SEC Filing – Katapult Holdings, Inc.

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kplt-20230930

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 September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-39116

Katapult Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware						81-4424170
(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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	KPLT	The Nasdaq Stock Market LLC
Redeemable Warrants	KPLTW	The 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	☐
Non-accelerated filer	x	Smaller reporting company	x
		Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of November 3, 2023: 4,065,175.

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:

•executing on 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;

•anticipating the occurrence and timing of prime lending tightening and impact on our results of operations;

•customer adoption and continued growth of our mobile app featuring Katapult Pay;

•general economic conditions in the markets where we operate, the cyclical nature of consumer spending, and seasonal sales and spending patterns of customers;

•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, 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, 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;

•reliability of our platform and effectiveness of our risk models;

•data security breaches or other information technology incidents or disruptions, including cyber-attacks, and the protection of confidential, proprietary, personal and other information, including personal data of consumers;

•attracting and retaining employees, executive officers or directors;

•effectively responding to general economic and business conditions;

•obtaining additional capital, including equity or debt financing and servicing our indebtedness;

•enhancing future operating and financial results;

•anticipating rapid technological changes, including generative AI and other new technologies;

•complying with laws and regulations applicable to our business, including laws and regulations related to rental purchase transactions;

•staying abreast of modified or new laws and regulations applying to our business, including with respect to rental purchase transactions and data privacy;

•maintaining and growing relationships with merchants and partners;

•responding to uncertainties associated with product and service developments and market acceptance;

•impacts from 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 consolidated financial statements;

•successfully defending litigation;

•litigation, regulatory matters, complaints, adverse publicity and/or misconduct by employees, vendors and/or service providers;

•other events or factors, including those resulting from civil unrest, war, foreign invasions (including the conflict involving Russia and Ukraine and Israel-Hamas conflict), terrorism, or public health crises, or responses to such events;

•our ability to meet the minimum requirements for continued listing on the Nasdaq Global Market (“Nasdaq”); and

•the effects of the reverse stock split on our Common Stock (as defined below).

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.

FORM 10-Q

September 30, 2023

INDEX


		Page
PART 1	Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets — September 30, 2023 and December 31, 2022	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss — Three and Nine Months Ended September 30, 2023 and 2022	2
	Condensed Consolidated Statements of Stockholders’ (Deficit) Equity — Three and Nine Months Ended September 30, 2023 and 2022	3
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2023 and 2022	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	32

PART II	Other Information	33
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	60
	Signatures	61

References in this Quarterly Report on Form 10-Q to “KPLT”, “Katapult”, “we”, “us”, “the Company”, or “our” means Katapult Holdings Inc. and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

PART I. Financial Information

Item 1. Financial Statements

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)


	September 30,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	32,187	$	65,430
Restricted cash	6,682		4,411

Property held for lease, net of accumulated depreciation and impairment (Note 3)	53,581		50,278
Prepaid expenses and other current assets	6,777		8,515
Total current assets	99,227		128,634
Property and equipment, net (Note 4)	427		557
Security deposits	91		91
Capitalized software and intangible assets, net (Note 5)	2,060		1,847
Right-of-use assets (Note 8)	498		772
Total assets	$	102,303	$	131,901
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable	$	735	$	1,264
Accrued liabilities (Note 6)	15,747		14,532
Term loan (Note 7)	—		25,000
Unearned revenue	2,124		1,552
Lease liabilities (Note 8)	297		382
Total current liabilities	18,903		42,730
Revolving line of credit, net (Note 7)	60,397		57,639
Term loan, net, non-current (Note 7)	24,543		23,057
Other liabilities	131		902
Lease liabilities, non-current (Note 8)	218		445
Total liabilities	104,192		124,773
STOCKHOLDERS' (DEFICIT) EQUITY
Common stock, $.0001 par value-- 250,000,000 shares authorized; 4,065,175 and 3,943,423 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	93,225		83,804
Accumulated deficit	(95,114)		(76,676)
Total stockholders' (deficit) equity	(1,889)		7,128
Total liabilities and stockholders' (deficit) equity	$	102,303	$	131,901


See accompanying notes.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(amounts in thousands, except per share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue
Rental revenue	$	54,481	$	49,260	$	163,079	$	160,075
Other revenue	769		1,081		2,418		3,183
Total revenue	55,250		50,341		165,497		163,258
Cost of revenue	42,439		38,417		128,486		131,379
Gross profit	12,811		11,924		37,011		31,879
Operating expenses:
Servicing costs	1,100		1,025		3,193		3,362
Underwriting fees	422		419		1,370		1,330
Professional and consulting fees	1,169		2,697		5,447		8,244
Technology and data analytics	1,639		2,421		5,263		7,286
Compensation costs	5,117		6,752		17,942		18,599
General and administrative	2,664		3,276		8,344		10,733
Total operating expenses	12,111		16,590		41,559		49,554
Income (loss) from operations	700		(4,666)		(4,548)		(17,675)
Loss on partial extinguishment of debt	—		—		(2,391)		—
Interest expense and other fees	(4,264)		(5,074)		(13,551)		(13,760)
Interest income	287		223		1,334		223
Change in fair value of warrant liability	382		381		771		5,793
Loss before income taxes	(2,895)		(9,136)		(18,385)		(25,419)
Provision for income taxes	(19)		(73)		(53)		(173)
Net loss	$	(2,914)	$	(9,209)	$	(18,438)	$	(25,592)

Weighted average common shares outstanding - basic and diluted	4,130		3,936		4,059		3,926


Net loss per common share - basic and diluted	$	(0.71)	$	(2.34)	$	(4.54)	$	(6.52)


See accompanying notes.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(amounts in thousands)

(unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders' (Deficit) Equity
	Shares	Amount
Balances at December 31, 2022	3,943	$	—	$	83,804	$	(76,676)	$	7,128
Issuance of warrants in connection with Credit Agreement amendment	—	—		4,060		—		4,060

Vesting of restricted stock units	106	—		—		—		—
Repurchases of restricted stock for payroll tax withholding	(20)	—		(317)		—		(317)
Stock-based compensation expense	—	—		5,678		—		5,678
Adjustment due to the rounding impact from the Reverse Stock Split in lieu of issuing fractional shares	36	—		—		—		—
Net loss	—	—		—		(18,438)		(18,438)
Balances at September 30, 2023	4,065	$	—	$	93,225	$	(95,114)	$	(1,889)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders' (Deficit) Equity
	Shares	Amount
Balances at December 31, 2021	3,903	$	—	$	77,642	$	(36,843)	$	40,799
Impact of ASC 842 adoption	—	—		—		(1,962)		(1,962)
Stock options exercised	11	—		65		—		65
Vesting of restricted stock units	30	—		—		—		—
Repurchases of restricted stock for payroll tax withholding	(7)	—		(293)		—		(293)
Stock-based compensation expense	—	—		4,753		—		4,753
Net loss	—	—		—		(25,592)		(25,592)
Balances at September 30, 2022	3,937	$	—	$	82,167	$	(64,397)	$	17,770


See accompanying notes.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(amounts in thousands)

(unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders' (Deficit) Equity
	Shares	Amount
Balances at June 30, 2023	4,021	$	—	$	91,920	$	(92,200)	$	(280)

Vesting of restricted stock units	12	—		—		—		—
Repurchases of restricted stock for payroll tax withholding	(4)	—		(70)		—		(70)
Stock-based compensation expense	—	—		1,375		—		1,375
Adjustment due to the rounding impact from the Reverse Stock Split in lieu of issuing fractional shares	36	—		—		—		—
Net loss	—	—		—		(2,914)		(2,914)
Balances at September 30, 2023	4,065	$	—	$	93,225	$	(95,114)	$	(1,889)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders' (Deficit) Equity
	Shares	Amount
Balances at June 30, 2022	3,933	$	—	$	80,404	$	(55,188)	$	25,216
Stock options exercised	—	—		5		—		5
Vesting of restricted stock units	5	—		—		—		—
Repurchases of restricted stock for payroll tax withholding	(1)	—		(49)		—		(49)
Stock-based compensation expense	—	—		1,807		—		1,807
Net loss	—	—		—		(9,209)		(9,209)
Balances at September 30, 2022	3,937	$	—	$	82,167	$	(64,397)	$	17,770


See accompanying notes.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(18,438)	$	(25,592)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	90,439		89,093
Net book value of property buyouts	18,909		24,783
Impairment expense	15,356		11,928
Change in fair value of warrants liability	(771)		(5,793)
Stock-based compensation	5,678		4,753
Loss on partial extinguishment of debt	2,391		—
Amortization of debt discount	2,147		3,278
Amortization of debt issuance costs, net	211		271
Accrued PIK Interest	1,208		1,508
Amortization of right-of-use assets	274		271
Change in operating assets and liabilities:
Property held for lease	(127,327)		(105,741)
Prepaid expenses and other current assets	1,738		(382)
Accounts payable	(529)		872
Accrued liabilities	734		159
Lease liabilities	(312)		(306)
Unearned revenues	572		(638)
Net cash used in operating activities	(7,720)		(1,536)
Cash flows from investing activities:
Purchases of property and equipment	(10)		(164)
Additions to capitalized software	(753)		(1,203)
Net cash used in investing activities	(763)		(1,367)
Cash flows from financing activities:
Proceeds from revolving line of credit	10,916		9,935
Principal repayments on revolving line of credit	(8,054)		(21,661)
Principal repayment on term loan	(25,000)		—
Payments of deferred financing costs	(34)		—
Repurchases of restricted stock	(317)		(293)
Proceeds from exercise of stock options	—		65
Net cash used in financing activities	(22,489)		(11,954)
Net decrease in cash, cash equivalents and restricted cash	(30,972)		(14,857)
Cash, cash equivalents and restricted cash at beginning of period	69,841		96,431
Cash, cash equivalents and restricted cash at end of period	$	38,869	$	81,574

Supplemental disclosure of cash flow information:
Cash paid for interest	$	9,821	$	7,954
Cash paid for income taxes	$	146	$	362
Debt issuance cost included in accrued liabilities	$	481	$	—
Issuance of warrants to purchase common stock in connection with debt refinancing	$	4,060	$	—
Right-of-use assets obtained in exchange for operating lease liabilities	$	—	$	1,139
Cash paid for operating leases	$	390	$	382


See accompanying notes.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Business— 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.

Subsidiaries— Our 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. and Katapult SPV-1 LLC. which originates all of the Company’s leases.

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 accompanying condensed consolidated financial statements are unaudited. Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Annual Report”). Our 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 period amounts have been reclassified to conform to current year presentation.

Reverse Stock Split— On July 27, 2023, the Company amended the Second Amended and Restated Certificate of Incorporation to effect, effective as of July 27, 2023, the Reverse Stock Split of our Common Stock. At the effective time of the Reverse Stock Split, every twenty-five shares of our Common Stock either issued and outstanding or held as treasury stock were automatically reclassified into one new share of our Common Stock. The Reverse Stock Split was approved by the Company’s stockholders at the Annual Meeting of Stockholders on June 6, 2023 and approved by the Board of Directors on July 11, 2023. The common stock began trading on Nasdaq on a reverse split-adjusted basis on July 28, 2023 under the existing trading symbol “KPLT.”

As a result of the Reverse Stock Split, proportionate adjustments were made to the number of shares of Common Stock underlying the Company’s outstanding equity awards and the number of shares issuable under our equity incentive plans and certain existing agreements, as well as the exercise, grant and acquisition prices of such equity awards, as applicable.

In addition, proportionate adjustments were made to the Company’s outstanding warrants, resulting in: (i) each publicly traded warrant issued under the Warrant Agreement, dated October 31, 2019, exercisable for 1/25th of a share of Common Stock at an exercise price of $287.50 per whole share; and (ii) the warrant under the Warrant to Purchase Stock, dated March 6, 2023, issued by Katapult to Midtown Madison Management LLC, exercisable for up to 160,000 shares of Common Stock at an exercise price of $0.25 per share.

No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who were entitled to receive fractional shares as a result of the Reverse Stock Split received one full share of post-Reverse Stock Split Common Stock, in lieu of receiving such fractional shares.

The effects of the Reverse Stock Split have been reflected in our condensed consolidated financial statements for all periods presented.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Correction of Prior Period Error

The Company corrected an immaterial error related to the amortization of debt discount during the three and nine months ended September 30, 2022. The correction made during the three and nine months ended September 30, 2022 resulted in an increase of $1,056 and $2,148, respectively, in interest expense and other fees in our condensed consolidated statements of operations and comprehensive loss and a corresponding decrease to debt discount reflected in the term loan line item of our condensed consolidated balance sheets which should have been recorded at September 30, 2022.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates— The preparation of our condensed consolidated financial statements in accordance with 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 our condensed consolidated financial statements, and the reported amounts of income and expense during the reporting periods. 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, impairments, determination of fair value of stock option grants, the fair value of 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 our 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 and Cash Equivalents—As of September 30, 2023 and December 31, 2022, cash consists primarily of checking and savings deposits. The Company holds certain cash equivalents, which 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 September 30, 2023, December 31, 2022 and September 30, 2022 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, cash equivalents and restricted cash is as follows:


	September 30,		December 31,		September 30,
	2023		2022		2022
Cash and cash equivalents	$	32,187	$	65,430	$	77,162
Restricted cash	6,682		4,411		4,412
Total cash, cash equivalents and restricted cash	$	38,869	$	69,841	$	81,574

Property Held for Lease, Net of Accumulated Depreciation and Impairment— Property held for lease consists of furniture, mattresses, 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 lease 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 in our condensed consolidated balance sheets.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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 Equipment			Useful Life
Computer, office and other equipment			5 years
Computer software			3 years
Furniture and fixtures			7 years
Leasehold improvements			Shorter of estimated useful life or remaining lease term

Capitalized Software— The Company capitalizes 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 our condensed consolidated balance sheets. Amortization of capitalized software is included in general and administrative expense in our condensed consolidated statements of operations and comprehensive loss.

Debt Issuance Costs— Costs incurred in connection with the issuance of the Company’s revolving line of credit (“RLOC”) and Term Loan 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 Term Loan issuance costs utilizes the effective interest method, and the amortization of the RLOC 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 in our condensed consolidated statements of operations and comprehensive loss.

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 nine months ended September 30, 2023 or 2022, respectively.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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 term. Accordingly, lease-purchase agreements are accounted for as operating leases with lease revenues recognized in the period 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 for 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. Revenues from leases are reported net of sales taxes.

Other Revenue— Other revenue consists primarily of asset sales revenue related to the sale of property held for lease, transfer of related lease obligations and past due lease payments. During the nine months ended September 30, 2023, the Company continued to advance its strategy to focus on additional opportunities to generate revenue, which includes the sale of property held for lease to third parties. The sale of property held for lease is now considered recurring and ordinary in nature to the Company’s business. As such, these sales are accounted for within the scope of ASC 606, Revenue from Contracts with Customers. Revenue is recognized when a performance obligation is satisfied by transferring control over an asset to a customer. Revenue is recorded with corresponding costs of revenue, presented on a gross basis. We recognized revenue from sales of property held for lease of $685 and $1,046 for the three months ended September 30, 2023 and 2022, respectively, and $2,158 and $3,081, for the nine months ended September 30, 2023 and 2022, respectively.

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 our 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 basis 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.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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 remains in a cumulative tax loss position for the 36 months ended September 30, 2023, 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 September 30, 2023 and December 31, 2022.

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 statements of operations and comprehensive loss. As of September 30, 2023 and December 31, 2022, no accrued interest or penalties are included on the related tax liability line in our condensed consolidated balance sheets.

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

Under the two-class method, basic net (loss) income per share available to stockholders is calculated by dividing the net (loss) income available to stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net (loss) 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. The Company reported net loss available to common shareholders during the three and nine months ended September 30, 2023 and 2022, respectively.

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 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.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The Company’s financial instruments consist of accounts payable, accrued expenses, warrant liability, RLOC, and Term Loan. 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. Our 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 13 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. 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 nine months ended September 30, 2023 and 2022, the Company did not have any customers that accounted for 10% or more of total revenue. As of December 31, 2022, 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 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. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 which deferred the sunset date of ASC 848 until December 31, 2024. This ASU did not have a material impact on our condensed consolidated financial statements.

3.PROPERTY HELD FOR LEASE, NET OF ACCUMULATED DEPRECIATION AND IMPAIRMENT

Property held for lease, net of accumulated depreciation and impairment consists of the following:


	September 30,		December 31,
	2023		2022
Property held for lease	$	239,775	$	289,800
Less: accumulated depreciation and impairment	(186,194)		(239,522)
Property held for lease, net	$	53,581	$	50,278

The table below details our cost of revenue for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Depreciation expense related to property held for lease	$	30,544	$	26,457	$	89,759	$	88,587
Net book value of property buyouts	5,988		5,743		18,909		24,783
Impairment charges related to property held for lease, net	4,841		4,438		15,356		11,928
Other (1)	1,066		1,779		4,462		6,081
Total cost of revenue	$	42,439	$	38,417	$	128,486	$	131,379

(1) Other consists mainly of payment processing fees, incentives and other lease related costs.

Substantially all property held for lease, net is on-lease as of September 30, 2023 and December 31, 2022.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

4.PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following:


	September 30,		December 31,
	2023		2022
Computer, office and other equipment	$	822	$	813
Computer software	80		80
Furniture and fixtures	100		100
Leasehold improvements	252		252
	1,254		1,245
Less: accumulated depreciation	(827)		(688)
Property and equipment, net	$	427	$	557

We recognized depreciation expense related to property and equipment, net of $46 and $47 for the three months ended September 30, 2023 and 2022, respectively, and $139 and $140 for the nine months ended September 30, 2023 and 2022, respectively, which is included in general and administrative in our condensed consolidated statements of operations and comprehensive loss.

5.CAPITALIZED SOFTWARE AND INTANGIBLE ASSETS, NET

Capitalized software and intangible assets, net consists of the following:


	September 30,		December 31,
	2023		2022
Capitalized software	$	3,344	$	2,591
Domain name	16		16
	3,360		2,607
Less: accumulated amortization	(1,300)		(760)
Capitalized software and intangible assets, net	$	2,060	$	1,847

We recognized amortization expense for capitalized software and intangible assets of $201 and $152 for the three months ended September 30, 2023 and 2022, respectively, and $540 and $366 for the nine months ended September 30, 2023 and 2022, respectively, which is included in general and administrative in our condensed consolidated statements of operations and comprehensive loss.

The following table summarizes estimated future amortization expense of capitalized software and intangible assets, net, exclusive of software not yet placed in service, as of September 30, 2023:


Year	Future Amortization Expense of Capitalized Software and Intangible Assets, Net
2023	$	194
2024	657
2025	241
2026	20
	$	1,112

As of September 30, 2023 and December 31, 2022, $932 and $398 of capitalized software was not yet placed in service, respectively.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

6.ACCRUED LIABILITIES

Accrued liabilities consists of the following:


	September 30,		December 31,
	2023		2022
Bonus accrual	$	3,311	$	2,376
Sales tax payable	6,495		5,582
Unfunded lease payable	4,001		4,159
Interest payable	140		118
Other accrued liabilities	1,800		2,297
Total accrued liabilities	$	15,747	$	14,532

7.DEBT

On March 6, 2023, the Company entered into the 15th amendment to the loan and security agreement (as amended the “Credit Agreement”). As part of the amendment, the maturity date of the RLOC and the senior secured term loan (“Term Loan”) was extended to June 4, 2025 and the commitments under the RLOC were reduced to $75,000 from $125,000. The spread on the RLOC was increased to 8.5% from 7.5%, while the spread on the Term Loan remained at 8.0%. Additionally, effective April 1, 2023 ,the Secured Overnight Financing Rate (“SOFR”) replaced the London Interbank Offered Rate (“LIBOR”), plus a 0.10% credit adjustment spread, for both the RLOC and the Term Loan’s benchmark rate for interest rate calculations. As of September 30, 2023, the interest rates for the RLOC and Term Loan, were 13.9% and 17.9%, respectively, (which includes the 4.5% interest rate applicable to interest paid-in-kind (“PIK”) with respect to the Term Loan).

In connection with the 15th amendment to the Credit Agreement, the Company repaid $25,000 of outstanding principal amount of the Term Loan and issued a warrant to purchase up to 80,000 shares (after the Reverse Stock Split) of the Company’s common stock at an exercise price of $0.25 per share, which vested on September 6, 2023. The issuance of warrants is accounted for equity and included in total stockholders’ deficit in our condensed consolidated balance sheet. In addition, the Company may be required to grant an additional 80,000 shares of common stock at the same exercise price under the warrant if any amount of the principal balance of the Term Loan remains outstanding upon the earlier to occur of (i) December 5, 2023, (ii) an Acquisition of the Company, and (iii) an Event of Default occurs under the Credit Agreement prior to December 5, 2023. If issued, such shares will become vested upon the first to occur of (i) three months after the grant date or (ii) an Acquisition of the Company. In conjunction with the 15th amendment to the Credit Agreement, the Company incurred a loss on partial extinguishment of debt of $2,391 during the nine months ended September 30, 2023. The loss on partial extinguishment of debt is attributed to the derecognition of a proportionate amount of the unamortized debt discount, a result of repaying the $25,000 of outstanding principal on the Term Loan.

In addition, the 15th amendment also updated certain financial covenants, including the Minimum Adjusted EBITDA levels, Minimum Tangible Net Worth, Minimum Liquidity and compliance with a Total Advance Rate. As of September 30, 2023 and December 31, 2022, the Company was in compliance with all covenants.

A reconciliation of the outstanding principal to the carrying amount of the RLOC is as follows::


	September 30,		December 31,
	2023		2022
Principal balance	$	60,860	$	57,998
Less: Unamortized issuance costs	(463)		(359)
Total carrying amount	$	60,397	$	57,639

The issuance costs are amortized over the life of the RLOC and included in interest expense and other fees in our condensed consolidated statements of operations and comprehensive loss.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

A reconciliation of the outstanding principal to the carrying amount of the Term Loan is as follows:


	September 30,		December 31,
	2023		2022
Principal balance	$	25,000	$	50,000
PIK	4,993		3,785
Less: Unamortized debt discount and issuance costs	(5,450)		(5,728)
Total carrying amount	$	24,543	$	48,057

The interest rate for PIK interest on the Term Loan (as defined in the Credit Agreement) is (A) if Liquidity is greater than $25,000, 4.5% or (B) if Liquidity is less than $25,000, 6%. We recognized amortization expense related to the Term Loan discount and issuance costs of $555 and $1,171 for the three months ended September 30, 2023 and 2022, respectively, and $2,147 and $3,278 for the nine months ended September 30, 2023 and 2022, respectively. Amortization of debt discount and issuance costs is included in interest expense and other fees in our condensed consolidated statements of operations and comprehensive loss.

The RLOC and Term Loan are 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 Credit Agreement also requires the Company to maintain the financial covenants with respect to Minimum Adjusted EBITDA (as defined in the Credit Agreement), Minimum Tangible Net Worth, Minimum Liquidity and compliance with the Total Advance Rate (as defined in the Credit Agreement). As of September 30, 2023 and December 31, 2022, the Company was in compliance with all covenants.

8.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 November 2023 and June 2025, respectively. Lease expenses are included in general and administrative expenses in our condensed consolidated statements of operations and comprehensive loss. The following is a schedule of future minimum lease payments required under the non-cancelable leases as of September 30, 2023, reconciled to the present value of operating lease liabilities:


Year	Future Minimum Lease Payments
2023	$	114
2024	334
2025	170
Total future minimum lease payments	$	618
Less: Interest	(103)
Total present value of lease liabilities	$	515

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Lease Liabilities— Lease liabilities consist of the following:


	September 30,		December 31,
	2023		2022
Current portion of lease liabilities	$	297	$	382
Long-term lease liabilities, net of current portion	218		445
Total lease liabilities	$	515	$	827

We recognized rent expense for operating leases of $140 and $134, for the three months ended September 30, 2023 and 2022, respectively and $407 and $400 for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the Company had a weighted average remaining lease term of 1.7 years and a weighted average discount rate of 9.25%.

9.STOCK-BASED COMPENSATION

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

2014 Plan

In accordance with the 2014 Plan, the board of directors of Legacy Katapult could grant equity awards to officers, employees, directors and consultants for common stock. There were no stock options or other equity awards granted during 2023 and 2022. The 2014 Plan has specific vesting for each stock option grant allowing vesting of the options over one to four years. No equity awards have been granted under the 2014 Plan since October 2020 and no new equity awards are expected to be granted under the 2014 Plan.

Stock Options

A summary of the status of the stock options under the 2014 Plan as of September 30, 2023, and changes during the nine months then ended is presented below (adjusted after the Reverse Stock Split):


	Number of Shares	Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Balance - December 31, 2022	322,855	$	7.50	6.3	$	5,479
Granted	—	—
Exercised	—	—
Forfeited	(375)	$	87.50
Balance - September 30, 2023	322,480	$	7.25	5.6	$	3,742
Exercisable - September 30, 2023	322,480	$	7.25	5.6	$	3,742
Unvested - September 30, 2023	—	$	—	5.6	$	—

No stock options were exercised during the nine months ended September 30, 2023. The total intrinsic value of stock options exercised during the nine months ended September 30, 2022 was $241.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

2021 Plan

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

In accordance with the 2021 Plan, directors may issue equity awards, including restricted stock awards (“RSA”), restricted stock unit awards (“RSU”) and stock options to officers, employees, directors and consultants to purchase common stock. The awards granted are subject to either service-based and/or performance-based vesting conditions. Awards granted under the 2021 Plan generally vest over one to four years depending upon the grantee. Following the effect of the 1-for-25 Reverse Stock Split, the total number of common stock authorized for issuance under our 2021 Plan is 92,628.

Stock Options

A summary of the status of the stock options under the 2021 Plan as of September 30, 2023, and changes during the nine months then ended is presented below (adjusted after the Reverse Stock Split):


	Number of Shares	Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Balance - December 31, 2022	13,864	$	261.25	8.5	$	—
Granted	—	—
Exercised	—	—
Forfeited	—	—
Balance - September 30, 2023	13,864	$	261.25	7.8	$	—
Exercisable - September 30, 2023	10,109	$	261.25	7.8	$	—
Unvested - September 30, 2023	3,755	$	261.25	7.8	$	—

As of September 30, 2023, total compensation cost not yet recognized related to unvested stock options was $604, which is expected to be recognized over a period of 1.1 years. No stock options were granted under the 2021 Plan during the nine months ended September 30, 2023 and 2022.

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 September 30, 2023, and changes during the nine months then ended is presented below (adjusted after the Reverse Stock Split):


	Number of RSUs	Weighted Average Grant Date Fair Value
Outstanding - December 31, 2022	245,645	$	59.50
Granted	182,694	20.50
Vested	(105,807)	58.75
Forfeited	(26,337)	63.00
Outstanding - September 30, 2023	296,195	$	46.75

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Stock-Based Compensation Expense— We recognized stock-based compensation expense of $1,375 and $1,807 for the three months ended September 30, 2023 and 2022, respectively, and $5,678 and $4,753 for the nine months ended September 30, 2023 and 2022, respectively. Stock-based compensation expense is included in compensation costs in our condensed consolidated statements of operations and comprehensive loss.

As of September 30, 2023, there was $9,185 of unrecognized compensation costs related to unvested RSU’s. This amount is expected to be recognized over a weighted-average period of 2.1 years. The total fair value of vested RSUs as of their respective vesting dates were $1,708.

10.INCOME TAXES

We recorded an income tax provision of $19 and $73 for the three months ended September 30, 2023 and 2022, respectively, and $53 and $173 for the nine months ended September 30, 2023 and 2022, respectively. The income tax provisions for the three and nine months ended September 30, 2023 and 2022 relates predominately to state income taxes due to the Company’s estimated taxable income for the year. Taxable income is expected to be generated in certain states where accelerated federal tax depreciation is disallowed. The Company’s effective tax rate for the three months ended September 30, 2023 and 2022 is different than the statutory rate primarily due to changes in the Company’s valuation allowance. The Company’s effective tax for the nine months ended September 30, 2023 and 2022 was primarily driven by expected state income taxes.

As of December 31, 2022, the Company had U.S. federal net operating loss carryforward of $136,200 that expire at various dates from 2032 through 2037 and includes $100,500 that have an unlimited carryforward period. As of December 31, 2022, the Company has U.S. state and local net operating loss carryforwards of $92,200 that expire from 2023 to 2041.

In evaluating its ability to realize its net deferred tax assets, the Company considered all available positive and negative evidence, such as past operating results, forecasted earnings, prudent and feasible tax planning strategies, and the future realization of the tax benefits of existing temporary differences. The Company remains in a cumulative tax loss position for the 36 months ended September 30, 2023, 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 September 30, 2023 and December 31, 2022.

11.NET LOSS PER SHARE

As discussed in Note 7, the Company issued a warrant to purchase up to 80,000 shares of the Company common stock at an exercise price of $0.25 per share, which vested on September 6, 2023. In addition, the Company may be required to grant an additional 80,000 shares of common stock at the same exercise price under the warrant if any amount of the principal balance of the Term Loan remains outstanding upon the earlier to occur of (i) December 5, 2023, (ii) an Acquisition of the Company, and (iii) an Event of Default occurs under the Credit Agreement prior to December 5, 2023. If issued, such shares will become vested upon the first to occur of (i) three months after the grant date or (ii) an Acquisition of the Company. The warrant was considered exercisable for 80,000 shares for little to no consideration and the shares are therefore included in basic shares outstanding at their issuance date. The additional 80,000 warrants were excluded as the contingency associated with their issuance has not been met.

The Company’s potentially dilutive securities, which include unvested RSUs, stock options to purchase common stock and warrants to purchase common stock, have been excluded from the computation of diluted net 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 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 (adjusted for after the Reverse Stock Split):

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
Public warrants	500,000	500,000	500,000	500,000
Private warrants	13,300	13,300	13,300	13,300
Stock options	336,345	337,335	336,345	337,335
Unvested restricted stock units	296,195	240,160	296,195	240,160
Warrants issued in connection with 15th amendment to Credit Agreement	80,000	—	80,000	—
Total common stock equivalents	1,225,840	1,090,795	1,225,840	1,090,795

12.COMMITMENTS AND CONTINGENCIES

Litigation risk— From time to time, the Company may become involved in various legal actions arising in the ordinary course of business. Management is of the opinion that the ultimate liability, if any, from these actions will not have a material effect on its financial condition or results of operations. The Company is not currently aware of any indemnification or other claims, except as discussed below and has not accrued any liabilities related to such obligations in our condensed consolidated financial statements as of September 30, 2023 and December 31, 2022.

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 (“DCA”), filed a complaint filed in the Supreme Court of the State of New York, New York County. The complaint relates to an April 11, 2018 letter agreement (the “Letter Agreement”) entered into by DCA and Legacy Katapult. Among other things, DCA alleges that Katapult breached its obligations to (i) provide DCA a right of first refusal to act as the “exclusive financial advisor” with respect to the 2020 sales transaction and the 2020 PIPE transaction, (ii) pay DCA fees in connection with such advisory roles, and (iii) pay a $100 termination fee when it terminated the Letter Agreement. DCA seeks damages in an amount to be determined by trial and seeks attorneys’ fees and costs, an award of pre- and- post -judgment interest, and such other and further relief as the Court deems just and proper.

On September 12, 2022, DCA filed a motion seeking summary judgment as to its claims, and on September 13, 2022, the Company filed a motion seeking summary judgment as to DCA’s first cause of action. The parties subsequently filed opposition and reply briefs and unsuccessfully attempted to resolve the matter via mediation. On September 6, 2023, the Court issued its decision and order on the motions, granting in part each party’s motion. It found that (1) Katapult breached its obligation to offer DCA the opportunity to act as its advisor on the 2020 sale transaction but that a triable question of fact remains regarding the damages, if any, caused by the breach (2) Katapult did not breach the contract with respect to its failure to offer DCA the opportunity to act as its advisor on the 2020 PIPE transaction; and (3) a triable question of fact remains regarding whether Katapult breached any obligations regarding the termination fee. On October 2, 2023, the Company filed a notice of appeal of the decision denying it summary judgment regarding the 2020 sale transaction. The Company intends to vigorously defend against the claims in this action.

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Shareholder Litigation

On August 27, 2021, a putative class action lawsuit, captioned McIntosh v. Katapult Holdings, Inc., et al, was filed in the U.S. District Court for the Southern District of New York. The operative second amended complaint was filed on November 4, 2022 against against Katapult Holdings, Inc., three current and former Company officers, and two FinServ officers. The second amended complaint alleges 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”). On May 26, 2022, the Court appointed a lead plaintiff, but on August 8, 2023, the court dismissed the Katapult Putative Class’ claims which were under Sections 10(b) and 20(a) and dismissed two current and former Company officers from the case. The Court declined to dismiss certain of the FinServ Putative Class’s claims under Sections 14(a) and 20(a). The Company and the remaining defendants intend to vigorously defend against the claims in this action.

On August 25, 2022, a purported Company stockholder filed a putative class action lawsuit, captioned Saunders v. Einbinder, et al., against directors and officers of FinServ Acquisition Corp. (“FinServ”) and FinServ Holdings LLC in the Delaware Court of Chancery. The operative amended complaint was filed on January 27, 2023, alleging that defendants breached their fiduciary duties by making false and misleading disclosures to induce FinServ stockholders to approve FinServ’s merger with Katapult. On March 13, 2023, the Court granted the parties’ stipulation to dismiss FinServ Holdings LLC from the case and amended the caption as In re FinServ Acquisition Corp. SPAC Litigation. The remaining defendants’ motion to dismiss the complaint is pending.

The Company has not recorded any loss or gain contingencies associated with the shareholder litigation as it is not probable or reasonably estimable at September 30, 2023.

13.FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of its warrant liability, RLOC, and Term Loan.

The estimated fair value of the Company’s RLOC and Term Loan were as follows:


	September 30, 2023						December 31, 2022
	Principal amount		Carrying amount		Fair value		Principal amount		Carrying amount		Fair value
RLOC	$	60,860	$	60,397	$	63,857	$	57,998	$	57,639	$	58,708
Term Loan	29,993		24,543		33,307		53,785		48,057		56,828
	$	90,853	$	84,940	$	97,164	$	111,783	$	105,696	$	115,536

The estimated fair values of the Company’s RLOC and Term Loan 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 September 30, 2023 or December 31, 2022. Liabilities measured at fair value on a recurring basis were as follows:


	September 30, 2023
	Fair Value Measurement Using
Liabilities:	Total		Level 1		Level 2		Level 3
Warrant liability - Public (Level 1) & Private Warrants (Level 3)	$	131	$	128	$	—	$	3
Total Other Liabilities	$	131	$	128	$	—	$	3

KATAPULT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)


	December 31, 2022
	Fair Value Measurement Using
Liabilities:	Total		Level 1		Level 2		Level 3
Warrant liability - Public (Level 1) & Private Warrants (Level 3)	$	902	$	875	$	—	$	27
Total Other Liabilities	$	902	$	875	$	—	$	27

During the nine months ended September 30, 2023 and 2022, 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 Warrant liability measured at fair value on a recurring basis:


	Warrant Liability
Balance at December 31, 2022	$	902
Changes in fair value	(771)
Balance at September 30, 2023	$	131

14.SUBSEQUENT EVENTS

The Company evaluated subsequent events from September 30, 2023, the date of these condensed consolidated financial statements, through November 8, 2023, which represents the date our condensed consolidated financial statements were issued, for events requiring adjustment to or disclosure in these condensed consolidated financial statements. 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 9, 2023. All dollar amounts are in thousands,unless otherwise specified.

OVERVIEW (dollars in thousands)

We are a technology driven lease-to-own platform that integrates with omnichannel retailers and e-commerce platforms to power the purchasing of everyday durable goods for underserved U.S. non-prime consumers. Through our POS integrations and innovative mobile app featuring Katapult Pay, consumers who may be unable to access traditional financing can shop a growing network of our merchants.

Recent Developments:

Reverse Stock Split

On July 27, 2023, we amended our Certificate of Incorporation to effect, effective as of 5:00 p.m. Eastern Time, the Reverse Stock Split of our Common Stock. At the effective time of the Reverse Stock Split, every twenty-five shares of our Common Stock either issued and outstanding or held as treasury stock were automatically reclassified into one new share of our Common Stock. The Reverse Stock Split was approved by our stockholders at the Annual Meeting of Stockholders on June 6, 2023 and approved by our Board of Directors on July 11, 2023. The primary goals of the Reverse Stock Split was to increase the share price in order to meet the minimum per share bid price requirement for continued listing on Nasdaq as well as to improve the perception of our Common Stock as an investment security and make the our Common Stock more attractive to a broader range of institutional investors that may have minimum share price targets for new investments. However, there can be no assurance that the foregoing goals will be realized or maintained. The common stock began trading on Nasdaq on a reverse split-adjusted basis on July 28, 2023 under the existing trading symbol “KPLT.” The effects of the Reverse Stock Split have been reflected in this Quarterly Report on Form 10-Q for all periods presented. For additional information on the Reverse Stock Split, see Note 1 to our Unaudited Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on

Form 10-Q.

Key Factors and Trends:

Key factors and trends impacting our business are as follows:

•Macroeconomic factors — Since the fourth quarter of 2021 and continuing throughout the nine months ended September 30, 2023, 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), the banking crisis in March 2023, as well as fears of a global recession. In response to these trends and the effect it had on our customers, we began tightening our underwriting in fourth quarter of 2021 and have continued throughout the nine months ended September 30, 2023. During the three and nine months ended September 30, 2023, our gross origination volume increased as compared to the prior year periods. The increase in gross originations was predominately a result of higher wallet capture during tax season and due to our mobile app featuring Katapult PayTM., which we launched in the third quarter of 2022, as well as growth from our direct merchants.

We continue to navigate an evolving but still uncertain macroeconomic environment. While there are tailwinds such as better inflation data and a reduced likelihood of a recession in the United States, interest rates remain elevated, lending standards are tight and there is uncertainty surrounding how the resumption of student loan repayments may impact our core consumer’s ability to take on new leases. It is also important to note, however, that over time, lease-to-own solutions have historically benefited when prime credit options become less available. We anticipate that this challenging macroeconomic environment will continue into early 2024 and management will continue to monitor both potential positive and negative business trends relating to the broader macroeconomic environment.

Segment Information

We conduct our business within one business segment, which is defined as providing lease payment options to consumers to obtain 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.

Key Performance Metrics

We regularly review several metrics, including the following GAAP and non-GAAP 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. 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 but are a leading indicator of potential revenue streams as a percentage of revenue is realized in the quarter in which the gross originations occurs and increases cumulatively over the following quarters, historically reaching approximately 70-75% of revenue realized within two quarters from when the originations occurred. 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 nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Change
	2023		2022		$		%
Gross Originations	$	49,591	$	44,100	$	5,491	12.5	%

Wayfair represented 56% and 54% of gross originations during the three months ended September 30, 2023 and 2022, respectively.


	Nine Months Ended September 30,				Change
	2023		2022		$		%
Gross Originations	$	159,037	$	137,136	$	21,901	16.0	%

Wayfair represented 54% and 58% of gross originations during the nine months ended September 30, 2023 and 2022, respectively.

The increase in gross originations during the three and nine months ended September 30, 2023 was predominately a result of higher wallet capture during tax season and our mobile app featuring Katapult PayTM., which we launched in the third quarter of 2022, as well as growth from our direct merchants. During the three and nine months ended September 30, 2023, we generated $8,549 and $21,913 of gross originations through Katapult PayTM, respectively.

Total Revenue

Total revenue represents the sum of rental revenue and other revenue. The following table presents total revenue for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Total revenue	$	55,250	$	50,341	$	165,497	$	163,258

Gross Profit

Gross profit represents total revenue less cost of revenue, and is a measure presented in accordance with 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 and underwriting fees. 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.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that is defined as net loss before interest expense and other fees, interest income, change in fair value of warrant liability, provision for income taxes, depreciation and amortization on property and equipment and capitalized software, impairment of leased assets, loss on partial extinguishment of debt and stock-based compensation expense. We believe that adjusted EBITDA provides a meaningful understanding of our operating performance. See “—Non-GAAP Financial Measures” section below for a reconciliation of adjusted EBITDA, which is a non-GAAP measure utilized by management, to net loss.

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 primarily of asset sales revenue related to the sale of property held for lease which are considered recurring and ordinary in nature to our business. Also included in other revenue is 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 our retail 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, 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. Compensation costs consist primarily of payroll and related costs and stock-based compensation. General and administrative expenses consist primarily of occupancy costs, travel and entertainment, and other general overhead costs, including depreciation and amortization related to office equipment and software. We have completed our operating expense reduction initiative and are now diligently managing expenses.

RESULTS OF OPERATIONS (amounts in thousands, except per share data)

Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022:


	Three Months Ended September 30,
	2023		2022		Change		% Change
Revenue
Rental revenue	$	54,481	$	49,260	$	5,221	10.6	%
Other revenue	769		1,081		(312)		(28.9	%)
Total revenue	55,250		50,341		4,909		9.8	%
Cost of revenue	42,439		38,417		4,022		10.5	%
Gross profit	12,811		11,924		887		7.4	%
Operating expenses:
Servicing costs	1,100		1,025		75		7.3	%
Underwriting fees	422		419		3		0.7	%
Professional and consulting fees	1,169		2,697		(1,528)		(56.7	%)
Technology and data analytics	1,639		2,421		(782)		(32.3	%)
Compensation costs	5,117		6,752		(1,635)		(24.2	%)
General and administrative	2,664		3,276		(612)		(18.7	%)
Total operating expenses	12,111		16,590		(4,479)		(27.0	%)
Gain (loss) from operations	700		(4,666)		5,366		(115.0	%)

Interest expense and other fees	(4,264)		(5,074)		810		(16.0	%)
Interest income	287		223		64		28.7	%
Change in fair value of warrant liability	382		381		1		0.3	%
Loss before income taxes	(2,895)		(9,136)		6,241		(68.3	%)
Provision for income taxes	(19)		(73)		54		(74.0	%)
Net loss	$	(2,914)	$	(9,209)	$	6,295	(68.4	%)

Weighted average common shares outstanding - basic and diluted	4,130		3,936		194		4.9	%

Net loss per common share - basic and diluted	$	(0.71)	$	(2.34)	$	1.63	(69.7	%)

Rental revenue. The increase in rental revenue was primarily the result of an increase in gross cash collections (due to higher year-over-year gross originations) during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. Write-offs as a percentage of total revenue was 9.3% and 8.1% during the three months ended September 30, 2023 and 2022, respectively.

Other revenue. The decrease in other revenue was primarily the result of a decrease in proceeds from lease sales during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Gross profit. The increase in gross profit was primarily due to a decline in early lease buyouts and stronger collections and underwriting performance. Gross profit as a percentage of total revenue decreased to 23.2% for the three months ended September 30, 2023 compared to 23.7% for the same period in 2022.

Professional and consulting fees. The decrease in professional and consulting fees was primarily driven by a decrease in consulting, accounting and recruiting fees as part of our operating expense reduction initiatives during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Technology and data analytics. The decrease in technology and data analytics was primarily due to a reduction in employee and developer headcount, as part of our operating expense reduction initiatives.

Compensation costs. The decrease in compensation costs was primarily due to a decrease in employee headcount during the first quarter of 2023 as part of our operating expense reduction initiatives and a decrease in stock compensation related to the vesting of restricted stock awards during the three months ended September 30, 2023. Total stock-based compensation expense decreased $432 period-over-period.

General and administrative. The decrease in general and administrative expenses was primarily due to a decrease in insurance related costs, marketing and advertising costs and software related expenses during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Interest expense and other fees. The decrease in interest expense and other fees was primarily due to the refinancing of the Credit Agreement which occurred in March 2023 in which we repaid $25,000 of outstanding principal on the Term Loan partially offset by in an increase of 1% of the spread over the benchmark rate on the RLOC and an increase in average outstanding principal under the RLOC period over period.

Interest income. Interest income represents interest earned from cash deposited in interest bearing accounts which started in the third quarter of 2022.

Change in fair value of warrant liability. The decrease in change in fair value of warrant liability is due to the decline in the fair value of our public and private warrants.

Provision for income taxes. The provisions are primarily due to state income taxes on our estimated taxable income for the year ending December 31, 2023 and 2022. Taxable income is expected to be generated in certain states where accelerated federal tax depreciation is disallowed.

Net loss. The decrease in net loss was due to the changes noted above.

Nine Months Ended September 30, 2023 compared to Nine Months Ended September 30, 2022:


	Nine Months Ended September 30,
	2023		2022		Change		% Change
Revenue
Rental revenue	$	163,079	$	160,075	$	3,004	1.9	%
Other revenue	2,418		3,183		(765)		(24.0	%)
Total revenue	165,497		163,258		2,239		1.4	%
Cost of revenue	128,486		131,379		(2,893)		(2.2	%)
Gross profit	37,011		31,879		5,132		16.1	%
Operating expenses:
Servicing costs	3,193		3,362		(169)		(5.0	%)
Underwriting fees	1,370		1,330		40		3.0	%
Professional and consulting fees	5,447		8,244		(2,797)		(33.9	%)
Technology and data analytics	5,263		7,286		(2,023)		(27.8	%)
Compensation costs	17,942		18,599		(657)		(3.5	%)
General and administrative	8,344		10,733		(2,389)		(22.3	%)
Total operating expenses	41,559		49,554		(7,995)		(16.1	%)
Income (loss) from operations	(4,548)		(17,675)		13,127		(74.3	%)
Loss on partial extinguishment of debt	(2,391)		—		(2,391)		—	%
Interest expense and other fees	(13,551)		(13,760)		209		(1.5	%)
Interest income	1,334		223		1,111		498.2	%
Change in fair value of warrant liability	771		5,793		(5,022)		(86.7	%)
Loss before income taxes	(18,385)		(25,419)		7,034		(27.7	%)
Provision for income taxes	(53)		(173)		120		(69.4	%)
Net loss	$	(18,438)	$	(25,592)	$	7,154	(28.0	%)

Weighted average common shares outstanding - basic and diluted	4,059		3,926		133		3.4	%

Net loss per common share - basic and diluted	$	(4.54)	$	(6.52)	$	1.98	(30.4	%)

Rental revenue. The increase in rental revenue was primarily the result of an increase in gross cash collections (due to higher year-over-year gross originations) during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Write-offs as a percentage of total revenue was 9.0% and 6.9% during the nine months ended September 30, 2023 and 2022, respectively. The increase in write-offs as a percentage of total revenue was due to seasonal patterns.

Other revenue. The decrease in other revenue was primarily the result of a decrease in lease sales during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Gross profit. The increase in gross profit was was primarily due to a decline in early lease buyouts and stronger collections and underwriting performance during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 partially offset by an increase in impairment expense during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Gross profit as a percentage of total revenue increased to 22.4% for the nine months ended September 30, 2023 compared to 19.5% for the same period in 2022.

Servicing Costs. The decrease in service costs was primarily due to the decrease in overall call center headcount, as part of our operating expense reduction initiatives.

Professional and consulting fees. The decrease in professional and consulting fees was primarily driven by a decrease in consulting, accounting and recruiting fees as part of our operating expense reduction initiatives partially offset by an increase in legal fees during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Compensation costs. The decrease in compensation costs during the nine months ended September 30, 2023 was primarily due to the previously mentioned head count reduction during the three months ended March 31, 2023 partially offset by an increase in stock-based compensation related to the vesting of restricted stock awards during the nine months ended September 30, 2023, which increased $925 period-over-period, as well as by a one-time severance related to headcount reductions during the nine months ended September 30, 2023, as part of our operating expense reduction initiatives.

General and administrative. The decrease in general and administrative expenses was primarily due to a decrease in insurance related costs, marketing and advertising costs and software related expenses during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Loss on partial extinguishment of debt. During the nine months ended September 30, 2023, we recorded a $2,391 loss on partial extinguishment of debt, primarily as a result of our debt refinancing in March 2023.

Interest income. Interest income represents interest earned from cash deposited in interest bearing accounts which started in the third quarter of 2022.

Change in fair value of warrant liability. The decrease in change in fair value of warrant liability is primarily due to the decline in the fair value of our public warrants and private warrants.

Provision for income taxes. The provisions are primarily due to state income taxes on our estimated taxable income for the years ending December 31, 2023 and 2022. Taxable income is expected to be generated in certain states where accelerated federal tax depreciation is disallowed.

Net loss. The decrease in net loss was due to the changes noted above.

Non-GAAP Financial Measures

In addition to gross profit and net loss, which are measures presented in accordance with GAAP, we believe that adjusted gross profit, adjusted EBITDA, and adjusted net loss 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 are supplemental measures of our performance that are neither required by nor presented in accordance with GAAP. Adjusted gross profit, adjusted EBITDA and adjusted net loss should not be considered as substitutes for GAAP metrics such as gross profit, operating loss, net loss, or any other performance measures derived in accordance with GAAP and may not be comparable to similar measures used by other companies.

Adjusted gross profit represents gross profit less variable operating expenses, which are servicing costs and underwriting fees.

We believe that adjusted gross profit provides a meaningful understanding of one aspect of our performance specifically attributable to total revenue and the variable costs associated with total revenue.

Adjusted net loss is a non-GAAP financial measure that is defined as net loss before change in fair value of warrant liability and stock-based compensation expense.

Adjusted gross profit, adjusted EBITDA and adjusted net loss 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 reconciliations of gross profit to adjusted gross profit for the three and nine months ended September 30, 2023 and 2022 are as follows:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2023		2022		Change		% Change		2023		2022		Change	% Change
Total revenue	$	55,250	$	50,341	$	4,909	9.8	%	$	165,497	$	163,258	2,239	1.4	%
Cost of revenue	42,439		38,417		4,022		10.5	%	128,486		131,379		(2,893)	(2.2	%)
Gross profit	12,811		11,924		887		7.4	%	37,011		31,879		5,132	16.1	%
Less:
Servicing costs	1,100		1,025		75		7.3	%	3,193		3,362		(169)	(5.0	%)
Underwriting fees	422		419		3		0.7	%	1,370		1,330		40	3.0	%
Adjusted gross profit	$	11,289	$	10,480	809		7.7	%	$	32,448	$	27,187	5,261	19.4	%

The reconciliations of net loss to adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022 are as follows:


Three Months Ended September 30,		Nine Months Ended September 30,
2023	2022	2023