,000. On December 4, 2020, the Company entered into the ninth amendment to the credit agreement. This amendment provided the lenders with the right to increase the revolving commitment amount from $125,000 to $250,000. This right has not yet been exercised by the lender as of May 10, 2022, the date these condensed consolidated financial statements were issued.

This facility is also subject to certain customary representations, affirmative covenants , which consist of maintaining lease performance metrics, financial ratios related to operating results, and lease delinquency ratios, along with customary negative covenants. The outstanding borrowings under the credit facilities, including unpaid principal and interest, is due on December 4, 2023, unless there is an earlier event of default such as bankruptcy, default on interest payments, or a change of control (excluding an acquisition by a special purpose acquisition company (“SPAC”), at which point the facility may become due earlier).

The credit agreement also requires the Company to maintain the financial covenants with respect to minimum trailing twelve month (“TTM”) Adjusted EBITDA (as defined in the credit agreement), minimum tangible net worth, minimum liquidity of $50,000 of cash and cash equivalents on hand and compliance with the Total Advance Rate (as defined in the credit agreement).

12

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
During the year ended December 31, 2021, the credit agreement was amended to, among other things: (1) amend the TTM Adjusted EBITDA financial covenant (2) increase the minimum liquidity covenant to $50,000; (3) amend the definition of “Liquidity” to include Cash Equivalents (as defined in the credit agreement): and (4) amend the Total Advance Rate (as defined in the credit agreement) financial covenant. No modifications were made to applicable funding costs or the maturity date of the credit agreement.

On March 14, 2022, the borrower, Katapult Holdings, Inc. and Katapult Group, Inc. entered into the thirteenth amendment to the credit agreement to amend the number of times the borrower can cure a default with respect to compliance with the Total Advance Rate covenant from two to five. As of the date of this report, the Borrower has exercised its right to cure such a default three times.
As of March 31, 2022 and December 31, 2021, the Company was in compliance with the covenants set forth in the above credit agreement.
8.LONG TERM DEBT

Pursuant to the ninth amendment to the credit agreement, the lenders also provided the Company with a senior secured term loan facility (“term loan facility”) commitment of up to $50,000. The Company drew down the full $50,000 of the term loan facility on December 4, 2020. The term loan facility bears interest at one-month LIBOR plus 8% per annum, (with a 1% floor on the LIBOR Rate) and additional 3% interest per annum will accrue to the principal balance as paid-in-kind (“PIK”) interest. The term loan maturity date is December 4, 2023. The term loan facility is subject to the same representations, affirmative and negative covenants and financial convenants.

A reconciliation of the outstanding principal to the carrying amount of long term debt is as follows:

March 31,December 31,
20222021
Outstanding principal50,000 50,000 
PIK2,052 1,664 
Debt discount(10,466)(11,003)
Total carrying amount41,586 40,661 
Total amortization expense related to the term loan facility was $537 and $697 for the three months ended March 31, 2022 and 2021, respectively. Amortization of debt issuance costs is shown within interest expense and other fees on the condensed consolidated statements of operations and comprehensive (loss) income.
9.STOCK-BASED COMPENSATION

The Company has two stock incentive plans, the Cognical Holdings, Inc. 2014 Stock Incentive Plan, (the “2014 Plan”) and the Katapult Holdings, Inc. 2021 Stock Incentive Plan, (the “2021 Plan”).

2014 Plan

In accordance with the 2014 Plan, the board of directors of Legacy Katapult could grant equity awards to officers, employees, directors and consultants for common stock. There were no stock options or other equity awards granted to non-employees during 2022 and 2021. The 2014 Plan has specific vesting for each stock option grant allowing vesting of the options over one to four years. Upon consummation of the Merger, no additional equity awards are being granted under the 2014 Plan. No awards have been granted under the 2014 Plan since October 2020.

Stock Options

A summary of the status of the stock options under the 2014 Plan as of March 31, 2022, and changes during the three months then ended is presented below:
13

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
Number of
Shares
Weighted- Average
 Exercise Price
Weighted-Average
 Remaining
 Contractual Term
 (In Years)
Aggregate
Intrinsic Value
Balance - December 31, 20218,371,097 $0.29 7.33$25,773 
Granted  
Exercised(275,435)0.22 
Forfeited  
Balance - March 31, 20228,095,662 0.30 7.08$16,930 
Exercisable - March 31, 20228,075,235 0.29 7.08$16,915 
Unvested - March 31, 202220,427 2.62 8.25$15 
The total intrinsic value of stock options exercised during the three months ended March 31, 2022 and 2021 was $602 and $1,875, respectively.
As of March 31, 2022, total compensation cost not yet recognized related to unvested stock options was $28, which is expected to be recognized over a period of 1.67 years.
2021 Plan

On June 9, 2021, the 2021 Plan, which was previously approved by the FinServ board of directors and FinServ stockholders in connection with the Merger, became effective.

In accordance with the 2021 Plan, directors may issue equity awards, including restricted stock awards, restricted stock unit awards and stock options to officers, employees, directors and consultants to purchase common stock. The awards granted are subject to service-based and/or performance-based vesting conditions.

Stock Options

A summary of the status of the stock options under the 2021 Plan as of March 31, 2022, and changes during the three months then ended is presented below:

Number of SharesWeighted- Average Exercise PriceWeighted-Average Remaining Contractual Term (In Years)Aggregate Intrinsic Value
Balance - December 31, 2021346,603 $10.45 9.50$ 
Granted - service conditions  
Granted - performance conditions  
Exercised  
Forfeited  
Balance - March 31, 2022346,603 10.45 9.25$ 
Exercisable - March 31, 2022115,534 10.45 9.25$ 
Unvested - March 31, 2022231,069 $10.45 9.25$ 
As of March 31, 2022, total compensation cost not yet recognized related to unvested stock options was $1,404, which is expected to be recognized over a period of 2.63 years.
No stock options were granted under the 2021 Plan during the three months ended March 31, 2022.

Restricted Stock Units

14

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
Restricted stock units (“RSUs”) are equity awards granted to employees that entitle the holder to shares of common stock when the awards vest. RSUs are measured based on the fair value of the Company’s common stock on the date of grant.

A summary of the status of the RSUs under the 2021 Plan as of March 31, 2022, and changes during the three months then ended is presented below:

Number of RSUsWeighted Average Grant Date Fair Value
Outstanding - December 31, 20212,115,162$6.10 
Granted4,618,3271.91 
Vested(378,425)6.27 
Forfeited(80,703)6.15 
Outstanding - March 31, 20226,274,361$3.01 

Stock-Based Compensation Expense— Stock-based compensation expense was $1,089 and $80 for three months ended March 31, 2022 and 2021, respectively. Stock-based compensation expense is included in compensation costs.

10.INCOME TAXES
For the three months ended March 31, 2022 and 2021, the Company recorded an income tax provision of $35 and $1,825, respectively. The provisions for the three months ended March 31, 2022 and 2021 relates predominately to state income taxes due to the Company’s estimated taxable income for the year. Taxable income is expected to be generated in certain states where accelerated federal tax depreciation is disallowed. The Company’s effective tax rate for the three month period ended March 31, 2022 and 2021 is different than the statutory rate primarily due to changes in the Company’s valuation allowance.
As of December 31, 2021, the Company had U.S. federal net operating loss carryforward of $119,200 that begin to expire in 2032 and includes $83,500 that have an unlimited carryforward period. As of December 31, 2021, the Company has U.S. state and local net operating loss carryforwards of $71,900 that begin to expire in 2023.
In evaluating its ability to realize its net deferred tax assets, the Company considered all available positive and negative evidence, such as past operating results, forecasted earnings, prudent and feasible tax planning strategies, and the future realization of the tax benefits of existing temporary differences. The Company remains in a cumulative tax loss position for the 36 months ended March 31, 2022, and determined that it is more likely than not that its net deferred tax assets will not be realized. The Company continues to maintain a full valuation allowance as of March 31, 2022 and December 31, 2021. It is possible that the Company will achieve profitability to enable the release of some or all of its valuation allowance in the future.
11.NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of net income (loss) per common share:
15

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
Three Months Ended March 31,
20222021
Net (loss) income per share
Numerator
Net (loss) income$(5,558)$8,090 
Denominator
Denominator for basic net (loss) income per weighted average common shares97,873,452 31,558,754 
Effect of dilutive securities
Warrants 5,186,007 
Private warrants 4,988,719 
Stock options 10,589,093 
Denominator for diluted net (loss) income per weighted average common shares97,873,452 52,322,573 
Net (loss) income per common share
Basic$(0.06)$0.26 
Diluted$(0.06)$0.15 
The Company’s potentially dilutive securities, which include unvested RSUs, stock options to purchase common stock and warrants to purchase common stock, have been excluded from the computation of diluted net income (loss) per share for certain periods, as the effect would be antidilutive. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net (loss) income per share is the same in periods of a net loss. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net (loss) income per share for the periods indicated because including them would have had an anti-dilutive effect:

Three Months Ended March 31,
20222021
Public warrants12,500,000  
Private warrants332,500  
Stock options8,442,265  
Unvested restricted stock units6,274,361 19,000,000 
Total common stock equivalents27,549,126 19,000,000 
Unvested restricted stock units that were outstanding during the three months ended March 31, 2021 were not included in the computation of diluted EPS because the performance obligation related to these restricted stock units had not occurred as of the reporting date.
12.COMMITMENTS AND CONTINGENCIES
Litigation risk— From time to time, the Company may become involved in various legal actions arising in the ordinary course of business. Management is of the opinion that the ultimate liability, if any, from these actions will not have a material effect on its financial condition or results of operations. The Company is not currently aware of any indemnification or other claims, except as discussed below and has not accrued any liabilities related to such obligations in the condensed consolidated financial statements as of March 31, 2022 and December 31, 2021.

Except as set forth below, the Company and its subsidiaries are not a party to, and their properties are not the subject of, any material pending legal proceedings.

DCA Litigation
16

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)

On April 9, 2021, Daiwa Corporate Advisory LLC (formerly known as DCS Advisory LLC) (“DCA”), a financial advisory firm, served Katapult Group, Inc. with a summons and a complaint filed in the Supreme Court of the State of New York, New York County, in a matter bearing the index number 652164/2021. The complaint relates to a March 22, 2018 letter agreement (the “Letter Agreement”) entered into by DCA and Legacy Katapult. Among other things, DCA alleges that the Letter Agreement confers upon DCA (i) a right to act as the “exclusive financial advisor” with respect to certain transactions defined in the Letter Agreement, (ii) a right to a “Placement Fee” and/or “mutually-agreed upon fees” in connection with such advisory roles, and (iii) a right to a $100 termination fee payable in certain circumstances by Katapult Group, Inc. in the event that Katapult Group, Inc. terminated the Letter Agreement. For its first cause of action, DCA alleges that Katapult Group, Inc. “breached the Letter Agreement by failing and/or refusing to extend to DCA the opportunity to exercise its right of first refusal in connection with” certain transactions and the PIPE Investment. DCA seeks “damages in an amount to be determined at trial” with respect to this first cause of action. For its second cause of action, DCA alleges that, assuming Katapult Group, Inc. properly terminated the Letter Agreement in April 2019 (which DCA disputes), Katapult Group, Inc. “also breached the Letter Agreement by failing to pay DCA a termination fee when it terminated the Letter Agreement.” DCA seeks “damages in an amount to be determined at trial, but no less than $100,” with respect to this second cause of action. With respect to both causes of action, DCA also seeks attorneys’ fees and costs pursuant to the Letter Agreement, an award of pre- and post-judgment interest, and such other and further relief as the Court deems just and proper.”

On May 24, 2021, Katapult Group, Inc. filed its answer to the complaint and also asserted counterclaims against DCA for breach of contract and for breach of the duty of good faith and fair dealing. In connection with its counterclaims, Katapult Group, Inc. is seeking damages in the amount of approximately $10,600, as well as attorneys’ fees and costs. Katapult Group, Inc. disputes the allegations in DCA’s complaint and intends to vigorously defend against the claims.

On July 29, 2021, the court entered a Preliminary Conference Order, which was subsequently amended on September 13, 2021 and October 25, 2021. The Amended Scheduling Order dated October 25, 2021 provides that: the parties must complete fact discovery on or before May 13, 2022; they must serve any expert disclosures by June 10, 2022; they must complete all discovery no later than June 24, 2022; and any motions for summary judgment must be filed by July 29, 2022. The parties are currently engaged in discovery.

The Company has not recorded any loss or gain contingencies associated with this matter as it is not probable or reasonably estimable at March 31, 2022.

Shareholder Litigation

On August 27, 2021, a putative class action lawsuit was filed in the U.S. District Court for the Southern District of New York against Katapult Holdings, Inc., two officers of FinServ, one of whom is a current Company director, and two officers of Legacy Katapult, both of whom are current Company officers. The lawsuit is captioned McIntosh v. Katapult Holdings, Inc., et al. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks an unspecified amount of damages on behalf of persons and entities that purchased or otherwise acquired Katapult securities between December 18, 2020 and August 10, 2021, inclusive (the “Putative Class”). The complaint alleges that defendants misled the Putative Class by failing to disclose that the Company was experiencing declining e-commerce retail sales and consumer spending, lacked visibility into its consumers’ future buying behavior, and had no reasonable basis for positive statements about its business, operations, and prospects. On October 26, 2021, seven investors filed motions to be appointed lead plaintiff of the Putative Class. The Company and the other defendants intend to vigorously defend against the claims in this action.

The Company has not recorded any loss or gain contingencies associated with this matter as it is not probable or reasonably estimable at March 31, 2022.
13.LEASES
17

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
Lessor Information— Refer to Note 2 to these condensed consolidated financial statements for further information about the Company’s revenue generating activities as a lessor. All of the Company’s customer agreements are considered operating leases.
Lessee Information— The Company determines if a contract contains a lease at inception. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate to determine the present value of lease payments, as the implicit rate is not readily determinable. The ROU asset also includes any lease payments made. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company leases office space in Plano, TX and New York, NY under operating leases with a non-cancelable lease term which end in August 2023 and June 2025, respectively. Lease expenses are included in general and administrative expenses on the condensed consolidated statement of operations and comprehensive (loss) income. The following is a schedule of future minimum lease payments required under the non-cancelable leases as of March 31, 2022 reconciled to the present value of operating lease liabilities:
Years Ending December 31,
2022 (remaining 9 months)$385 
2023456 
2024334 
2025170 
Thereafter 
Total undiscounted future minimum lease payments$1,345 
Less: Interest(204)
Total present value of operating lease liabilities$1,141 
Lease LiabilitiesLease liabilities as of March 31, 2022, consist of the following:
Current portion of lease liabilities$426 
Long-term lease liabilities, net of current portion715 
Total lease liabilities$1,141 
Rent expense for operating leases for the three months ended March 31, 2022 and 2021 were $135 and $148, respectively. As of March 31, 2022, the Company had a weighted average remaining lease term of 2.9 years and a weighted average discount rate of 9.25%.
14.FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of its warrant liability, RLOC, and term loan facility.

The estimated fair value of the Company’s RLOC, and long term debt (term loan facility) were as follows:
March 31, 2022December 31, 2021
Principal amountCarrying amountFair valuePrincipal amountCarrying amountFair value
Revolving line of credit$48,734 $48,105 $52,804 $61,958 $61,238 $70,688 
Long term debt52,053 41,586 55,980 51,664 40,661 58,143 
$100,787 $89,691 $108,784 $113,622 $101,899 $128,831 

The estimated fair values of the Company’s RLOC, and long term debt were determined using Level 2 inputs based on an estimated credit rating for the Company and the trading value of debt for similar debt instruments with similar credit ratings.

18

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
There were no assets measured at fair value on a recurring basis as of March 31, 2022 or December 31, 2021. Liabilities measured at fair value on a recurring basis were as follows:


March 31, 2022
TotalLevel 1Level 2Level 3
Liabilities:
Warrant liability - Public & Private Warrants$4,252 $4,125 $ 127 
Total Other Liabilities$4,252 $4,125 $ $127 


December 31, 2021
TotalLevel 1Level 2Level 3
Liabilities:
Warrant liability - Public & Private Warrants$7,341 $7,125 $ $216 
Total Other Liabilities$7,341 $7,125 $ $216 

During the three months ended March 31, 2022 and 2021, there were no transfers between Level 1 and Level 2, nor into or out of Level 3.

The following table summarizes the activity for the Company’s Level 3 liabilities measured at fair value on a recurring basis:

Warrant Liability
Balance at December 31, 2021$7,341 
Changes in fair value(3,089)
Balance at March 31, 2022$4,252 

15.SUBSEQUENT EVENTS

The Company evaluated subsequent events from March 31, 2022, the date of these condensed consolidated financial statements, through May 10, 2022, which represents the date the condensed consolidated financial statements were issued, for events requiring adjustment to or disclosure in these condensed consolidated financial statements. Other than disclosed below, there are no events that require adjustment to or disclosure in these condensed consolidated financial statements.

Credit Facility Amendment

On May 9, 2022, the Company entered into the fourteenth amendment to the credit agreement, which amended the credit agreement as follows:

The maximum Total Advance Rate was amended as follows: (i) from the period on May 9, 2022 to and including May 9, 2023, the maximum Total Advance Rate is 130% and (ii) at all times thereafter, it is 120%. In addition, the limitation on the number of times we can cure a breach of our Total Advance Rate covenant by depositing funds into a reserve bank account was eliminated. The Total Advance Rate calculation was also changed to reduce the amount of our loans used in the calculation by the amount of our unrestricted cash and cash equivalents if we have unrestricted cash of at least $50,000, and to provide no reduction in the amounts of our loans for purpose of the calculation if the amount of our unrestricted cash and cash equivalents is less than $50,000. Previously, the amount of our loans used in the calculation of Total Advance Rate was reduced by $20,000 without regard to the amount of unrestricted cash and cash equivalents.

19

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share and per share amounts)
The minimum Tangible Net Worth (as defined in the credit agreement) covenant was increased to the sum of (i) $(25,000) (from $18,500) plus (ii) the greater of (A) zero dollars and (B) fifty percent of all aggregate Parent Consolidated Net Income (as defined in the credit agreement) since April 30, 2019 (as determined in accordance with GAAP.

The Minimum Liquidity (as defined in the credit agreement) requirement was reduced from $50,000 to $15,000.

The Minimum Trailing Twelve Month Adjusted EBITDA (as defined in the credit agreement) requirement was amended as follows: (i) during the period on and after October 1, 2021 and until (and including) June 30, 2023, our minimum Trailing Twelve Month Adjusted EBITDA must be not less than ($25,000) (from $(15,000)), (ii) during the period on and after July 1, 2023 and until (and including) September 30, 2023, the Minimum Trailing Twelve Month Adjusted EBITDA must not be less than $(15,000), and (iii) at all times thereafter, $0.
The interest rate for PIK Interest on the term loan (as defined in the credit agreement) was increased from 3% to (A) if Liquidity is greater than $50,000, to 4.5% and (B) if Liquidity is less than $50,000, to 6%.
20




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise requires, all references in this section to “we,” “us,” “our,” the “Company”, or “Katapult” refer to Katapult Holdings, Inc and its subsidiaries.

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A, “Risk Factors,” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes included on our Annual Report on Form 10-K filed with the SEC on March 15, 2022. Due to the Company’s adoption of ASC 842, effective January 1, 2022, using the transition method, the Company has not restated the financial statements as of and for the three months ended March 31, 2021 and therefore these financial statements are not comparable to the financial statements for the three months ended March 31, 2022. See “ASC 842 Adoption and Comparability” below for more information. All dollar amounts are in thousands, unless otherwise specified.

Overview

We are an e-commerce focused financial technology company offering e-commerce point-of-sale (“POS”) lease-purchase options for non-prime U.S. consumers. Our fully-digital, next-generation technology platform provides non-prime consumers with a flexible lease purchase option to enable them to obtain durable goods from our network of e-commerce merchants.

Key events impacting our business are as follows:

COVID-19 — Due to the economic uncertainty that has and may continue to result from the COVID-19 pandemic, there is an added risk factor in the overall future outlook of the Company. We have implemented cost containment and cash management initiatives to mitigate the potential impact of the COVID-19 pandemic on our business and liquidity. Although we experienced positive performance during the onset of the pandemic due to increased customer activity and the resiliency of our business model, our business has been impacted by a number of factors including changes in consumer spending habits, government stimulus, new variants and other potential factors. Management continues to monitor both positive and negative potential business trends as these factors continue throughout 2022.

Key factors and trends impacting our business include the following:

In the first quarter 2021, consumers were bolstered by two stimulus payments, one in January and the other in March, which drove consumer spending and consequently our gross originations volume. These stimulus payments also changed historic 90-day buyout and delinquency patterns through the first quarter 2021, with these trends now normalizing to pre-pandemic levels in 2022. Macro headwinds we have observed since fourth quarter 2021 that are continuing include key merchant partners experiencing lower sales volumes than they did in early 2021. In addition, in response to these trends and a deterioration in overall payment ability of our customers, we initiated tightening of our underwriting in fourth quarter 2021 and continuing into 2022, which has led to fewer approvals.

Record levels of inflation combined with continued supply chain issues (including availability of raw materials from Russia and Ukraine) and consumer sentiment are expected to impact customers ability to make lease payments and impact key merchant partners.

We anticipate that the challenging macro environment will continue in 2022 but expect that our largest merchant partners will be able to return to growth in the second half of 2022. We also anticipate that impairment charges will continue to rise back to pre-pandemic levels.

Based on historical trends, if prime lenders that had previously expanded their underwriting due to record low delinquencies in early 2021, tighten their underwriting, this could result in potential additional volume and higher credit customers to the Company.

Segment Information

We conduct our business within one business segment, which is defined as providing lease payment options to consumers for the purchase of durable goods from e-commerce partners. Our operations are aggregated into a single reportable operating segment based upon similar economic and operating characteristics as well as similar markets.
21



ASC 842 Adoption and Comparability

The Company was required to adopt ASC 842 relating to lessor accounting effective January 1, 2022. The Company’s lease-to-own agreements, which comprise the majority of the Company’s revenue, fall within the scope of ASC 842 under lessor accounting and as a result of the adoption, the Company is recognizing revenue from customers when revenue is earned and cash is collected instead of on an accrual basis, which it had done historically, including for the period ended March 31, 2021. The Company has adopted ASC 842 beginning with the three months ended March 31, 2022 using the transition approach which permits the Company to not apply ASC 842 for comparative periods in the year of adoption. As a result, the Company has not restated the financial statements for 2021 or prior periods to conform to ASC 842 and therefore the financial statements as of and for the three months ended March 31, 2021 are not comparable to the financial statements as of and for the three months ended March 31, 2022. In particular, the 2022 financial statements do not include (i) rental revenue arising from lease payments earned but not yet collected and any corresponding net bad debt expense in the condensed consolidated statement of operations and comprehensive (loss) income and (ii) accounts receivable arising from lease receivables and any corresponding allowance for doubtful accounts on its condensed consolidated balance sheet. These items are recorded and shown in the Company’s condensed consolidated financial statements for the 2021 period. In periods prior to 2022, the Company recognized revenue from customers on an accrual basis of accounting. If ASC 842 was effective for the three months ended March 31, 2021, total revenue would have been $77,558 and income before provision for income taxes would have been $11,725.

Key Performance Metrics

We regularly review several metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions, which may also be useful to an investor.

Gross Originations

We measure gross originations to assess the growth trajectory and overall size of our lease portfolio. There is a direct correlation between gross origination growth and revenue growth. We define gross originations as the retail price of the merchandise associated with lease-purchase agreements entered into during the period through our platform. Gross originations do not represent revenue earned. However, we believe this is a useful operating metric for both the Company and investors to use in assessing the volume of transactions that take place on our platform.

The following table presents gross originations for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,Change
20222021$%
Gross Originations$46,676 $63,765 $(17,089)(26.8)%

Wayfair represented 58% and 63% of gross origination during the three months ended March 31, 2022 and 2021, respectively.


Gross originations have decreased as a result of the aforementioned stimulus payments in the first quarter of 2021, which drove up spending and our gross originations volume. The decline of gross originations from customers, excluding Wayfair, year-over-year was approximately 17%.

Total Revenue
Total revenue represents the sum of rental revenue and other revenue. The Company adopted ASC 842 (“Leases”) in the first quarter of 2022 and as a result the Company records revenue when earned and cash is collected.

Three Months Ended March 31,
20222021
Total revenue$59,877 $80,635 

If ASC 842 was effective for the three months ended March 31, 2021, total revenue would have been $77,558.


Gross Profit
22



Gross profit represents total revenue less cost of revenue, and is a measure presented in accordance with U.S. GAAP. We also use adjusted gross profit as a key performance indicator to provide an understanding of one aspect of our performance specifically attributable to total revenue and the variable costs associated with total revenue.

Adjusted Gross Profit

Adjusted gross profit represents gross profit less variable operating expenses, which are servicing costs, underwriting fees, and bad debt expense. We believe that adjusted gross profit provides a meaningful understanding of one aspect of our performance specifically attributable to total revenue and the variable costs associated with total revenue. See “—Non-GAAP Financial Measures” section below for a reconciliation of adjusted gross profit, which is a non-GAAP measure utilized by management, to gross profit.

Components of Results of Operations

Revenue

Revenue consists of rental revenue and other revenue. Rental revenue consists of revenue earned from property held for lease and agreed-upon charges related to lease-purchase agreements. Other revenue consists of sub-lease revenue, revenue from merchant partnerships, and infrequent sales of property formerly on lease when customers terminate a lease and elect to return the property to the Company rather than the Company’s merchant partners.

Cost of Revenue

Cost of revenue consists primarily of depreciation expense related to property held for lease, impairment of property held for lease, net book value of property buyouts, payment processing fees, and other costs associated with offering lease-purchase transactions to customers.

Operating Expenses

Operating expenses consist of servicing costs, underwriting fees, professional and consulting fees, technology and data analytics expense, bad debt expense, compensation costs and general and administrative expense. Servicing costs primarily consist of permanent and temporary call center support. Underwriting fees primarily consist of data costs related to inputs from customer underwriting models. Professional and consulting fees primarily consist of corporate legal and accounting costs. Technology and data analytics expense primarily consist of salaries and benefits for computer programming and data analytics employees that support our underlying technology and proprietary risk model algorithms. Bad debt expense primarily consists of provisions for uncollectible accounts receivable, net of recoveries. Compensation costs consist primarily of payroll and related costs and stock-based compensation. General and administrative expense consists primarily of occupancy costs, travel and entertainment, and other general overhead costs, including depreciation and amortization related to office equipment and software.



Results of Operations

Comparison of the three months ended March 31, 2022 and 2021
The following tables are references for the discussion that follows.


23


Three Months Ended March 31,Change
20222021$%
Revenue
Rental revenue$59,830 $80,625 $(20,795)(25.8)%
Other revenue47 10 37 370.0 %
Total revenue59,877 80,635 (20,758)(25.7)%
Cost of revenue48,113 52,882 (4,769)(9.0)%
Gross profit11,764 27,753 (15,989)(57.6)%
Operating expenses:
Servicing costs1,207 1,138 69 6.1 %
Underwriting fees488 467 21 4.5 %
Professional and consulting fees3,288 1,534 1,754 114.3 %
Technology and data analytics2,410 1,549 861 55.6 %
Bad debt expense— 4,887 (4,887)(100.0)%
Compensation costs5,377 2,582 2,795 108.2 %
General and administrative3,805 1,183 2,622 221.6 %
Total operating expenses16,575 13,340 3,235 24.3 %
(Loss) income from operations(4,811)14,413 (19,224)(133.4)%
Interest expense and other fees(3,801)(4,140)339 (8.2)%
Change in fair value of warrant liability3,089 (358)3,447 100.0 %
(Loss) income before provision for income taxes(5,523)9,915 (15,438)(155.7)%
Provision for income taxes35 1,825 (1,790)(98.1)%
Net (loss) income$(5,558)$8,090 $(13,648)(168.7)%

Rental revenue

Rental revenue decreased by $20,795, or 25.8%, to $59,830 for the three months ended March 31, 2022, from $80,625 for the same period in 2021. If ASC 842 were in effect for the three months ended March 31, 2021, rental revenue would have decreased $17,681 or 22.8%. The decrease in rental revenue was directly attributable to the aforementioned stimulus payments and continued unemployment benefits in the first quarter of 2021, which increased spending and our gross originations volume. Further contributing to the decrease was a decrease in originations related to Wayfair. Our Wayfair originations decreased from 63% during the three months ended March 31, 2021 to 58% during the three months ended March 31, 2022. Partially offsetting the decline was rental revenue from originations from 27 new merchant partners that were onboarded during the three months ended March 31, 2022.

Cost of revenue

Cost of revenue decreased $4,769, or 9.0%, to $48,113 for the three months ended March 31, 2022, from $52,882 for the same period in 2021. This decrease was primarily driven by various merchant promotions combined with the decrease in rental revenue and originations over this period.

Gross profit

Gross profit decreased by $15,989, or 57.6%, to $11,764 for the three months ended March 31, 2022 from $27,753 for the same period in 2021. The decrease in gross profit was primarily due to the aforementioned government stimulus payments and continued unemployment benefits in the first quarter of 2021, coupled with a decline in origination volume. Gross profit as a percentage of total revenue decreased to 19.6% for the three months ended March 31, 2022, compared to 34.4% for the same period in 2021. This decrease was driven by the normalization of customer payment performance as compared to the 2021 period and various promotions for merchant partners.

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Operating expenses

The following tables quantify the dollar amounts of operating costs versus total revenue for the three months ended March 31, 2022 and 2021.

Three Months Ended March 31,Percentage of Total Revenue
2022202120222021
Total revenue$59,877 $80,635 
Servicing costs1,207 1,138 2.0 %1.4 %
Underwriting fees488 467 0.8 %0.6 %
Professional and consulting fees3,288 1,534 5.5 %1.9 %
Technology and data analytics2,410 1,549 4.0 %1.9 %
Bad debt expense— 4,887 — %6.1 %
Compensation costs5,377 2,582 9.0 %3.2 %
General and administrative3,805 1,183 6.4 %1.5 %

Servicing Costs

Servicing costs increased by $69, or 6.1%, to $1,207 for the three months ended March 31, 2022, from $1,138 for the same period in 2021. This was primarily due to the increase in overall call center headcount.

Underwriting fees

Underwriting fees were consistent with the prior year period at $488 for the three months ended March 31, 2022, compared to $467 for the 2021 period.

Professional and consulting fees

Professional and consulting fees increased by $1,754, or 114.3%, to $3,288 for the three months ended March 31, 2022, compared to $1,534 for the same period in 2021. This increase was primarily driven by an increase in accounting and legal fees associated with being a public company coupled with consulting fees associated with Sarbanes Oxley Act (“SOX”) compliance.

Technology and data analytics

Technology and data analytics expense increased by $861, or 55.6%, to $2,410 for the three months ended March 31, 2022, compared to $1,549 for the same period in 2021. This was primarily due to added employee headcount to continue the build-out of the Company’s technological infrastructure and continued improvement and management of our proprietary risk model algorithms, partially offset by a greater portion of software development activities qualifying for capitalization during the three months ended March 31, 2022.

Bad debt expense

As a result of adopting ASC 842, the Company no longer records bad debt expense and therefore for the three months ended March 31, 2022, no bad debt expense was recorded as compared to $4,887 for the same period in 2021. As discussed above in “ASC 842 Adoption and Comparability”, the Company adopted the transition method for ASC 842 and is not required to restate its 2021 or prior periods to reflect the changes related to ASC 842. Effective January 1, 2022, the Company recognizes revenue from customers when the revenue is earned and cash is collected. In addition, the Company no longer records accounts receivable arising from lease receivables due from customers and any corresponding allowance for doubtful accounts on its condensed consolidated balance sheet. In the periods prior to 2022, the Company recognized revenue from customers on an accrual basis of accounting.

Compensation costs

Compensation costs increased by $2,795 or 108.2% to $5,377 for the three months ended March 31, 2022, from $2,582 for the same period in 2021. This increase is largely driven by an increase in stock-based compensation related to the vesting of restricted stock awards in 2022 and added sales and business development headcount to support the growth of the Company. Total stock-based compensation expense increased $1,009 year-over-year.
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General and administrative

General and administrative expense increased by $2,622, or 221.6%, to $3,805 for the three months ended March 31, 2022, from $1,183 for the same period in 2021. This increase is related to an approximate $1,500 increase in insurance-related costs as a public company, increased marketing and advertising, and increased software related expense.

Interest expense and other fees

Interest expense and other fees decreased by $339, or 8.2%, to $3,801 for the three months ended March 31, 2022, compared to $4,140 for the same period in 2021. This was primarily due to a decrease in the RLOC balance.

Change in fair value of warrant liability

The change in fair value of warrant liability was a gain of $3,089 for the three months ended March 31, 2022 and was a loss of $358 for the same period in 2021. The balance consists of changes in the fair value of the Company’s warrant liability, which has decreased due to the decline in the fair value of our public warrants and private warrants.

Provision for income taxes

Provision for income taxes was $35 for the three months ended March 31, 2022 compared to $1,825 for the same period in 2021. The provisions are primarily due to state income taxes on the Company’s estimated taxable income for the year ending December 31, 2022 and 2021. Taxable income is expected to be generated in certain states where accelerated federal tax depreciation is disallowed.

Non-GAAP Financial Measures

In addition to gross profit and net income, which are measures presented in accordance with U.S. GAAP, we believe that adjusted gross profit, adjusted EBITDA and adjusted net (loss) income provide relevant and useful information which is widely used by analysts, investors, and competitors in our industry in assessing performance. Adjusted gross profit, adjusted EBITDA and adjusted net (loss) income are supplemental measures of our performance that are neither required by nor presented in accordance with U.S. GAAP. Adjusted gross profit and adjusted EBITDA should not be considered as substitutes for U.S. GAAP metrics such as gross profit, operating income, net income, or any other performance measures derived in accordance with U.S. GAAP and may not be comparable to similar measures used by other companies.

Adjusted gross profit represents gross profit less variable operating expenses, which are servicing costs and underwriting fees.We believe that adjusted gross profit provides a meaningful understanding of one aspect of our p