Good day and thank you for standing by. Welcome to the Katapult Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Wright, Vice President, Investor Relations. Please go ahead..

Thank you and good morning. Welcome to the Katapult’s fourth quarter and full year 2021 earnings results and investor update conference call. With me today are Orlando Zayas, Chief Executive Officer; Karissa Cupito, Chief Financial Officer; and Derek Medlin, Chief Operating Officer.

We issued our earnings release and corresponding investor presentation this morning and we will be referencing these during the call. Both can be found on the Investor Relations section of our website. We will be available for Q&A following today’s prepared remarks.

Before we begin, I would like to remind everyone this call will contain forward-looking statements regarding future events and our financial performance, including statements regarding our market opportunity, the impact of our growth initiatives and our future financial performance.

These should be considered in conjunction with cautionary statements contained in our earnings release and the company’s most recent periodic SEC reports, including our Form 10-K for the year ended December 31, 2021.

These statements reflect management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements.

Except as required by law, we undertake no obligation to publicly update or revise any of these statements whether as a result of any new information, future events or otherwise. During today’s discussion of our financial performance, we will provide certain information that constitutes non-GAAP financial measures under SEC rules.

These include measures such as adjusted EBITDA and adjusted net income. These non-GAAP financial measures should not be considered replacements for and should be read together with our GAAP results.

Reconciliations to GAAP measures and certain additional information are also included in today’s earnings release, which is available on the Investor Relations section of our website. This call is being recorded and a webcast will be available for replay on the Investor Relations section of our website. I will now turn the call over to Orlando..

number one, fiscal year 2021 revenue grew 23% year-over-year. Number two, despite the ongoing macro challenges noted, we added 20 new merchants in the fourth quarter bringing our total to 102 new merchants in 2021, up 127% from 45 new merchants in 2020. Number three, our satisfaction metrics remain strong.

Our net promoter score was 54 as of December 31, 2021 and has grown to 59 as of the end of February 2022 and repeat customers made up 53% of our Q4 2021 origination. We also have strong merchant retention as demonstrated by our deepening relationships with key merchants during 2021.

Number four we are accelerating our investment in initiatives that support our long-term growth strategy. We are adding critical personnel to our organization to facilitate execution of our strategy as well as bring new leaders in key areas of growth opportunity.

We are planning to invest in strategic product and technology initiatives that are designed to enable us to capture more market share. As we build our already solid operating foundation, we believe we are in the initial stages of creating a sizable, durable and scalable business, which I will discuss in more detail later in the presentation.

I will now turn it over to Karissa, our CFO who will provide more details on our financial performance..

one, increased bad debt expense due to continued credit normalization, I will discuss the treatment of bad debt expense going forward on Slide 15; two, higher compensation costs from the addition of 36 full-time employees during the year as part of our strategic growth plan; and three, increased general and administrative expenses related to public company costs and higher marketing spend.

Full year financial results are presented on Slide 12. Gross originations increased 5% to $248 million in the face of a challenging macro backdrop during ‘21. Total revenue for the full year 2021 was $303.1 million, up 23% year-over-year.

Net income was modestly lower at $21.2 million in 2020 and adjusted EBITDA for 2021 decreased to $17.3 million, which reflects the addition of new full-time employees throughout the year, other investments and growth initiatives aimed at increasing market penetration and public company costs.

Turning to Slide 13, effective January 1, 2022, the company has adopted a revised standard for accounting for leases, as required by GAAP ASC 842 leases. This is a leasing standard that for Katapult dictates the timing of the recognition of leasing revenue and will modify the accounting treatment of bad debt expense within the income statement.

As a result of this adoption this year going forward, the company will record lease revenues on a cash basis and will no longer record rental revenue arising from lease receivables or any corresponding bad debt expense.

We will adopt the accounting standard for the 3 months ending March 31, 2022 using the modified retrospective approach and plan to adopt the optional transition method in which reporting entities are permitted to not apply ASC 842 for comparative periods in the year of adoption.

Therefore, we will not recast or restate 2021 or prior periods to conform to the new standard.

On Slide 14, for illustrative purposes only, we are disclosing here non-GAAP revenue, the elimination of bad debt expense and non-GAAP income before provision for income taxes, as if the lesser accounting impacts of ASC 842 were in effect for the years ended December 31, 2021 and 2020 respectively.

As you can see on a non-GAAP basis applying the impact of ASC 842, rental revenue was reduced as compared to our historical results, which reflects the timing of cash receipts and the corresponding bad debt expense is eliminated as compared to our as reported numbers.

Since bad debt expense will no longer be reported starting in the quarter ending March 31, 2022 due to our adoption of ASC 842 in order to evaluate lease portfolio performance, we point you to the impairment charges related to property held for lease that we book each quarter, which we have detailed on the next slide.

Looking at Slide 15, impairment charges related to property held for lease as percentage of gross originations was 5.9% in Q4 2021. As we have previously detailed, the seamless payments that occurred during 2020 and early 2021 in response to COVID-19 led to historically favorable credit performance for both prime and non-prime consumers.

Beginning in the third quarter of 2021, the credit environment started to normalize and heading into Q4 2021 a significant increase in inflation coupled with an absence of stimulus funds further pressured performance.

In response to these new data trends and a deterioration in credit quality, we initiated proactive tightening of our underwriting in Q4 2021 and we have continued to do so in 2022. We do anticipate impairment charges as a percentage of gross origination to trend up to higher pre-pandemic levels for the first half of 2022.

I will now turn it over to Orlando to discuss our strategic investments..

Slide 16 details the strategic investments we made in 2021 that positioned us to capture the large growth opportunity ahead. In sales and marketing, we expanded the total sales and marketing team from 21 to 46 full-time employees, all focused on capturing and onboarding new merchants.

We also partnered with our merchants on co-promotion and messaging leading to insightful learnings on what marketing tactics we believe work best to attract new customers and improve lifetime value. In addition, we expanded digital marketing efforts in customer acquisition channels.

In product, we hired and onboarded additional strategic product roles, which are intended to allow us to launch our innovative enhancements and capabilities at a faster pace. We also built and deployed dynamic testing environment for real-time conversion flow and individualized offers.

This powerful tool is designed to be instrumental in maximizing our conversion rates and we believe it’s a competitive differentiator for how we go to market. In addition, our team developed proof-of-concepts for next generation lease-to-own capabilities, which we anticipate launching in 2022.

We also hired key roles at the management level in technology, data science and analytics. We continue to integrate with more e-commerce platforms and point-of-sale systems that will drive future volume. We also made a sizable investment in infrastructure and security to ensure we can scale effectively.

All these investments which we characterize as core investments have created a solid foundation, which we believe will enable us to accelerate growth in the future. I would now like to step back and provide an overall investor update beginning with market overview on Slide 18.

We play in a virtual lease-to-own market estimated to be approximately $40 billion to $50 billion. We believe we have captured less than 1% of this addressable market, so our opportunity is vast. As you can see on Slide 19, we believe we have a competitive advantage that differentiates us from our peers.

We are the only e-commerce LTO company that is focused solely on serving non-prime consumers. We view the prime focused lenders not as competition, but as partners. Our product serves the different type of consumer from the prime lenders given it as a lease not alone and has different requirements, regulations and benefits.

Given these differences, prime lenders look to us as a solution and strategic partner for this particular segment of the durable goods e-commerce market. We are also differentiated by our focus on e-commerce as other lease-to-own businesses that serve non-prime consumers are largely based in brick-and-mortar stores.

As a result, we believe we are well-positioned to capture a significant share of the addressable market as we focus on our strategic growth plans. I will now turn it over to Derek to discuss our business in more detail..

Thank you, Orlando. On Slide 21, you can see that Katapult provides value to merchants through our proprietary and differentiated technology and highly predictive risk model, which is designed to give merchants the opportunity to access a large segment of underserved to non-prime consumers.

We believe that many of the lease sales enabled by Katapult are incremental to our merchants as this segment of consumers would have otherwise been declined by traditional financing options. Our simple and straightforward application process and strong customer service focus is designed to lead to high conversion rates and more repeat transactions.

Our proprietary tech solution is entirely merchant-focused, designed for quick and efficient integration of our platform, using a variety of options, including platform, direct, and waterfall. Each of these options is intended to provide a seamless experience for our merchant partners and position them to increase their sales capture.

Let me touch upon a few examples and success stories over the next few slides. Slides 22 provides detail on our platform and direct integration options. Our platform integration allows Katapult to create a payment solution in the form of a plug-in or extension for a merchant.

This provides a streamlined experience for the merchant since no development is required. We are integrated with e-commerce platforms like Magento and Shopify. If a merchant is on this platform where we are integrated, it can be as quick as 30 minutes to complete integration and be a payment option in a shopping cart.

We also offer direct custom integrations via APIs. This provides merchants the flexibility to integrate with Katapult if they utilize a proprietary shopping platform. We are also partnered with select prime lenders to offer waterfall integration.

A waterfall is where the consumers declined application will flow from the prime lender to others automatically, giving the consumer the best option for their credit situation. Our first waterfall partner realized that having a solution for their declines was important to their retailers.

They chose to integrate with us creating a waterfall where the consumer only has to submit the application once. If the prime lender declines the application, the data is electronically transmitted to us and we have the opportunity to approve this customer.

E-commerce retailers understand that when a consumer is searching for financing and payment flexibility, it’s important to give them the best offer for their credit situation where they may lose that customer to another retailer. We believe we offer clear and compelling value proposition to consumers as you can see on Slide 24.

Our platform is designed to remove financial barriers to increase inclusion, affordability and access for underserved consumers in order to give them options to purchase the durable goods that they need for their daily lives. We offer the consumer a way to make purchases without the need for credit score and without worrying about late fees.

But perhaps most importantly, we offer flexible and fully transparent payment options. The application process is transparent with no hidden fees or charges since we are communicating directly with the consumer online. We offer the consumer the option to get to ownership if that’s their goal.

Our most cost effective option is to buyout the item in 90 days or less charging a 5% fee. After 90 days, we will discount the remaining lease payments versus the full contractual cost to help facilitate ownership. Our goal is to be their core consumer time and time again as their needs arise.

Being upfront about how the lease works and communicating along the way is important to us as we work to increase financial inclusion for these underserved non-prime consumers. Our customers also appreciate the ease of use of the Katapult platform and our customer-centered approach. Slide 25 demonstrates our application and checkout process.

We provide consumers with a seamless and intuitive experience. Our three-step lease application is fast, simple and discreet, with only 14 fields to fill out no requirements provided information or personal references, and importantly, no FICO hard credit bureau check.

Once our consumers have completed the application process, they are given transparent lease terms before any money is collected. Customers can pay by payment card and their item is immediately shipped after the initial payment is made. Finally, we offer our customers on demand access to a lease management portal for their convenience.

As part of our mission of financial inclusion for all, we empower our customers to understand more about their financing options, make changes to their account, and communicate with us through chat, text and e-mail.

For those who wish to call, our support teams are using digital tools to rapidly solve the consumers’ questions and get them back to enjoying their items. I will now turn it back to Orlando to discuss our strategy for growth..

number one, ensuring our customer gets the offer that is right for them; number two, maximizing conversion rates and originated lease volume; and three, accelerating the merchant flywheel and setting ourselves up to win larger enterprise accounts. Turning to Slide 28, we plan on investing $15 million to $21 million in growth initiatives in 2021.

These initiatives are intended to focus on opportunities to access more consumers and convert more merchants for this purpose driving growth.

While this is our current plan given the inputs we see today, I would like to note that our investment spend is discretionary and the team and I will continue to monitor the macro environment and adjust this spend that we deem necessary. At a high level, hiring for strategic leadership roles has been a huge focus for us.

And I am pleased to announce that we have been successful in this area. So far in 2022, we have onboarded a Chief Marketing Officer, Chief Human Resources Officer, VP of Strategy, VP of Sales and VP of Partnerships, all with extensive experience at companies such as Klarna, Adyen, UBS, Verizon, and Morgan Stanley.

These leaders will be instrumental in moving the company forward to help execute on the initiatives detailed on this slide. When it comes to sales initiatives, we are laser focused on adding new merchants.

We believe there are thousands of eligible merchants offering durable goods that could benefit from access to our platform and we plan to target with an optimized sales process developed by our new VP of Sales, Marino Ruiz.

Marino comes to us from ShopKeep, where he implemented a structured plan around sales processes, which utilize data-driven decisions to accelerate the merchant flywheel. He is partnering with our new Chief Marketing Officer, Colleen Gorsky to expand our B2B marketing opportunities, leveraging her experience at Klarna.

We are also dedicated to deepening the relationships with our existing merchants, where we see opportunity to grow volume through increased sales penetration. Currently, our lease originations represent a modest percentage of total sales volume of our merchants.

We believe we can increase our penetration rate of merchants’ overall total sales by collaborating with merchants to target a new and engaged customer base that is looking for solutions to acquire the items they need for everyday living. Our marketing investments focus around expanding brand awareness and positioning initiatives.

In addition, we plan to expand our customer reach through targeted customer promotions and cross shopping. In product, we are building new functionality that is designed to increase customer conversion rates and repeat business through new product capabilities and enhanced propensity data models.

We are also focusing on expanding our partnership network to provide new solutions to both consumers and merchants. Our technology focus is on building out new digital and omni-channel experiences as well as continue to integrate with additional e-commerce platforms and lenders to further expand our footprint.

Moving to Slide 29, as we turn to 2022 many of the recent macro headwinds from Q4 2021 have carried into Q1 2020. Q1 2022 represents our most difficult comp this year, as consumers were bolstered by two stimulus taxes last year during the first quarter. One in January and one in March that drove spending and consequently our gross origination volume.

Our key merchant partners are experiencing lower sales volumes than a year ago. In addition, we have continued to tighten underwriting as we remain prudent in our lease portfolio risk management, leading to fewer approvals. The combination of these factors is resulting in originations trending down approximately 25% year-over-year through February.

We expect the challenging macro environment to persist and that we will have tough comps during Q2. But our expectation is that our largest merchant partners will be able to return to growth in the second half of the year.

We also anticipate impairment charges returning to pre-pandemic levels as lower performing lease vintages work through the lifecycle.

Our management team has been working with the non-prime consumer for over a decade and have observed that as the credit environment becomes weaker, it leads to prime focused lenders that previously expanded their underwriting due to record low delinquencies will tighten their underwriting.

This will drive the volume of applications as well as increase the credit quality of customers looking to us for payment solutions. We believe, we have the tools and available cash to withstand what we anticipate our near-term macro headwinds. Our proprietary risk model is calibrated for a dynamic credit environment.

Our focus is to underwrite conservatively now in order to have the capacity to add more leases later this year to the extent that historical trends bear out and higher quality customers start to come to us.

As we look ahead, we are planning to seize the opportunity to invest in our business now to remain the leader in the e-commerce non-prime finance segment. Slide 30 lays out our growth plan over the next 3 years.

We have built a solid platform and ecosystem for non-prime consumers to access high quality merchants and expand their e-commerce product choice. Near-term, our plans are to continue to grow our merchant base, deepen our relationships with existing merchants and partners and build out a robust pipeline.

Product and technology enhancements that are designed to improve conversion rates by keeping the control of the transaction in the customers’ hands are in the works. The improvements are intended to empower consumers with the knowledge that enabled more informed and quicker purchasing decisions.

We believe this level aid consumers ability to purchase high quality goods that retailers would had previously been unable to qualify for financing. Looking out further, we are developing additional ways to connect our merchants and non-prime consumers with solutions that are intended to drive lifetime value.

We believe our platform and merchant integrations position us to be able to eventually expand to other financial products as our customers improve their credit scores and desire lower costs financing options. We also plan to look to diversify our revenue by monetizing our data product platform and proprietary risk models.

Our goal of these efforts is to create a high margin and transaction based revenue and expand our share of the addressable market. In conclusion, as we look ahead to the rest of the year, we are proud of our ability to provide high levels of both customer and merchant satisfaction.

We believe our customer is well positioned to take advantage of strong, long-term trends in digital commerce and alternative payment solutions and strategically grow our company for the investment strategy that we have laid out today. With that, I will now take questions..

[Operator Instructions] Our first question comes from Josh Siegler with Cantor Fitzgerald. Your line is open..

Yes. Hi. Good morning. Thanks for taking my question. I was wondering if you could start by providing a little more color on the build out.

Typically, do expect your initiatives materially contribute to your revenue growth in 2022?.

Hi Josh. Thanks for asking the question. Yes, this is Orlando. We have been very aggressive in hiring the team. I think we have gone from 21 to 47. There is a fourth – sorry, got the number wrong. They are in the process of getting on-boarded. We also hired a new VP of Sales, Marino Ruiz who came from ShopKeep.

And he is doing a great job on kind of the data analytics around sales, lead generation. And we are starting to see the fruits of that labor. We also see from a sales – and then we also hired a Chief Marketing Officer, who has experience in BNPL and merchant financing.

And she is doing some really interesting things around how to drive the leads that are appropriate for our business, and get them through the sales funnel as quick as possible. I think all these things are starting to come together with the new adds that we have, plus the new headcount that we had.

So, we are starting to see the merchant count tick up. But the lead generation is definitely on track, so I believe have a successful second half of the year..

Excellent. That’s very helpful. And then, as you mentioned, you are on-boarding more than 100 new merchants this year, do your new customers typically generate a material contribution immediately, or is there a significant ramp period that can provide a tailwind heading into 2022? Thank you..

Hi, Josh, this is Derek, I will take that question. We see a variety of different ramp times depending on the size and the experience with financing by different retailers. So, the answer is that it depends.

However, our team has been working closely again with the new resources that we brought onboard and the new tool kits to ramp those new merchants much more quickly.

And typically, we will see anywhere between three months to six months to see the full cycle come through as retailers get the merchandising established, and their consumer base gets – becomes more aware that this option is available.

So, we do expect to see some pull through from those 100 retailers this year and then as we continue to add more as just continues to grow..

And Josh, this is Orlando. If I can add when we onboard a merchant, usually it’s through either a waterfall or possibly a direct channel, it depends on where they come to us. And usually that’s one or the two of the first integration. And then if they have stores, that would be the third.

So, the way we look at it is we want to get the integration done as quick as possible. Usually, the waterfall integration comes first, then the direct integration into the shopping carts were an option, their shopping cart maybe on their finance page. And then finally, if they have any storefronts, we have the capacity to do the storefront.

So, that’s where you see the volume increasing over time as we integrate those three different channels..

Great. Thank you very much..

Thanks..

Thank you. Our next question comes from Anthony Chukumba with Loop Capital Markets. Your line is open..

Good morning. Thank you so much for taking my question. I guess my question is on the quarter-to-date lease originations, might be a bit tough to parse this out.

But how much of that do you think is due to some of those macro trends that you identified as opposed to decisions you have made in terms of tightening your credit? How should we think about that?.

Hi, Anthony, this is Karissa, great question. So, when we look at it, it’s the macro impact that we are seeing at our largest retailers are affecting their sales, so, our top funnel that’s coming in terms of application in the teen. So, you could parse it out that that’s really a macro impact that our merchants are challenged with right now.

And then remainder of that 25% would be us proactively tightening and being conservative in our approval rates because of the macro condition in terms of the credit..

Another important thing, Anthony, for you to be reminded of is that year-over-year we are coming off stimulus that occurred right after the first of the year and so just the comps are a little bit different year-over-year. However, we are seeing kind of a turnaround of that thing equalizing the tax..

Got it. That’s helpful. And then just wonder if you would give any update in terms of your largest retail partner, Wayfair. And how you are doing there, I mean it looks like, your lease originations sort of outperformed in the fourth quarter relative to their – to their U.S.

revenue growth, but I don’t think that they are sales going to be down 25% or anything close to that in the first quarter. So, I am just wondering if you can give us an update in terms of how things are going there. Thank you..

Thanks Anthony. We don’t comment specifically. We know that they called out to us on their call the other day, and we really appreciate the partnership that we have with them. And they have got a great business over there.

And so our teams continue to lean in together and find optimal ways to help continue to grow their business and ours and deliver a great experience for our mutual customers. And so they continue to be good.

And we are optimistic on the secular shift that continues to have an e-commerce and we think we are positioned to continue to gain share and grow with alongside them..

Fair enough. Thanks..

Thanks, Anthony..

Thank you. And we have a question from Ramsey El-Assal with Barclays. Your line is open..

Hi, this is Ben on for Ramsey. Thanks so much for taking the question. I wanted to kind of follow-up on the quarter-to-date results. And I understand there is sort of a lot of macro impacts that are difficult to forecast as well as challenging comps. But – so understanding why perhaps you didn’t guide for the full year I’ll ask anyway.

And maybe I’ll ask this way, is there any way you can give us a sense of what you think the seasonality might look like? Because 1Q ‘22 look like a – normal 1Q ‘22 in terms of like the percentage, the distribution of originations, any color like that would be very helpful?.

Yes, thanks, Ramsey. This is Karissa again. For Q1 last year obviously was our toughest comp, because there was abnormal seasonality with the two stimulus payments, one in January and one in March. So we are hoping, but obviously, the macro conditions remain very dynamic. So, it’s hard to provide near-term guidance. It’s really challenging.

But we are hoping we go back to a more normalized calendar by the end of the year, which ultimately Q4 would – historically has been our highest origination volume quarter when the world is normal and the holiday season is strong.

So, we would anticipate that returning, but obviously, everything remains very dynamic at this point in the macro environment. So that’s why we are not providing any near-term guidance..

Sure. Very understandable.

And then just one follow-up on the sort of the new merchants in Q4 and perhaps the initiatives you’ve got with some of the new hires, is there any color you can share around either the pipeline or some characteristics around the new merchants? Is it SMBs, enterprise, anything like that?.

Yes, Ramsey. This is Orlando. Thanks for the question. So what we are seeing this year compared to mid-last year let’s just say is that the retailers have gone past the BNPL shine that we had last year or the excitement around BNPL. I think we are seeing a lot of mergers and acquisitions happening on the BNPL side.

I think they have penetrated many of the retailers by now. And so we are starting to see a shift in retailer saying, okay, I have done the BNPL, now, what’s the next step. And our pipeline has been building pretty nicely. Now, it’s a matter of just executing those leads into deals and getting them integrated as quick as possible.

So – and then, with the addition of the added sales team, we are getting a lot more coverage out there reaching out to these retailers. But I guess compared to last year, the one way I would describe it is they are answering the phone now, where last year there was like, talk to me later.

So, it gives me great hope in the year that we will be able to execute the plans and getting these retailers integrated as quick as possible and starting to produce..

Okay, great. Thanks for taking my questions..

Thank you. We have a question from Hal Goetsch with Loop Capital. Your line is open..

Hi, there. With so many more retailers onboard and more to come and then job market being materially better than it was in 2020 – in early 2021.

You would think there is more people coming into your funnel or more qualifiable people than before? And so with that being said like, are your applications still growing and you are not improving as many or what is your outlook for kind of application growth with more stores and probably more qualifiable borrowers because of improving job market? Thank you..

Yes, I think there is a few answers there. One, obviously, short-term, near-term with just the macro challenges going on that our merchants are facing to applications like we mentioned, especially with the year-to-date or through February numbers to give you the application funnel has shrunk a little.

But ultimately, the long-term viability of this business and some of the secular trends and countercyclicality that we would face especially if credit markets continue, we anticipate that prime will have to tighten and respond to increase delinquencies, which would widen that funnel for us.

And then in terms of our sales pipeline and incremental merchants, yes, as we onboard more merchants that obviously creates more application flow.

So, I think it’s a function of will continue to execute on our side from a merchant onboarding, which will increase applications coming to us, but then also there could be a tailwind as prime /tightens above us and then more decline from the prime come to us in the form of applications..

Thank you..

Thank you. And there are no other questions in the queue. This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day..