KPLT - Katapult Turnaround?

2023-04-17 13:10:14 ET

Summary

• Promised cost reductions should be hitting the books now.
• Katapult thrives in a market of shrinking "prime credit".
• ASC842 ~$9M is the difference between a $5M loss and ~$4M profit.
• Katapult Pay™ virtual credit card showing impressive results.
• Term loan due at end of 2023 extended to mid-2025.

Katapult ( KPLT ) posted a $5M loss, albeit beating on revenue , but that loss, along with the CFO passing on guidance, caused the stock to tank. If you look at their Q4 earnings call , Katapult actually performed pretty well " in the face of rising inflation ", reduced " consumer spending and a challenging labor market ". At the same time of their earnings call, the entire banking industry deflated due to the SVB debacle which only made matters worse. If you review the results of their past quarter, along with management's testimony, you can still see that Katapult might become profitable this year.

Katapult was once a $10 SPAC IPO at the end of 2019; they could still post over $200M in revenue this year, and after Q1 one-time expenses, could be profitable and experience a long-awaited turnaround. I've recommended Katapult in two past articles — here and here , and have been able to average down like many KPLT investors. I believe the company has been treated harshly by the market but still must become profitable this year or face bankruptcy; I'll try to convince you that Katapult has potential for a turnaround.

Katapult management has relayed a vision that their virtual credit card technology and direct merchant acquisitions would take time to implement, and there'd be software costs involved that would be reduced once development had completed. Katapult is past the development cycle, having released their new app and virtual credit card, so the return on investment they made should start showing results in the next few quarters. If you don't believe this and didn't take your loss last year, then why not let it ride until the end of this year, and take your loss then, or maybe by then, you'll be happy you held firm. I'm holding my shares and think in this type of economy, Katapult is needed — whether you like them or not. From the Q3 earnings call , the CEO stated —

With the launch of several of our significant initiatives completed, we anticipate lower operating expenses for the full-year of 2023 as our growth initiatives reach completion, and as we continue lowering operating expenses across the organization in light of a challenging macroeconomic environment. "

So, these reductions should start to be realized now and in the next few quarters helping make Katapult profitable.

Katapult is a Lease-to-Own company that deals specifically in the subprime market or with people who have no credit at all. Katapult has an excellent repeat customer base which represents more than half of their revenue each quarter on average.

In our stimulus-less economy, Katapult may have an advantage. As CEO Orlando " Oz " Zayas stated on the last earnings call, " Historically lease-to-own solutions benefit from periods of shrinking prime credit availability, creating a counter-cyclical hedge against the challenging macro environment ". In this type of economy, Katapult is a lender of last resort. According to Experian in June, 2021, about a third of the consumers were in the subprime category, but surely that number has increased given the current economic zeitgeist, and it doesn't include those with no credit at all. Since Biden was planted in the White House, almost 6 million people without credit histories have poured in through our Southern border, so Katapult's market has surely increased.

Katapult surveyed 1,184 adults in the U.S. whose credit scores qualify as non-prime (660-601), subprime (600-501), and deep subprime (500-300). Fielding took place in August 2022.

According to the survey, 60% of Gen Z and Millennials would be more likely to shop from a merchant that offered flexible payment options, compared to 45% of their Gen X and older counterparts. Additionally, younger consumers are slightly more likely (6%) to have used lease-to-own previously.

We’ve found lease-to-own and other flexible payment options appeal to younger consumers since they are more likely to pick up on newer trends, less likely to have established credit, warier of incurring credit card debt, and often struggle with larger purchases since they have yet to hit their prime earning years. By offering flexible payment options, retailers can reach younger customers now and earn their loyalty for years to come.”

The Q4 1.5% y-o-y gross originations increase was positive, but it was the month of December that was extremely interesting, for both the CEO and CFO mentioned it. The stat was sort of nebulous in the call, but if you search for the word " teens " in the transcript , you can find it twice. If the gross originations for the month of December increased in the teens percentage-wise, then Q1 may continue at that level.

In Q3, Katapult had 2,000 gross originations, and Q4 had 8,000, so that's a 400% increase; this increase was due to Katapult's app with their virtual credit card, Katapult Pay™, and it occurred " without additional direct-to-consumer marketing expense ". According to the CEO, Katapult " believes their technology is industry disruptive ", and they " expect to see year-over-year gross originations growth continue into 2023 ".

Consider that in this past year, Katapult added:

• 21 " direct " merchants where Katapult is embedded into their systems
• 18 merchants for their virtual credit card, Katapult Pay™, which is just in its infancy having been released ~4 months ago.

Q4 earnings call positive points...

• Repeat customers increased by 11% from Q3. Over 50% of the gross originations were from repeat customers. These transactions are much safer for Katapult since the customer already has a credit history, having paid their bills responsibly. Consider that from this pool of repeat customers, 12,000 leases for over $8M in gross originations resulted from Katapult Pay™.

• Adjusted EBITDA was a $5 million loss which was due to the ASC 842 $9M accounting. The ASC 842 rules began on 1/1/2022, so the effect on quarterly earnings should diminish as revenue starts getting reported once transactions are finally closed. As the CFO said on the earnings call, operating expenses really decreased by $6M, but due to ASC 842, they actually showed an increase of $3.5M.

• The company announced a 10% operating expense reduction for 2023 and that one-time severance costs would hit in Q1.

• Impairment charges as a percentage of gross originations decreased 13%.

• The status of the $53.8M term loan due by end of 2023 was extended until 6/4/2025, and $25M was paid off.

Katapult is currently selling at under $1 a share. Their last day over $1 was March 13th, so they're about to trigger a 180-day delisting warning from NASDAQ; that can be appealed for an additional 180 days once time is up. Hopefully within one year, this delisting issue will be moot. In my opinion, the CEO's comments on the last call are a bellwether —

T he results speak for themselves, whether measuring monthly active users, or gross originations through our mobile app. "

As always, Oz continues to exude confidence and positive energy, but most importantly, he was once denied credit, so he understands the business from the other side, and that is important. In addition, the veteran CFO, Nancy Walsh, who has taken over Katapult finances , has made some strategic moves. Q1 1-time severance costs will hurt, but remove these costs, and maybe there'll be profit; that would imply Q2 would be the turnaround quarter.

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