Document

 
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-257583
Prospectus Supplement No. 2
(To Prospectus Dated April 14, 2022)
https://cdn.kscope.io/6a73e1d52fcf106f56ae78aaf6f0f332-kpltupdatedlogo.jpg
57,071,540 Shares of Common Stock
Up to 12,832,500 Shares of Common Stock Issuable Upon Exercise of the Warrants
Up to 332,500 Warrants
___________________
This prospectus supplement updates, amends and supplements the prospectus dated April 14, 2022 (as supplemented or amended from time to time, the “Prospectus”), which forms a part of our Registration Statement on Form S-1, as amended (Registration No. 333-257583).

This prospectus supplement is being filed to update, amend and supplement the information in the Prospectus with the information contained in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2022 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.

The Prospectus and this prospectus supplement relate to the offer and sale from time to time by the Selling Securityholders named in the Prospectus (the “Selling Securityholders”) of (i) up to 57,071,540 shares of our common stock, par value $0.0001 per share (“Common Stock”) and (ii) up to 332,500 warrants (the “Private Placement Warrants”) originally issued in a private placement in connection with the initial public offering (an “IPO”) of FinServ Acquisition Corp. (“FinServ”).

The Prospectus and this prospectus supplement also relate to the issuance by us of up to an aggregate of 12,832,500 shares of our Common Stock which consists of (i) 332,500 shares of Common Stock that are issuable upon the exercise of the Private Placement Warrants and (ii) 12,500,000 shares of Common Stock that are issuable upon the exercise of 12,500,000 warrants (the “Public Warrants” and, together with the Private Placement Warrants, the “Warrants”) originally issued in the IPO of FinServ.

You should read this prospectus supplement in conjunction with the Prospectus, including any amendments or supplements to it. This prospectus supplement is qualified by reference to the Prospectus, except to the extent that the information provided by this prospectus supplement supersedes information contained in the Prospectus. This prospectus supplement is not complete without, and may not be delivered or used except in conjunction with, the Prospectus, including any amendments or supplements to it.

Our Common Stock and our Public Warrants are listed on the Nasdaq Capital Market, under the symbols “KPLT” and “KPLTW,” respectively. On August 5, 2022, the closing price of our Common Stock was $1.48 and the closing price for our Public Warrants was $0.19.
___________________

We are an “emerging growth company” under federal securities laws and are subject to reduced public company reporting requirements. Investing in our securities involves a high degree of risks. See the section entitled “Risk Factors” beginning on page 9 of the Prospectus, and under similar headings in any amendments or supplements to the Prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus supplement is August 9, 2022.








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 June 30, 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 001-39116Katapult 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 registrant had outstanding 98,378,821 shares of common stock as of August 5, 2022.




Page
Part I - Financial Information
Item 1.
Financial Statements
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Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021
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Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and six months ended June 30, 2022 and 2021 (Unaudited)
#SectionPage#
Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021 (Unaudited)
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Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (Unaudited)
#SectionPage#
Notes to Unaudited Condensed Consolidated Financial Statements
#SectionPage#
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
#SectionPage#
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
#SectionPage#
Item 4.
Controls and Procedures
#SectionPage#
Part II - Other Information
Item 1.
Legal Proceedings
#SectionPage#
Item 1A.
Risk Factors
#SectionPage#
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
#SectionPage#
Item 3.
Defaults Upon Senior Securities
#SectionPage#
Item 4.
Mine Safety Disclosures
#SectionPage#
Item 5.
Other Information
#SectionPage#
Item 6.
Exhibits
#SectionPage#
Signatures
#SectionPage#




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, new brand and expanding information and technology capabilities;
• our market opportunity and our ability to acquire new customers and retain existing customers;
• the timing and impact of our growth initiatives on our future financial performance and the impact of our new executive hires and brand strategy;
• anticipated occurrence and timing of prime lending tightening and impact on our results of operations;
• 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, inflation, 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 and willingness and ability of consumers to pay for the goods they lease through us when due;
• 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 transaction volume 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;
• ability to effectively respond to general economic and business conditions;
• ability to obtain additional capital, including equity or debt financing;
• enhance future operating and financial results;
• ability to 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 laws;
• 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)
June 30,December 31,
20222021
ASSETS(Unaudited)
Current assets:
Cash$85,025 $92,494 
Restricted cash2,229 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 4)45,935 61,752 
Prepaid expenses and other current assets4,646 4,249 
Total current assets137,835 164,439 
Property and equipment, net (Note 5)636 576 
Security deposits91 91 
Capitalized software and intangible assets, net (Note 6)1,687 1,056 
Right-of-use assets (Note 14)960 — 
Total assets$141,209 $166,162 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$1,752 $2,029 
Accrued liabilities (Note 7)10,914 11,959 
Unearned revenue1,623 2,135 
Lease liabilities (Note 14)439 — 
Total current liabilities14,728 16,123 
Revolving line of credit (Note 8)55,183 61,238 
Long term debt (Note 9)42,461 40,661 
Other liabilities1,929 7,341 
Lease liabilities, non-current (Note 14)600 — 
Total liabilities114,901 125,363 
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value-- 250,000,000 shares authorized; 98,334,413 and 97,574,171 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively
10 10 
Additional paid-in capital80,394 77,632 
Accumulated deficit(54,096)(36,843)
Total stockholders' equity26,308 40,799 
Total liabilities and stockholders' equity$141,209 $166,162 



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 June 30,Six Months Ended June 30,
2022202120222021
Revenue
Rental revenue$53,020 $77,237 $112,851 $157,862 
Other revenue19 232 66 242 
Total revenue53,039 77,469 112,917 158,104 
Cost of revenue44,849 55,922 92,962 108,804 
Gross profit8,190 21,547 19,955 49,300 
Operating expenses:
Servicing costs1,131 1,072 2,337 2,210 
Underwriting fees423 477 910 944 
Professional and consulting fees2,259 1,324 5,547 2,858 
Technology and data analytics2,455 2,344 4,864 3,893 
Bad debt expense— 8,026 — 12,913 
Compensation costs6,470 14,755 11,847 17,337 
General and administrative3,649 2,503 7,459 3,686 
Total operating expenses16,387 30,501 32,964 43,841 
(Loss) income from operations(8,197)(8,954)(13,009)5,459 
Interest expense and other fees(3,794)(4,146)(7,594)(8,286)
Change in fair value of warrant liability2,323 3,169 5,412 2,811 
Loss before income taxes(9,668)(9,931)(15,191)(16)
(Provision) benefit for income taxes(65)1,828 (100)
Net loss$(9,733)$(8,103)$(15,291)$(13)
Net loss per share:
Basic$(0.10)$(0.17)$(0.16)$— 
Diluted$(0.10)$(0.17)$(0.16)$— 
Weighted average shares used in computing net loss per share:
Basic97,944,724 46,989,376 98,036,263 39,274,794 
Diluted97,944,724 46,989,376 98,036,263 39,274,794 





Redeemable Convertible
Preferred Stock
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders'
 Equity
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— — 623,258 — — — — 
Repurchases of restricted stock for payroll tax withholding— — (138,451)— (244)— (244)
Stock-based compensation expense— — — — 2,946 — 2,946 
Net loss— — — — — (15,291)(15,291)
Balances at June 30, 2022— $— 98,334,413 $10 $80,394 $(54,096)$26,308 

Redeemable Convertible Preferred StockCommon StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balances at December 31, 202068,589,913 $49,894 9,524,440 $10 $7,196 $(58,049)$(50,843)
Retroactive application of recapitalization(68,589,913)(49,894)21,908,037 (7)49,901 — 49,894 
Adjusted beginning balance— — 31,432,477 $$57,097 $(58,049)$(949)
PIPE proceeds— — 15,000,000 149,998 — 150,000 
Merger financing— — 39,408,662 251,105 — 251,109 
Consideration paid to selling stockholders— — — — (329,560)— (329,560)
Transaction costs— — — — (33,534)— (33,534)
Merger warrants liability — — — — (44,272)— (44,272)
Stock options exercised— — 1,422,406 — 442 — 442 
Stock-based compensation expense— — 2,850,000 — 9,766 — 9,766 
Stock warrant exercise— — 6,708,070 13,101 — 13,102 
Net loss— — — — — (13)(13)
Balances at June 30, 2021— — 96,821,615 $10 $74,143 $(58,062)$16,091 






Redeemable Convertible Preferred StockCommon StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balances at March 31, 2022— $— 98,126,012 $10 $78,586 $(44,363)$34,233 
Stock options exercised— — — — — — — 
Vesting of restricted stock units— — 244,833 — — — — 
Repurchases of restricted stock for payroll tax withholding— — (36,432)— (49)— (49)
Stock-based compensation expense— — — — 1,857 — 1,857 
Net loss— — — — — (9,733)(9,733)
Balances at June 30, 2022— $— 98,334,413 $10 $80,394 $(54,096)$26,308 


Redeemable Convertible Preferred StockCommon StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balances at March 31, 202168,589,913 $49,894 9,781,884 $10 $7,360 $(49,959)$(42,589)
Retroactive application of recapitalization(68,589,913)(49,894)21,908,037 (7)49,901 — 49,894 
Adjusted beginning balance— — 31,689,921 $$57,261 $(49,959)$7,305 
PIPE proceeds— — 15,000,000 149,998 — 150,000 
Merger financing— — 39,408,662 251,105 — 251,109 
Consideration paid to selling stockholders— — — — (329,560)— (329,560)
Transaction costs— — — — (33,534)— (33,534)
Merger warrants liability — — — — (44,272)— (44,272)
Stock options exercised— — 1,164,962 — 358 — 358 
Stock-based compensation expense— — 2,850,000 — 9,686 — 9,686 
Stock warrant exercise— — 6,708,070 13,101 — 13,102 
Net loss— — — — — (8,103)(8,103)
Balances at June 30, 2021— $— 96,821,615 $10 $74,143 $(58,062)$16,091 










KATAPULT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
Six Months Ended June 30,
20222021
Cash flows from operating activities:
Net loss$(15,291)$(13)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization62,438 73,160 
Net book value of property buyouts19,040 22,836 
Impairment expense7,490 7,721 
Bad debt expense— 12,913 
Change in fair value of warrants liability(5,412)(2,811)
Stock-based compensation2,946 9,766 
Amortization of debt discount1,015 1,390 
Amortization of debt issuance costs181 179 
Accrued PIK Interest785 760 
Amortization of right-of-use assets179 — 
Change in operating assets and liabilities:
Accounts receivable— (13,475)
Property held for lease(72,844)(105,251)
Prepaid expenses and other current assets(397)(4,667)
Accounts payable(277)5,813 
Accrued liabilities(899)(1,516)
Lease liabilities(201)— 
Unearned revenues(512)321 
Net cash (used in) provided by operating activities(1,759)7,126 
Cash flows from investing activities:
Purchases of property and equipment(153)(198)
Additions to capitalized software(845)(423)
Net cash used in investing activities(998)(621)
Cash flows from financing activities:
Principal repayments on revolving line of credit(16,171)(7,948)
Principal advances on revolving line of credit, net of issuance costs9,935 5,809 
Repurchases of restricted stock(244)— 
Proceeds from exercise of stock options60 442 
PIPE proceeds— 150,000 
Merger financing, net of redemptions— 251,109 
Consideration paid to selling shareholders— (329,560)
Transaction costs paid— (33,534)
Net cash (used in) provided by financing activities(6,420)36,318 
Net (decrease) increase in cash and restricted cash(9,177)42,823 
Cash and restricted cash at beginning of period96,431 69,597 
Cash and restricted cash at end of period$87,254 $112,420 
Supplemental disclosure of cash flow information:
Cash paid for interest$5,200 $5,868 
Cash paid for income taxes$362 $— 
Right-of-use assets obtained in exchange for operating lease liabilities$1,139 $— 
Cash paid for operating leases$254 $— 
Assumed warrant liability in connection with the Merger$— $44,272 
Exercise of common stock warrant accounted for as a liability$— $13,102 




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. Refer to Note 3 to these condensed consolidated financial statements for further information about the Merger.
Subsidiaries
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, 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.





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.

Correction of Prior Period Classification Error

The Company corrected an immaterial classification error within operating expenses that was included in the prior period condensed consolidated statement of operations and comprehensive (loss) income. The correction resulted in a decrease in Technology and data analytics expense and an increase in General and administrative expense of $257 and $423, for the three and six months ended June 30, 2021, respectively. This correction had no effect on total operating expenses, loss before income taxes, net loss, or any other previously reported amounts in the Company’s condensed consolidated financial statements for the year ended June 30, 2021.
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 June 30, 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 June 30, 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:




June 30,June 30,December 31,December 31,
2022202120212020
Cash$85,025 $109,785 $92,494 $65,622 
Restricted cash2,229 2,635 3,937 3,975 
Total cash and restricted cash$87,254 $112,420 $96,431 $69,597 


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 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 six months ended June 30, 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.

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, Net— Property 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 loss (income).




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 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 and six months ended June 30, 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 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 June 30, 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 Loss Per ShareThe Company calculates basic and diluted net 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 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



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 15 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 and six months ended June 30, 2022 and 2021, the Company did not have any customers that accounted for 10% or more of total revenue. As of June 30, 2022 and 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.




3.MERGER

The Merger is accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, FinServ was treated as the “acquired” company for financial reporting purposes, see Note 1. 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.

Recapitalization
Cash - FinServ Trust$251,059 
Less: Redemptions(64)
Cash - FinServ Operating114 
Cash - PIPE150,000 
Less: Consideration paid to selling shareholders(329,560)
Less: Transaction costs(33,534)
Net contributions from Merger and PIPE38,015 
Less: Warrant liability(44,272)
Total$(6,257)

Merger Warrants

Warrants to purchase shares of the Company’s stock deemed acquired as part of the Merger and outstanding during the three and six months ended June 30, 2022 consisted of the following:

June 30, 2022
Public warrants12,500,000 
Private warrants332,500 
Total12,832,500 

Earn out Shares

At the closing of the Merger, the Company issued 7,500,000 earn out shares to Legacy Katapult stockholders subject to an earn out period and vesting conditions. The earn out period concludes on the sixth anniversary of the Merger (June 9, 2027). One-half of the earn out shares will vest if the closing price of Katapult common shares are greater than or equal to $12.00 over any 20 trading days within any 30 consecutive trading day period and one-half will vest if the closing price of the Katapult common shares is greater than or equal to $14.00 over any 20 trading days within any 30 consecutive trading day period, in each case, during the earn out period. The earn out shares are classified as equity.
4.PROPERTY HELD FOR LEASE, NET
Property held for lease, net consists of the following:
June 30,December 31,
20222021
Property held for lease$231,991 $220,259 
Less: accumulated depreciation(186,056)(158,507)
Property held for lease, net$45,935 $61,752 
Total depreciation expense related to property held for lease, net for the three months ended June 30, 2022 and 2021, was $29,512 and $37,027, respectively. Total depreciation expense related to property held for lease, net for the six months ended June 30, 2022 and 2021, was $62,130 and $73,041, respectively.



Net book value of property buyouts for the three months ended June 30, 2022 and 2021, was $9,020 and $12,250, respectively. Net book value of property buyouts for the six months ended June 30, 2022 and 2021, was $19,040 and $22,836, respectively.
Total impairment charges related to property held for lease, net for the three months ended June 30, 2022 and 2021, was $4,266 and $3,921, respectively. Total impairment charges related to property held for lease, net for the six months ended June 30, 2022 and 2021, was $7,490 and $7,721, 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 (loss) income.
All property held for lease, net is on-lease as of June 30, 2022 and December 31, 2021.
5.PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
June 30,December 31,
20222021
Computer, office and other equipment$798 $659 
Computer software80 80 
Furniture and fixtures100 100 
Leasehold improvements252 238 
1,230 1,077 
Less: accumulated depreciation(594)(501)
Property and equipment, net$636 $576 
Total depreciation expense related to property and equipment, net was $48 and $33 for the three months ended June 30, 2022 and 2021, respectively. Total depreciation expense related to property and equipment, net was $93 and $63 for the six months ended June 30, 2022 and 2021, respectively.
6.CAPITALIZED SOFTWARE AND INTANGIBLE ASSETS, NET
Capitalized software and intangible assets, net consists of the following:
June 30,December 31,
20222021
Capitalized software$2,099 $1,254 
Domain name16 16 
2,115 1,270 
Less: accumulated amortization(428)(214)
Capitalized software and intangible assets, net$1,687 $1,056 
Total amortization expense for capitalized software and intangible assets was $139 and $38 for the three months ended June 30, 2022 and 2021, respectively.
Total amortization expense for capitalized software and intangible assets was $214 and $56 for the six months ended June 30, 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 6 months)$339 
2023531 
2024426 
202566 
$1,362 
As of June 30, 2022, $309 of capitalized software was not yet placed in service.
7.ACCRUED LIABILITIES
Accrued liabilities consists of the following:
June 30,December 31,
20222021
Bonus accrual$1,178 $1,807 
Sales tax payable5,841 5,445 
Unfunded lease payable1,935 2,697 
Interest payable62 91 
Other accrued liabilities1,898 1,919 
Total liabilities$10,914 $11,959 
8.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 June 30, 2022, total borrowings outstanding on the RLOC were $55,722 less issuance costs of $539, netting to a total of $55,183. 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 and other fees. 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 August 9, 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).

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 Company entered into the thirteenth amendment to the credit agreement to amend the number of times the Company 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 Company has exercised its right to cure such a default three times.

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 the Company 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 the Company’s unrestricted cash and cash equivalents if the Company has unrestricted cash of at least $50,000 and to provide no reduction in the amounts of the Company’s loans for purpose of the calculation if the amount of the Company’s unrestricted cash and cash equivalents is less than $50,000. Previously, the amount of the Company’s 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.

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 “TTM 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, the Company’s minimum TTM 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 TTM Adjusted EBITDA must not be less than $(15,000), and (iii) at all times thereafter, $0.

The interest rate for paid-in-kind (“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%.

As of June 30, 2022 and December 31, 2021, the Company was in compliance with the covenants set forth in the above credit agreement.
9.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). The interest rate for PIK interest on the term loan (as defined in the credit agreement) is (A) if Liquidity is greater than $50,000, 4.5% or (B) if Liquidity is less than $50,000, 6%. 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 covenants.

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

June 30,December 31,
20222021
Outstanding principal$50,000 $50,000 
PIK2,449 1,664 
Debt discount(9,988)(11,003)
Total carrying amount$42,461 $40,661 
Total amortization expense related to the term loan facility discount was $479 and $692 for the three months ended June 30, 2022 and 2021, respectively. Total amortization expense related to the term loan facility was $1,015 and $1,390 for the six months ended June 30, 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.



10.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 June 30, 2022, and changes during the six months then ended is presented below:
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 - June 30, 20228,095,662 0.30 6.83$6,377 
Exercisable - June 30, 20228,083,925 0.29 6.83$6,377 
Unvested - June 30, 202211,737 3.50 8.29$— 
There were no options granted under the 2014 Plan during the six months ended June 30, 2022 and 2021. The total intrinsic value of stock options exercised during the six months ended June 30, 2022 and 2021 was $241 and $14,933, respectively.
As of June 30, 2022, total compensation cost not yet recognized related to unvested stock options was $24, which is expected to be recognized over a period of 1.96 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 June 30, 2022, and changes during the six 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 - June 30, 2022346,603 10.45 9.00$— 
Exercisable - June 30, 2022137,197 10.45 9.00$— 
Unvested - June 30, 2022209,406 $10.45 9.00$— 
As of June 30, 2022, total compensation cost not yet recognized related to unvested stock options was $1,271, which is expected to be recognized over a period of 2.38 years.
No stock options were granted under the 2021 Plan during the three and six months ended June 30, 2022 and 2021.

Restricted Stock Units

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 June 30, 2022, and changes during the six months then ended is presented below:

Number of RSUsWeighted Average Grant Date Fair Value
Outstanding - December 31, 20212,115,162$6.10 
Granted5,450,7491.84 
Vested(623,258)6.29 
Forfeited(101,016)5.48 
Outstanding - June 30, 20226,841,637$2.70 

Stock-Based Compensation Expense— Stock-based compensation expense was $1,857 and $9,686 for the three months ended June 30, 2022 and 2021, respectively. Stock-based compensation expense was $2,946 and $9,766 for the six months ended June 30, 2022 and 2021, respectively. Stock-based compensation expense is included in compensation costs.
On August 26, 2020, the Company granted a total of 19,000,000 restricted shares of the Company’s common stock to certain employees (the “Award Shares”). The Award Shares vest only upon a Liquidation Event, which is defined as any liquidation, dissolution, or winding up of the Company, including a consolidation, stock exchange, or merger with another Company. The number of Award Shares that will be forfeited or will vest will depend upon the achieved liquidation price per common share. Vesting of the Award Shares is contingent upon the recipient’s continuous employment with the Company through a Liquidation Event. The Liquidation Event represented a performance condition that was satisfied as a result of the Merger discussed in Note 3. The Award Shares had a grant date fair value of $3.28 per share which resulted in the recognition of $9,348 of stock-based compensation expense during the three and six months ended June 30, 2021. Based on the liquidation price per common share, 15% of the total Award Shares vested as a result of the Merger.
11.INCOME TAXES



For the three months ended June 30, 2022 and 2021, the Company recorded an income tax provision and benefit of $65 and $1,828, respectively.

For the six months ended June 30, 2022 and 2021, the Company recorded an income tax provision and benefit of $100 and $3, respectively.
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 $71,900 that begin to expire in 2023.
In evaluating its ability to realize its net deferred tax assets, the Company considered all available positive and negative evidence, such as past operating results, forecasted earnings, prudent and feasible tax planning strategies, and the future realization of the tax benefits of existing temporary differences. The Company remains in a cumulative pre-tax loss position for the 36 months ended June 30, 2022, and determined that it is more likely than not that its net deferred tax assets will not be realized. The Company continues to maintain a full valuation allowance as of June 30, 2022 and December 31, 2021. It is possible that the Company will achieve profitability to enable the release of some or all of its valuation allowance.
12.NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of net (loss) income per common share:
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Net loss per share
Numerator
Net loss$(9,733)$(8,103)$(15,291)$(13)
Denominator
Denominator for basic net loss per weighted average common shares97,944,724 46,989,376 98,036,263 39,274,794 
Net (loss) income per common share
Basic$(0.10)$(0.17)$(0.16)$— 
Diluted$(0.10)$(0.17)$(0.16)$— 
The Company’s potentially dilutive securities, which include unvested RSU’s, stock options to purchase common stock and warrants to purchase common stock, have been excluded from the computation of diluted net 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 per share is the same in the 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 per share for the periods indicated because including them would have had an anti-dilutive effect:

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Public warrants12,500,000 12,500,000 12,500,000 12,500,000 
Private warrants332,500 332,500 332,500 332,500 
Stock options8,442,265 9,140,107 8,442,265 9,140,107 
Unvested restricted stock units6,841,637 — 6,841,637 — 
Total common stock equivalents28,116,402 21,972,607 28,116,402 21,972,607 
Unvested restricted stock units that were outstanding during the three and six months ended June 30, 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.



13.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 June 30, 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

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 complaint filed in the Supreme Court of the State of New York, New York County. 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 to provide that any motions for summary judgment must be filed by August 22, 2022.

The Company has not recorded any loss or gain contingencies associated with this matter as it is not probable or estimable at June 30, 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. On May 26, 2022, the Court appointed a lead plaintiff, who, on July 29, 2022, filed an amended complaint in the action. The amended complaint asserts violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934, and seeks an unspecified amount of damages on behalf of persons and entities that (a) beneficially owned and/or held FinServ common stock as of the close of business on May 11, 2021 and were eligible to vote at FinServ’s June 7, 2021 special meeting (the “FinServ Putative Class”); or (b) purchased or otherwise acquired Katapult securities between June 15, 2021 and August 9, 2021, inclusive (the “Katapult Putative Class”). The amended complaint alleges that certain defendants misled the FinServ Putative Class by failing to disclose that prime lenders could and would reach down the credit waterfall and take Katapult’s customers. The amended complaint further alleges that certain defendants misled the Katapult Putative Class by providing materially false and misleading financial guidance. The Company and the other defendants currently have until September 23, 2022 to respond to the amended complaint. 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 June 30, 2022.



14.LEASES
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. 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 June 30, 2022 reconciled to the present value of operating lease liabilities:
Years Ending December 31,
2022 (remaining 6 months)$257 
2023456 
2024334 
2025170 
Total future minimum lease payments$1,217 
Less: Interest(178)
Total present value of lease liabilities$1,039 
Lease Liabilities— Lease liabilities as of June 30, 2022, consist of the following:

Current portion of lease liabilities$439 
Long-term lease liabilities, net of current portion600 
Total lease liabilities$1,039 
Rent expense for operating leases for the three months ended June 30, 2022 and 2021 were $131 and $141, respectively. Rent expense for operating leases for the six months ended June 30, 2022 and 2021 were $267 and $290, respectively. As of June 30, 2022, the Company had a weighted average remaining lease term of 2.6 years and a weighted average discount rate of 9.25%.
15.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 revolving line of credit, and long term debt (term loan facility) were as follows:

June 30, 2022December 31, 2021
Principal amountCarrying amountFair valuePrincipal amountCarrying amountFair value
Revolving line of credit$55,722 $55,183 $57,173 $61,958 $61,238 $70,688 
Long term debt52,449 42,461 53,161 51,664 40,661 58,143 
$108,171 $97,644 $110,334 $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.




There were no assets measured at fair value on a recurring basis as of June 30, 2022 or December 31, 2021. Liabilities measured at fair value on a recurring basis were as follows:


June 30, 2022
Fair Value Measurement Using
Liabilities:TotalLevel 1Level 2Level 3
Warrant liability - Public & Private Warrants$1,929 $1,875 $— $54 
Total$1,929 $1,875 $— $54 



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

During the three and six months ended June 30, 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(5,412)
Balance at June 30, 2022$1,929 

Term Loan WarrantWarrant Liability
Balance at December 31, 2020$12,744 $— 
Exercise(13,102)— 
Assumed from Merger— 44,272 
Changes in fair value358 (3,169)
Balance at June 30, 2021$— $41,103 

16.SUBSEQUENT EVENTS
The Company evaluated subsequent events from June 30, 2022, the date of these condensed consolidated financial statements, through August 9, 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. Except as discussed below, there are no events that require adjustment to or disclosure in these condensed consolidated financial statements.








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 our adoption of ASC 842, effective January 1, 2022, using the transition method, we have not restated the financial statements as of and for the three and six months ended June 30, 2021 and therefore these financial statements are not comparable to the financial statements for the three months and six months ended June 30, 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 factors and trends impacting our business are as follows:

Macroeconomic factors — Since the fourth quarter of 2021 and during the six months ended June 30, 2022, our business has been impacted by a number of macroeconomic factors, including record levels of inflation combined with continued supply chain issues (including availability of raw materials from Russia and Ukraine). These factors have led to declining consumer confidence and spending, which has led to our key merchant partners’ experiencing lower sales volume than in 2021 and negatively impacted our gross origination volume and revenue during the period. We also expect these factors will impact customer’s ability to make lease payments. In response to these trends and a deterioration in overall payment ability of our customers, we began tightening our underwriting in fourth quarter 2021 and into 2022, which has led to fewer approvals and negatively impacted our gross origination volume and revenue.

COVID-19 — The COVID-19 pandemic has impacted, and may continue to impact, our business, results of operations and financial condition. We initially experienced positive performance during the onset of the pandemic due to increased customer spending, in particular ecommerce spending. These trends continued during the first half of 2021 when 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 throughout the six months ended June 30, 2021. More recently, we have seen these pandemic-related trends subside, with buyout and delinquency patterns normalizing to pre-pandemic levels during the six months ended June 30, 2022. In addition, impairment charges returned to pre-pandemic levels during the period.

We anticipate that the challenging macroeconomic environment will continue in 2022 and management continues to monitor both potential positive and negative business trends relating to COVID-19, including as a result of the emergence of new variants, as the broader macroeconomic environment.

In addition, based on historical trends, we believe that 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 for us.

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.




ASC 842 Adoption and Comparability

We were required to adopt ASC 842 relating to lessor accounting effective January 1, 2022. Our lease-to-own agreements, which comprise the majority of our revenue, fall within the scope of ASC 842 under lessor accounting and as a result of the adoption, we are recognizing revenue from customers when revenue is earned and cash is collected instead of on an accrual basis, which we had done historically, including for the three and six months ended June 30, 2021. We adopted ASC 842 using the transition approach, which permits us to not apply ASC 842 for comparative periods in the year of adoption. As a result, we have 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 and six months ended June 30, 2021 are not comparable to the financial statements as of and for the three and six months ended June 30, 2022. In particular, the financial statements for the three and six months ended June 30, 2022 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 our condensed consolidated financial statements for the three and six months ended June 30, 2021. If ASC 842 was effective for the three and six months ended June 30, 2021, total revenues would have been $69,472 and $147,030, respectively and (loss) income before income taxes would have been $(9,902) and $1,823, respectively.

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 investors to use in assessing the volume of transactions that take place on our platform.

The following tables present gross originations for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30,Change
20222021$%
Gross Originations$46,359 $64,388 $(18,029)(28.0)%

Wayfair represented 62% of gross origination during both the three months ended June 30, 2022 and 2021.

Six Months Ended June 30,Change
20222021$%
Gross Originations$93,036 $128,151 $(35,115)(27.4)%

Wayfair represented 60% and 62% of gross originations during the six months ended June 30, 2022 and 2021, respectively.

Total Revenue
Total revenue represents the sum of rental revenue and other revenue. We adopted ASC 842 in the first quarter of 2022 and as a result we record revenue when earned and cash is collected. The following table presents total revenue for the three and six months ended June 30, 2022 and 2021.
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Total revenue$53,039 $77,469 $112,917 $158,104 

If ASC 842 was effective for the three and six months ended June 30, 2021, total revenue would have been $69,472 and $147,030, respectively.

Gross Profit




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 us rather than to our 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 June 30, 2022 and 2021
The following tables are references for the discussion that follows.





Three Months Ended June 30,Change
20222021$%
Revenue
Rental revenue$53,020 $77,237 $(24,217)(31.4)%
Other revenue19 232 (213)(91.8)%
Total revenue53,039 77,469 (24,430)(31.5)%
Cost of revenue44,849 55,922 (11,073)(19.8)%
Gross profit8,190 21,547 (13,357)(62.0)%
Operating expenses:
Servicing costs1,131 1,072 59 5.5 %
Underwriting fees423 477 (54)(11.3)%
Professional and consulting fees2,259 1,324 935 70.6 %
Technology and data analytics2,455 2,344 111 4.7 %
Bad debt expense— 8,026 (8,026)(100.0)%
Compensation costs6,470 14,755 (8,285)(56.2)%
General and administrative3,649 2,503 1,146 45.8 %
Total operating expenses16,387 30,501 (14,114)(46.3)%
Loss from operations(8,197)(8,954)757 (8.5)%
Interest expense and other fees(3,794)(4,146)352 (8.5)%
Change in fair value of warrant liability2,323 3,169 (846)(26.7)%
Loss before income taxes(9,668)(9,931)263 (2.6)%
(Provision) benefit for income taxes(65)1,828 (1,893)(103.6)%
Net loss$(9,733)$(8,103)$(1,630)20.1 %

Total Revenue

Total revenue decreased by $24,430, or 31.5%, to $53,039 for the three months ended June 30, 2022, from $77,469 for the same period in 2021. If ASC 842 were in effect for the three months ended June 30, 2021, total revenue would have decreased by $16,433 or 23.7%. The decrease in total revenue was directly attributable to a 28.0% decrease in gross originations when compared to the prior period. The decrease in originations was primarily due to the impact of challenging macroeconomic environment combined with targeted tightened underwriting.

Cost of revenue

Cost of revenue decreased by $11,073, or 19.8%, to $44,849 for the three months ended June 30, 2022, from $55,922 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 $13,357, or 62.0%, to $8,190 for the three months ended June 30, 2022, from $21,547 for the same period in 2021. The decrease in gross profit was primarily due to the aforementioned decline in origination volume, lower lease margins and the impact of the adoption of ASC 842. Gross profit as a percentage of total revenue decreased to 15.4% for the three months ended June 30, 2022 compared to 27.8% for the same period in 2021. This decrease is related to lower lease margins driven by the normalization of customer payment performance as compared to the 2021 period and various promotions for merchant partners.

Operating Expenses

Servicing Costs

Servicing costs remained relatively flat at $1,131 for the three months ended June 30, 2022, compared to $1,072 for the same period in 2021.




Underwriting fees

Underwriting fees remained relatively flat at $423 for the three months ended June 30, 2022, compared to $477 for the same period in 2021.

Professional and consulting fees

Professional and consulting fees increased by $935, or 70.6%, to $2,259 for the three months ended June 30, 2022, from $1,324 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 with recruiting costs associated with an increase in headcount.

Technology and data analytics

Technology and data analytics expense increased by $111, or 4.7%, to $2,455 for the three months ended June 30, 2022, from $2,344 for the same period in 2021. This was primarily due to an increased portion of software development activities qualifying for capitalization during the three months ended June 30, 2022 when compared to the the same period in 2021.

Bad debt expense

As a result of adopting ASC 842, we no longer record bad debt expense and therefore for the three months ended June 30, 2022, no bad debt expense was recorded as compared to $8,026 for the same period in 2021. As discussed above in “ASC 842 Adoption and Comparability”, we adopted the transition method for ASC 842 and are not required to restate our 2021 or prior periods to reflect the changes related to ASC 842. Effective January 1, 2022, we recognize revenue from customers when the revenue is earned and cash is collected. In addition, we no longer record accounts receivable arising from lease receivables due from customers and any corresponding allowance for doubtful accounts on our condensed consolidated balance sheet. In the periods prior to 2022, we recognized revenue from customers on an accrual basis of accounting.

Compensation costs

Compensation costs decreased by $8,285 or 56.2% to $6,470 for the three months ended June 30, 2022, from $14,755 for the same period in 2021. This decrease is related to the prior year vesting of executive restricted stock awards of $9,348 as a result of the Merger and payment of transaction related employee bonuses in preparation of the Merger. Total stock-based compensation expense decreased $7,829 quarter-over-quarter.

General and administrative

General and administrative expense increased by $1,146, or 45.8%, to $3,649 for the three months ended June 30, 2022, from $2,503 for the same period in 2021. This increase is related to an 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 $352, or 8.5%, to $3,794 for the three months ended June 30, 2022, from $4,146 for the same period in 2021. This was primarily due to a decrease in the outstanding RLOC balance.

Change in fair value of warrant liability

The change in fair value of warrant liability was $2,323 for the three months ended June 30, 2022, compared to $3,169 for the same period in 2021. The balance consists of changes in the fair value of our warrant liability, which has decreased due to the decline in the fair value of our public warrants and private warrants.

(Provision) benefit for income taxes

Provision from income taxes was $65 for the three months ended June 30, 2022, compared to a benefit of $1,828 for the same period in 2021. The provisions are primarily due to state income taxes on our estimated taxable income for the years ending December 31, 2022 and 2021. Taxable income is expected to be generated in certain states where accelerated federal tax depreciation is disallowed.


Comparison of the six months ended June 30, 2022 and 2021



The following tables are references for the discussion that follows.

Six Months Ended June 30,Change
20222021$%
Revenue
Rental revenue$112,851 $157,862 $(45,011)(28.5)%
Other revenue66 242 (176)(72.7)%
Total revenue112,917 158,104 (45,187)(28.6)%
Cost of revenue92,962 108,804 (15,842)(14.6)%
Gross profit19,955 49,300 (29,345)(59.5)%
Operating expenses:
Servicing costs2,337 2,210 127 5.7 %
Underwriting fees910 944 (34)(3.6)%
Professional and consulting fees5,547 2,858 2,689 94.1 %
Technology and data analytics4,864 3,893 971 24.9 %
Bad debt expense— 12,913 (12,913)(100.0)%
Compensation costs11,847 17,337 (5,490)(31.7)%
General and administrative7,459 3,686 3,773 102.4 %
Total operating expenses32,964 43,841 (10,877)(24.8)%
(Loss) income from operations(13,009)5,459 (18,468)(338.3)%
Interest expense and other fees(7,594)(8,286)692 (8.4)%
Change in fair value of warrant liability5,412 2,811 2,601 92.5 %
Loss before income taxes(15,191)(16)(15,175)94843.8 %
(Provision) benefit for income taxes(100)(103)(3433.3)%
Net loss$(15,291)$(13)$(15,278)117523.1 %

Total Revenue

Total revenue decreased by $45,187, or 28.6%, to $112,917 for the six months ended June 30, 2022, from $158,104 for the same period in 2021. If ASC 842 were in effect for the six months ended June 30, 2021, total revenue would have decreased by $34,113 or 23.2%. The decrease in total revenue was directly attributable to a $35,115 decrease in gross originations when compared to the prior year period. The decrease in originations was primarily due to the impact of a challenging macroeconomic environment combined with targeted tightened underwriting. Further contributing to the decrease was the aforementioned stimulus payments and unemployment benefits that occurred during the first half of 2021, which increased spending and gross origination volume.

Cost of revenue

Cost of revenue decreased $15,842, or 14.6%, to $92,962 for the six months ended June 30, 2022, from $108,804 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 $29,345, or 59.5%, to $19,955 for the six months ended June 30, 2022, from $49,300 for the same period in 2021. The decrease in gross profit was primarily due to the aforementioned government stimulus payments and 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 17.7% for the six months ended June 30, 2022 compared to 31.2% for the same period in 2021, which was driven by the normalization of customer payment performance as compared to the 2021 period.

Operating Expenses
Servicing Costs




Servicing costs increased by $127, or 5.7%, to $2,337 for the six months ended June 30, 2022, from $2,210 for the same period in 2021. This was primarily due to the increase in overall call center headcount.

Underwriting fees

Underwriting fees remained relatively flat at $910 for the six months ended June 30, 2022, compared to $944 for the same period in 2021.

Professional and consulting fees

Professional and consulting fees increased by $2,689, or 94.1%, to $5,547 for the six months ended June 30, 2022, from $2,858 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 recruiting costs associated with an increase in headcount.

Technology and data analytics

Technology and data analytics expense increased by $971, or 24.9%, to $4,864 for the six months ended June 30, 2022, from $3,893 for the same period in 2021. This was primarily due to added employee headcount to continue the build-out of our technological infrastructure and continued improvement and management of our proprietary risk model algorithms.

Bad debt expense

As a result of adopting ASC 842, we no longer record bad debt expense and therefore for the six months ended June 30, 2022, no bad debt expense was recorded as compared to $12,913 for the same period in 2021. As discussed above in “ASC 842 Adoption and Comparability”, we adopted the transition method for ASC 842 and are not required to restate our 2021 or prior periods to reflect the changes related to ASC 842. Effective January 1, 2022, we recognize revenue from customers when the revenue is earned and cash is collected. In addition, we no longer record accounts receivable arising from lease receivables due from customers and any corresponding allowance for doubtful accounts on our condensed consolidated balance sheet. In the periods prior to 2022, we recognized revenue from customers on an accrual basis of accounting.

Compensation costs

Compensation costs decreased by $5,490 or 31.7% to $11,847 for the six months ended June 30, 2022, from $17,337 for the same period in 2021. This decrease is related to the prior year vesting of executive restricted stock awards of $9,348 as a result of the Merger and payment of transaction related employee bonuses in preparation of the Merger. Total stock-based compensation expense decreased $6,820 period-over-period.

General and administrative

General and administrative expense increased by $3,773, or 102.4%, to $7,459 for the six months ended June 30, 2022, from $3,686 for the same period in 2021. This increase is related to an 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 $692, or 8.4%, to $7,594 for the six months ended June 30, 2022, from $8,286 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 $5,412 for the six months ended June 30, 2022, compared to $2,811 for the same period in 2021. The balance consists of changes in the fair value of our warrant liability, which has decreased due to the decline in the fair value of our public warrants and private warrants.

(Provision)/benefit for income taxes

Provision from income taxes was $100 for the six months ended June 30, 2022 and was a benefit of $3 for the same period in 2021. The provisions are primarily due to state income taxes on our estimated taxable income for the years 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 loss, 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, adjusted EBITDA and adjusted net (loss) income should not be considered as substitutes for U.S. GAAP metrics such as gross profit, operating income, net loss, 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, 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.

Adjusted EBITDA is a non-GAAP financial measure that is defined as net loss before interest expense and other fees, change in fair value of warrant liability, (provision) benefit for income taxes, depreciation and amortization on property and equipment and capitalized software, impairment of leased assets, stock-based compensation expense, and transaction costs associated with the Merger.

Adjusted net (loss) income is a non-GAAP financial measure that is defined as net loss before change in fair value of warrant liability, stock-based compensation expense and transaction costs associated with the Merger.

Adjusted gross profit, adjusted EBITDA and adjusted net (loss) income are useful to an investor in evaluating our performance because these measures:

Are widely used to measure a company’s operating performance;
Are financial measurements that are used by rating agencies, lenders and other parties to evaluate our credit worthiness; and
Are used by our management for various purposes, including as measures of performance and as a basis for strategic planning and forecasting.

The reconciliation of gross profit to adjusted gross profit for the three and six months ended June 30, 2022 and 2021 are as follows:

(in thousands)Three Months Ended June 30,ChangeSix Months Ended June 30,Change
20222021$%20222021$%
Total revenue$53,039 $77,469 (24,430)(31.5)%$112,917 $158,104 (45,187)(28.6)%
Cost of revenue44,849 55,922 (11,073)(19.8)%92,962 108,804 (15,842)(14.6)%
Gross profit8,190 21,547 (13,357)(62.0)%19,955 49,300 (29,345)(59.5)%
Less:
Servicing costs1,131 1,072 595.5 %2,337 2,210 127 5.7 %
Underwriting fees423 477 (54)(11.3)%910 944 (34)(3.6)%
Bad debt expense— 8,026 (8,026)(100.0)%— 12,913 (12,913)(100.0)%
Adjusted gross profit$6,636 $11,972 (5,336)(44.6)%$16,708 $33,233 (16,525)(49.7)%

The reconciliations of net loss to adjusted EBITDA for the three and six months ended June 30, 2022 and 2021 are as follows:




(in thousands)Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Net loss$(9,733)$(8,103)$(15,291)$(13)
Add back:
Interest expense and other fees3,794 4,146 7,594 8,286 
Change in fair value of warrant liability(2,323)(3,169)(5,412)(2,811)
Provision (benefit) for income taxes65 (1,828)100 (3)
Depreciation and amortization on property and equipment186 70 308 118 
Impairment of leased assets866 (15)315 (640)
Stock-based compensation expense (1)
1,857 10,140 2,946 10,221 
Transaction costs associated with Merger (2)
— 2,675 — 3,350 
Adjusted EBITDA$(5,288)$3,916 $(9,440)$18,508 

(1) Includes employer payroll taxes.
(2) Consists of non-capitalizable transaction cost associated with the Merger during the three and six months ended June 30, 2021.


The reconciliations of net loss to adjusted net (loss) income for the three and six months ended June 30, 2022 and 2021 are as follows:


(in thousands)Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Net loss$(9,733)$(8,103)$(15,291)$(13)
Add back:
Change in fair value of warrant liability(2,323)(3,169)(5,412)(2,811)
Stock-based compensation expense (1)
1,857 10,140 2,946 10,221 
Transaction costs associated with Merger (2)
— 2,675 — 3,350 
Adjusted net (loss) income$(10,199)$1,543 $(17,757)$10,747 

(1) Includes employer payroll taxes.
(2) Consists of non-capitalizable transaction cost associated with the Merger during the three and six months ended June 30, 2021.


Liquidity and Capital Resources

To date, the funds received from Legacy Katapult common stock and preferred stock financings, the Merger, as well as our ability to obtain lending commitments, have and will continue to provide the liquidity necessary for us to fund operations. If we are unable to generate positive operating cash flows, additional debt and equity financings may be necessary to sustain future operations.

The following table presents our cash, restricted cash, and accounts receivable, net, as of June 30, 2022 and December 31, 2021:

June 30,December 31,
20222021
Cash$85,025 $92,494 
Restricted cash2,229 3,937 
Accounts receivable, net (1)
— 2,007 
(1) In the first quarter of 2022, we adopted ASC 842 pursuant to which we recognize revenue from customers when the revenue is earned and cash is collected. In addition, we no longer records accounts receivable arising from lease receivables due from customers or any corresponding allowance for doubtful accounts. See “ASC 842 Adoption and Comparability” above for more information.




Cash Flows

The following table presents cash (used in) provided by operating, investing, and financing activities during the six months ended June 30, 2022 and 2021:

Six Months Ended June 30,Change
20222021$
Net cash (used in) provided by operating activities$(1,759)$7,126 $(8,885)
Net cash used in investing activities(998)(621)(377)
Net cash (used in) provided by financing activities(6,420)36,318 (42,738)
Net (decrease) increase in cash and restricted cash$(9,177)$42,823 $(52,000)

Operating Activities

Net cash used in operating activities was $1,759 for the six months ended June 30, 2022, a decrease of $8,885 from $7,126 provided by operating activities for the six months ended June 30, 2021. This reflects our net loss of $15,291, adjusted for non-cash charges of $88,662 and net cash outflows of $75,130 from changes in our operating assets and liabilities. Non-cash charges consisted primarily of depreciation and amortization, which decreased $10,722; net book value of property buyouts, which decreased $3,796; impairment expense which decreased $231; and bad debt expense which decreased $12,913. Each of these decreases were driven by the decreased customer origination and lease-purchase activity discussed above, other than bad debt expense, which we no longer record following the adoption of ASC 842.


Net cash provided by operating activities was $7,126 for the six months ended June 30, 2021. This reflects our net loss of $13, adjusted for non-cash charges of $125,914 and net cash outflows of $118,775 from changes in our operating assets and liabilities. Non-cash charges consisted primarily of depreciation and amortization, which increased $27,498; net book value of property buyouts, which increased $10,732; impairment expense, which decreased $647; and bad debt expense, which increased $6,273. Each of these increases were driven by increased customer origination and lease-purchase activity during the period.

Investing Activities
Net cash used in investing activities was $998 for the six months ended June 30, 2022 and was primarily due to purchases of property and equipment of $153 and increase in capitalized software of $845.
Net cash used in investing activities was $621 for the six months ended June 30, 2021 and was primarily due to purchases of property and equipment of $198 and increase in capitalized software of $423.

Financing Activities
Net cash used in financing activities was $6,420 for the six months ended June 30, 2022 and was due primarily to $16,171 of principal repayments on the revolving line of credit coupled with $244 of repurchases of restricted stock for payroll withholding. Partially offsetting this was $9,935 of principal repayments on the revolving line of credit coupled with proceeds of $60 from the exercise of stock options.

Net cash provided by financing activities was $36,318 for the six months ended June 30, 2021 and was due to $38,015 of cash received from the Merger, net of transaction costs and consideration paid to selling stockholders, $5,809 of advances on the revolving line of credit, and $442 of proceeds from exercise of stock options. These increases were offset by $7,948 of principal repayments on the revolving line of credit.

Financing Arrangements

Senior Secured Term Loan and Revolving Loan Facility

On May 14, 2019, Katapult SPV-1 LLC, as borrower (the "Borrower"), and Katapult Group, Inc. (f/k/a Cognical, Inc.) entered into a loan and security agreement (as amended, the “credit agreement”) with Midtown Madison Management, LLC as agent for various funds of Atalaya Capital Management (“Atalaya”), for a senior secured revolving loan facility (as amended, the “revolving loan facility”). The revolving loan facility has a commitment of $125.0 million that the lenders have the right to increase to $250.0 million. This right has not yet been exercised by the lenders as of the date of these condensed consolidated financial statements. Total outstanding principal under the revolving line of credit was $55.7 million at June 30, 2022. The revolving loan facility is subject certain covenants and has a 90% advance rate on eligible accounts receivable. The annual interest rate on the principal is LIBOR plus 7.5% per annum. There is a 2% floor on the LIBOR. The revolving loan facility matures on December 4, 2023.




In addition, in connection with a prior amendment to the credit agreement entered into on December 4, 2020, Atalaya also provided us with a senior secured term loan (as amended, “term loan facility”) commitment of up to $50.0 million. We drew down the full $50.0 million of the term loan facility on December 4, 2020. The term loan facility bears interest at one-month LIBOR plus 8.0% (with a 1% LIBOR floor) and an additional 3% interest per annum will accrue to the principal balance as paid-in-kind (“PIK”) interest. Total outstanding principal and PIK interest is $52.4 million at June 30, 2022. An additional 3% interest per annum will accrue to the principal balance as PIK interest. The term loan facility matures on December 4, 2023. The interest rate for PIK Interest on the term loan facility is (A) if Liquidity (as defined in the credit agreement) is greater than $50,000, 4.5% and (B) if Liquidity is less than $50,000, to 6%.

The term loan facility is also subject to certain negative and affirmative covenants. The negative covenants limit our ability to: incur additional indebtedness; pay dividends, redeem stock or make other distributions; amend our material agreements; make investments; create liens; transfer or sell the collateral for the credit facility; make negative pledges; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and enter into certain transactions with affiliates. Early repayments of certain amounts under the term loan facility are subject to prepayment penalties.

The credit agreement governing the term loan facility also has affirmative covenants, including the following financial covenants:

Minimum Trailing Twelve Month Adjusted EBITDA: As of the end of each fiscal month, the TTM Adjusted EBITDA (as defined in the credit agreement) must not be less than (i) during the period on and after October 1, 2021 and until (and including) June 30, 2023, ($25.0 million), (ii) during the period on and after July 1, 2023 and until (and including) September 30, 2023, ($15.0 million), and (iii) at all times thereafter, $0.

Minimum Tangible Net Worth: As of the end of each fiscal month, the Tangible Net Worth (as defined in the credit agreement) of Katapult Holdings, Inc. and its subsidiaries, on a consolidated basis, must be greater than or equal to the sum of (i) ($25.0 million) 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).

Minimum Liquidity: As of any date of determination, Katapult Holdings, Inc. must not permit to be less than $15.0 million of cash and cash equivalents on hand.

Compliance with Total Advance Rate: At the end of each fiscal month and as of the making of any advance under the credit agreement, the Total Advance Rate (as defined in the credit agreement) must not exceed (i) from the period on May 9, 2022 to and including May 9, 2023, 130% and (ii) at all times thereafter, 120%. If at any time during which a Total Advance Rate Reserve Account is in place (as defined in the credit agreement), the Total Advance Rate exceeds the applicable rate for any of the foregoing periods, the borrower may cure such Default (as defined in the credit agreement) by depositing funds in the Total Advance Rate Reserve Account in an amount necessary to reduce the Total Advance Rate to the maximum permitted rate for such period, which right is unlimited. As of the date of this report, the Borrower has exercised its right to cure such a default three times.

Failure to comply with any of these covenants or other obligation or agreement under the credit agreement that is not cured within the specified period under the credit agreement would result in an event of default under the agreement. Upon an event of default, the lenders can exercise their remedies under the credit agreement including the immediate termination of any loan commitments under the agreement and the acceleration of repayment of all obligations under the credit agreement immediately.

As of June 30, 2022 and December 31, 2021, we were in compliance with the covenants in the credit agreement.
For additional information on our loan obligations, refer to Notes 8 and 9 of the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Pledge and Guaranty

Pursuant to the Pledge Agreement, dated as of May 14, 2019, between Katapult Group, Inc. (f/k/a Cognical, Inc.) and Midtown Madison Management, LLC, Katapult Group, Inc. pledged and granted a first priority security interest in all equity interests of the Borrower and any investment property and general intangibles evidenced by or related to such membership interests. Pursuant to the Corporate Guaranty and Security Agreement, dated as of December 4, 2020, by and among Katapult Group, Inc., Legacy



Katapult and Midtown Madison Management, LLC, Katapult and Katapult Group, Inc. have granted a first priority security interest in all of their respective assets and Katapult and Katapult Group, Inc. guarantee payment of all obligations of the Borrower under the facility.

Sources and Material Cash Requirements

Our principal sources of liquidity are our cash, cash flows generated from operations and availability under our revolving credit facility. Our primary uses of cash include purchases of assets held for lease and funding for growth initiatives.

Our ability to fund future operating needs will be dependent on our ability to generate positive cash flows from operations and obtain financing for growth as needed. We have $85.0 million of unrestricted cash as of June 30, 2022 which we believe is sufficient to meet our liquidity needs for the next 12 months.

The table below summarizes debt, lease and other minimum cash obligations outstanding as of June 30, 2022:
Payments Due by Period
(in thousands)Total20222023-20242025-2026Thereafter
Revolving credit facility (1)
$63,839 $2,691 $61,148 $— $— 
Term loan facility (2)
64,159 4,765 59,394 — — 
Operating lease commitments1,217 257 790 170 — 
Total$129,215 $7,713 $121,332 $170 $— 
(1) Future cash obligations include scheduled interest payments due based on the interest rate of 9.5% as of June 30, 2022.
(2) Future cash obligations include scheduled interest payment due based on the interest rate of 9.0%, plus 4.5% paid-in-kind interest, as of June 30, 2022.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. We evaluate our significant estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions, impacting our reported results of operations and financial condition.

There have been no significant changes to our critical accounting policies and estimates included in our Annual Report on Form 10-K filed with the SEC on March 15, 2022.

Recently Issued and Adopted Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our condensed consolidated financial statements.

Emerging Growth Company

As of June 30, 2022, we are an emerging growth company, as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards applicable to public companies, allowing them to delay the adoption of those standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, our condensed consolidated financial statements may not be comparable to the financial statements of companies that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2024, (b) the last date of our fiscal year in which we have a total annual gross revenue of at least $1.07 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding securities held by non-affiliates or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk




We are exposed to a variety of market and other risks, including the effects of changes in interest rates, and inflation, as well as risks to the availability of funding sources and other risks.

Interest Rate Risk

The market risk inherent in our financial instruments and our financial position represents the potential loss arising from adverse changes in interest rates. We manage our interest rate risk based on an ongoing assessment of trends in interest rates and economic developments, giving consideration to possible effects on both total return and reported earnings. As a result of such assessment, we may enter into swap contracts or other interest rate protection agreements from time to time to mitigate this risk.

As of June 30, 2022 and December 31, 2021, we have interest bearing debt with a principal amount of $108,171 and $113,622, respectively.

Our revolving line of credit as of June 30, 2022 is a variable rate loan that accrues interest at a variable rate of interest based on the one month LIBOR rate, subject to a 2% floor, plus 7.5% per annum. As of June 30, 2022, the calculated interest rate is 9.5%.

Inflation Risk

Although Katapult believes that inflation has indirectly impacted its business by negatively impacting consumer spending and the sales of its key merchants, Katapult does not believe that inflation has directly had, or currently directly has, a material effect on its results of operations or financial condition.

Foreign Currency Risk

There was no material foreign currency risk for the three and six months ended June 30, 2022 and 2021. Katapult’s activities to date are conducted only in the United States.
ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of June 30, 2022, due to the existence of two outstanding material weaknesses in internal control over financial reporting that were identified in connection with the audits of our consolidated financial statements as of December 31, 2021, 2020 and 2019 and for the years in the three year period ended December 31, 2021, and which are still being remediated.

Material Weaknesses in Internal Control Over Financial Reporting

In connection with the audit of our financial statements for the fiscal year ended December 31, 2021, 2020 and 2019, our independent registered public accounting firm identified certain control deficiencies in the design and implementation of our internal control over financial reporting that in aggregate constituted material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Our evaluation was based on the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control — Integrated Framework (2013).

The two outstanding material weaknesses relate to (1) an insufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience to create the proper control environment for effective internal control over financial reporting and to ensure that oversight processes and procedures in applying nuanced guidance to complex accounting transactions for financial reporting are adequate and (2) a lack of controls in place to review journal entries, reconcile journal entries to underlying support and evaluate if journal entries are in compliance with U.S. GAAP before the entries are manually posted. Our prior material weaknesses relating to (1) a lack of control in place to perform a review of the depreciation, cost of property sold, and impairment



expense curves, specifically associated with evaluating the accuracy and completeness of the underlying data supporting the curves, or reconcile the expense amounts per the curves to the general ledger, (2) an incomplete implementation of the information and communication component of the COSO framework, specifically with respect to user access controls to ensure appropriate segregation of duties and to adequately restrict user and privileged access to its financial applications and data to appropriate company personnel and (3) a lack of controls in place surrounding the accounting of warrants from FinServ Acquisition Corp. identified in connection with the audit of our financial statements for the fiscal year ended December 31, 2020 and 2019 were remediated as of December 31, 2021.

Remediation Efforts to Address Material Weakness

As part of our plan to remediate the remaining two outstanding material weaknesses, we are performing a full review of our internal control procedures. We have implemented, and plan to continue to implement, new controls and new processes. We cannot assure you that the measures that we have taken, and that will be taken, to remediate these material weaknesses will, in fact, remedy the material weaknesses or will be sufficient to prevent future material weaknesses from occurring. We also cannot assure you that we have identified all of our existing material weaknesses.

The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. While we are undertaking efforts to remediate this material weakness, the material weakness will not be considered remediated until our remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded, through testing, that the newly implemented and enhanced controls are operating effectively.

Changes in Internal Control Over Financial Reporting

Except as disclosed above, there were no changes in our internal control over financial reporting that occurred during the six months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS

The information contained under the heading “Litigation risk” in Note 13 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated by reference into this Item.

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks of which you should be aware before making a decision to invest in our securities. The summarized risks described below are not the only risks that we face. The following summarized risks as well as risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially and adversely affect our business, results of operations, financial condition, earnings per share, cash flow or the trading price of our common stock. These summarized risks include, among others, the following:

Risks Related to Our Business, Strategy and Growth

A large percentage of our gross originations is concentrated with a single merchant partner, and any deterioration in the business of, or in our relationship with this merchant partner or any other key merchant relationship or partner would materially and adversely affect our business, results of operations, financial condition, and future prospects.
The success of our business is dependent on factors affecting consumer spending that are not under our control.
Unexpected changes caused by macro conditions, such as inflation could cause our proprietary algorithms and decisioning tools used in approving customers to no longer be indicative of customer's ability to perform.
If we are unable to attract additional merchant partners and retain and grow our relationships with our existing merchant partners, our results of operations, financial condition, and prospects would be materially and adversely affected.
Our success depends on the effective implementation and continued execution of our strategies.
Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
We rely on the accuracy of third-party data, and inaccuracies in such data could adversely impact our approval process.



The success and growth of our business depends upon our ability to continuously innovate and develop new products and technologies.
To the extent that we seek to grow through future acquisitions, or other strategic investments or alliances, we may not be able to do so effectively.

Risks Related to Our Indebtedness

We have substantial indebtedness, which reduce our capability to withstand adverse developments or business conditions.
Our credit facility includes restrictive covenants, which could limit our flexibility and our ability to make distributions.
A change in control as defined by our credit agreement could accelerate our obligation to pay our outstanding indebtedness, and we may not have sufficient liquid assets at that time to repay these amounts.

Financial Risks Related to Our Business

We have a history of operating losses and may not sustain profitability in the future.
Our revenue and operating results may fluctuate, which could result in a decline in our profitability and make it more difficult for us to grow our business.
We rely on card issuers or payment processors which could put us at risk of suspensions or terminations of our registrations.
We have experienced rapid growth, which may be difficult to sustain and which may place significant demands on our operational, administrative, and financial resources.
Our ability to use our net operating loss carry forwards and certain other tax attributes may be limited.

Risks Related to Our Technology and Our Platform

Our results depend on more prominent presentation, integration, and support of our platform by our merchants.
Real or perceived software errors, failures, bugs, defects, or outages could have adverse effects.
Any significant disruption in, or errors in, service on our platform or relating to vendors could prevent us from processing transactions on our platform or posting payments and have a material and adverse effect.
Our ability to protect our confidential, proprietary, or sensitive information, including the confidential information of consumers on our platform, may be adversely affected by cyber-attacks, employee or other internal misconduct, computer viruses, physical or electronic break-ins, or similar disruptions.
We may be at risk of identity fraud, which may adversely affect the performance of the lease-to-own transactions facilitated through our platform.

Legal and Compliance Risks

Failure or perceived failure to comply with existing or future laws, regulations, contracts, self-regulatory schemes, standards, and other obligations related to data privacy and security (including security incidents) could harm our business. Compliance or the actual or perceived failure to comply with such obligations could increase the costs of our products or services, limit their use or adoption, and otherwise negatively affect our operating results and business.
We are subject to securities litigation, which is expensive and could divert management attention and adversely impact our business.
Our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting in connection with the audit of our financial statements as of and for the fiscal years ended December 31, 2021, 2020 and 2019, and we may identify additional material weaknesses in the future.
Changes to tax laws or exposure to additional tax liabilities may have a negative impact on our operating results.
We may be subject to legal proceedings from time to time which seek material damages.

Operational Risks Related to Our Business

Unstable market and economic conditions have had, and may in the future have, serious adverse consequences on our business, financial condition and share price.



Failure to effectively manage our costs could have a material adverse effect on our profitability.
Negative publicity about us or our industry could adversely affect our business, results of operations, financial condition, and future prospects.
Misconduct and errors by our employees, vendors, and service providers could harm our business and reputation.
The loss of the services of any of our executive officers could materially and adversely affect our business, results of operations, financial condition, and future prospects.
Our business depends on our ability to attract and retain highly skilled employees.
The COVID-19 pandemic has impacted our working environment and diverted personnel resources and any prolonged effects of the pandemic may adversely impact our operations and employees.

Other Risks

Our management has limited experience in operating a public company.
We will continue to incur increased costs as a result of operating as a public company, and our management will devote substantial time to new compliance initiatives.
Future sales, or the perception of future sales, by us or our stockholders in the public market could cause the market price for our Common Stock to decline.
The price of our securities may change significantly in the future and you could lose all or part of your investment as a result.

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including Item 2,“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our securities could decline.

Risks Relating to Our Business and Industry

Risks Related to Our Business, Strategy and Growth

A large percentage of our gross originations is concentrated with a single merchant partner, and any deterioration in the business of, or in our relationship with, this merchant partner or any other key merchant relationship or partner would materially and adversely affect our business, results of operations, financial condition, and future prospects.

We depend on continued relationships with Wayfair and other key merchant partners. Our top merchant partner, Wayfair, represented approximately 62% of our gross originations during both the three months ended June 30, 2022 and 2021, respectively. Wayfair, represented approximately 60% and 62% of our gross originations during the six months ended June 30, 2022 and 2021, respectively. There can be no guarantee that these relationships will continue or, if they do continue, that these relationships will continue to be successful. There is a risk that we may lose merchants for a variety of reasons, including a failure to meet key contractual or commercial requirements, or if merchant partners shift to in-house solutions (including providing a service competitive to us) or competitor providers.

The concentration of a significant portion of our business and transaction volume with a single merchant or a limited number of merchants exposes us disproportionately to events, circumstances, or risks affecting such single merchant, such as Wayfair, or other key merchants, including risks related to the macroeconomic environment, consumer spending changes, inflation, COVID-19, supply chain issues (including availability of raw materials from Russia and Ukraine), access to capital markets, labor shortages or other risks they may be facing with respect to their industry, business or results of operations. For example, inflation and supply chain issues due to disruptions from the COVID-19 pandemic and the Russia-Ukraine war negatively impacted the sales of many of our merchant partners, including Wayfair, during the six months ended June 30, 2022, which in turn contributed to a decline in our gross origination volume during the period. If our key merchant partners, in particular Wayfair, are unable to acquire new customers or retain existing customers or are otherwise negatively impacted by the macroeconomic and geopolitical conditions, including the COVID-19 pandemic, our results of operations, financial condition and future prospects will be negatively impacted.




The loss of Wayfair as a merchant partner, in particular, would materially and adversely affect our business, results of operations, financial condition, and future prospects. In addition, a material modification in the merchant agreement with Wayfair or a significant merchant partner could affect our results of operations, financial condition, and future prospects.

We also depend on continued relationships with key partners that assist in obtaining and maintaining our relationships with merchants. There is a risk that e-commerce platforms with which we partner (such as Shopify, BigCommerce, WooCommerce, and Magneto) may limit or prevent Katapult from being offered as a payment option at checkout. We also face the risk that our key partners could become competitors of our business.

If our relationship with Wayfair or another key merchant partner deteriorates, they choose to no longer partner with us or choose to partner with a competitor, or their business is negatively impacted by one or more factors, our business, results of operations, financial condition and future prospects will be materially and adversely affected.

The success of our business is dependent on consumers making payments on their leases when due and other factors affecting consumer spending and default behavior that are not under our control.

We generate substantially all of our revenue through payments on leases we provide to consumers to purchase the merchandise of our merchant partners and we bear the risk of non-payment or late payments by our customers. As such, the success of our business is dependent on consumers making payments on their leases when due. We primarily provide leases to non-prime consumers who do not have sufficient cash or credit to purchase electronics, computers, home furnishings, appliances and other durable goods. The ability of these consumers to make payments to us when due may be impacted by a variety of factors, such as loss of employment, the emergence of significant unforeseen expenses as well as factors affecting consumer spending. Consumer spending is also affected by general economic conditions and other factors including levels of employment, disposable consumer income, inflation, prevailing interest rates, consumer debt and availability of credit, costs of fuel, inflation, recession and fears of recession, war and fears of war (including the conflict involving Russia and Ukraine), pandemics (such as COVID-19), inclement weather, tariff policies, tax rates and rate increases, timing of receipt of tax refunds, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security. For example, inflation has increased in recent months at the fastest pace in nearly 40 years. Food, energy, residential rent, and other costs have increased, reflecting a tight labor market and supply chain issues. Unfavorable changes in factors affecting discretionary spending for non-prime consumers as a result of one or more of these factors could reduce demand for our products and services resulting in lower revenue and negatively impacting our business and our financial results. In addition to reducing demand for our products, these factors may unfavorably impact our customers' ability or willingness to make the payments they owe us, resulting in increased customer payment delinquencies and lease merchandise write-offs and decreased gross margins, which could also materially and adversely impact our business, financial condition and results of operations.

If consumers are unable or unwilling to pay us due to one or more of these factors, our gross orginations may not reflect and/or be directly correlated to our revenue. In addition, if our assumptions around consumers’ ability to pay us after we have recognized revenue deteriorate, such deterioration could result in a material impairment, increase our cost of revenue and materially and adversely impact our business, financial condition, results of operations and prospects.

Our business may also be adversely impacted by, among other issues, where other consumer finance companies increase the availability of credit to our target consumer market in response to changes in consumer spending habits as a result of macro or other factors. If more credit is available to our target consumer market, we will face increased competition, which may negatively impact our gross originations and our business, results of operations, financial condition and future prospects.

Unexpected changes to consumer spending patterns could cause our proprietary algorithms and decisioning tools used in approving customers to no longer be indicative of our customer's ability to perform.

We believe our proprietary lease decisioning processes to be a key to the success of our business. The decisioning processes assume behavior and attributes observed for prior customers, among other factors, are indicative of performance by our future customers. Unexpected changes in behavior caused by general economic conditions and other factors, including, for example, the significant increase in inflation in the U.S., which has reached levels not seen in 40 years, the U.S. economy experiencing a prolonged recession and/or job losses widespread and prolonged supply chain disruptions, the expiration of government stimulus payments and other changes, related to the COVID-19 pandemic and changes in customer behavior relating thereto, may mean that our decisioning tools do not function as intended and may approve relatively more customers that are not able to perform, which would lead to increased incidence and costs related to impairment of property held for lease. When there are unexpected changes to consumer spending patterns, our decisioning process typically requires more frequent adjustments and the application of greater management judgment in the interpretation and adjustment of the results produced by our decisioning tools. Due to the challenging macro environment in recent months, for example, we expect we may need to make more frequent



adjustments to our decisioning process in the near term. If our decisioning tools are unable to accurately predict and respond to changes to customer behaviors as a result of general economic or other factors, our ability to manage risk and avoid charge-offs may be negatively affected, which may result in insufficient reserves and materially and adversely impact our business, financial condition, results of operations and prospects.

If we are unable to attract additional merchant partners and retain and grow our relationships with our existing merchant partners, our results of operations, financial condition, and prospects would be materially and adversely affected.

Our continued success is dependent on our ability to maintain our relationship with our existing merchant partners and grow our gross originations (which we define as the retail price of the merchandise associated with lease-purchase agreements entered into through the Katapult platform and do not represent revenue earned) from those existing merchant partners through their e-commerce platforms, and also to expand our merchant partner base. Our ability to retain and grow our relationships with merchant partners depends on the willingness of our merchant partners to partner with us. The attractiveness of our platform to merchant partners depends upon, among other things, our brand and reputation, ability to sustain our value proposition to merchant partners for consumer acquisition, the attractiveness to merchant partners of our digital and data-driven platform, the services, products and customer decisioning standards offered by our competitors; and our ability to perform under, and maintain, our merchant partner agreements.

In addition, competition for smaller merchant partners has intensified significantly in recent years, with many such merchant partners simultaneously offering several products and services that compete directly with the products and services offered by us. Having a diversified mix of merchant partners is important to mitigate risk associated with changing consumer spending behavior, economic conditions and other factors that may affect a particular type of retailer. If we fail to retain any of our larger merchant partners or a substantial number of our smaller merchant partners, if we do not acquire new merchant partners, if we do not continually grow our gross originations from our merchant partners, or if we are not able to retain a diverse mix of merchant partners, our results of operations, financial condition, and prospects would be materially and adversely affected.

Our success depends on the effective implementation and continued execution of our strategies.

We are focused on our mission to provide innovative lease financing solutions to non-prime consumers and to enable everyday transactions at the merchant point of sale.

Growth of our business, including through the launch of new product offerings, requires us to invest in or expand our information and technology capabilities, engage and retain experienced management, and otherwise incur additional costs. Our inability to address these concerns or otherwise to achieve targeted results associated with our initiatives could adversely affect our results of operations, or negatively impact our ability to successfully execute future strategies, which may result in an adverse impact on our business and financial results.

If we fail to maintain customer satisfaction and trust in our brand, our business, results of operations, financial condition, and prospects would be materially and adversely affected.

We provide an additional option for qualified consumers seeking to purchase durable goods from e-commerce merchant partners. If consumers do not trust our brand or do not have a positive experience, they will not use our products and services and be unable to attra