Katapult Holdings, Inc.

Thank you and good morning. Welcome to the Catapult Third Quarter 2021 Earnings Conference Call. With me today are Alanda Dias, Chief Executive Officer, Derek Mandlin, Chief Operating Officer, and Krista Cuperto, Chief Financial Officer. We issued our earnings release and 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 Form 10-Q for the quarter ended September 30, 2021. These statements reflected 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 financial information that constitute non-GAAP financial measures under SEC rules. These include measures such as adjusted EBITDA, 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.

Thanks, Bill. Good morning, and thank you for joining us. On today's call, we will review our third quarter 2021 results, share what we're seeing in the current macro environment, and provide an update on how our strategy for sustainable growth within our large addressable market is progressing. We are confident our highly scalable technology is delivering on our mission of financial inclusion for the non-prime consumer. We see growing evidence of the value and satisfaction that we bring to our customers, as well as incremental sales opportunities we enable for our merchant partners that allow them to reach a very large and unpenetrated market of non-prime consumers. Our long-term vision of supporting this underserved segment is coming into sharp focus And we are pleased with our progress on our platforms and partnerships that enable ongoing growth. Turning to slide five, you can see the addressable market for durable goods e-commerce is already substantial. As the leading e-commerce financing platform is focused solely on non-prime consumers, we believe we are well positioned to capture a significant share of durable goods e-commerce market, targeting underserved consumers as we continue to grow strategically. Our proprietary technology platform, combined with our sophisticated risk and decisioning model, is designed to allow us to deliver value-added solutions to our merchant partners and offer innovative lease financing solutions to underserved non-prime consumer. We pride ourselves on delivering a seamless customer experience with flexible and transparent payment options. Looking ahead, we'll deliver incremental opportunities to our customers and merchant communities, bringing more financial possibilities to the non-prime consumer. As you can see from the quarterly highlights on slide six, our team continues to execute well in the face of a difficult macro environment. Consumer spending habits are changing as we begin to emerge from the pandemic. With people starting to move about more freely in public, spending on services and wants like entertainment and travel has increased. However, demand for durable goods that are needed on a daily basis remains strong. In addition, Significant supply chain disruptions are creating challenges for our merchant partners to secure inventory and fulfill orders in a timely manner, which is pressuring their sales and consequently our revenue and gross originations. In spite of these ongoing macro challenges, we continue to capture market share and add merchant partners, with 25 new merchants added in the quarter, bringing our total to 82 new merchants year-to-date. Our merchant retention rate also remains strong while our customer satisfaction metrics such as our net promoter score and repeat customers are up significantly year over year. We expect that after a few more quarters of recovery from the pandemic, we will see a return to more normal macro environment. Our strong balance sheet with $100 million of cash supports our growth strategy, which includes expanded business development that is driving the addition of new merchants that can be onboarded more quickly, as a strategic investment in new product and technology initiatives, setting us up for an exciting year ahead as we seek to accelerate the growth of our business. Despite the current macro challenges that are impacting our merchant partners, we are executing well against a challenging sales backdrop. We have established a solid operating foundation from which to execute our longer-term growth strategy and believe we are in early stages of building a large and durable financial service enterprise with dramatic incremental profit opportunities as we scale. I will now turn it over to Carissa, our CFO, who will provide more details on our third quarter performance. Carissa?

Thank you, Orlando. As detailed on slide 7, total revenue for the third quarter of 2021 was $71.7 million, an increase of 1% year-over-year. Revenue year-to-date reached $229.8 million versus $173.8 million last year, an increase of 32% year-over-year. Growth originations were $61 million in the third quarter of 2021, up 1% year-over-year. Growth originations year-to-date are $189.1 million versus $175.3 million, up 8% year-over-year. As Orlando highlighted, significant supply chain disruptions are creating challenges for our merchant partners to secure inventory and to fill orders in a timely manner, which leads to lower sales and conversion rates. These headwinds did mute third quarter origination growth from our merchant partners that we believe would have been higher absent the challenging macro environment. Despite these difficult macro factors, we were able to slightly increase overall growth originations in Q3 as our merchant partners worked through these supply chain disruptions. Breaking down our Q3 growth originations. Our largest merchant partner reported third quarter U.S. sales down 21% year-over-year. However, we actually increased our penetration rate, defined as growth originations, as a percentage of U.S. sales with this merchant, and our growth originations with that partner were down only 6% year-over-year. Our growth originations with our other merchants grew 17% year-over-year, spurred by new merchant ads. We believe the overall trajectory of our revenue and origination growth should accelerate as we continue to add new merchants to a healthier baseline of existing growth originations. Though we are optimistic these industry trends will ultimately prove to be transitory, we anticipate supply chain disruptions will continue to create uncertainty for our merchant partners throughout the remainder of 2021. Given these macro headwinds, it remains difficult for us to have sufficient visibility for the balance of the fourth quarter and be in a position to provide guidance at this time. As a result, we plan to update you on our fourth quarter progress in the beginning of December after the Cyber 5 period, which is Thanksgiving through Cyber Monday. and historically brings in record shoppers and sales for many retailers. Looking longer term, trends in e-commerce sales remain extremely encouraging. Our adjusted EBITDA for the third quarter of 2021 was roughly breakeven at $122,000, reflecting three areas of year-over-year expense increases. One, more normalized seasonal lease payment performance. Two, some level of incremental public company costs. And three, our increased investment in key new hires and growth initiatives. We will dig into each of these categories more specifically, but at a high level, we feel our profit margin profile is poised to grow nicely as we gain economies of scale through our growth strategy. Looking at Friday 8, the stimulus payments that occurred during 2020 and early 2021 in response to COVID led to historically favorable credit performance for prime and non-prime consumers alike. As we move through 2021, the credit environment is beginning to normalize to pre-pandemic patterns. Our lease payment performance is following that track in both lower early buyout levels and higher write-offs. Our 90-day early purchase auction rates have trended down through Q3, and delinquencies for the period increased year-to-year but are stabilizing at pre-COVID levels. Our third quarter bad debt expense was up compared to a year ago when the issuance of stimulus checks led to historically low delinquency rates. However, bad debt expense is actually down sequentially from $8 million in Q2 of 2021 to $6 million this quarter. Our provision for impairment on our lease assets, which is a proxy for write-offs, was $3.4 million in the third quarter of 2021 versus $4.4 million in the third quarter of 2020. We do anticipate this to normalize back to our pre-pandemic levels going forward. In regards to the credit normalization that we are seeing, one crucial distinction between buy now, pay later in our lease-to-own business is our revenue model is driven by customer lease payments. We don't rely on merchant discounts, but rather higher margin lease economics, and therefore we have more capacity for variations in our delinquencies. In addition, our proprietary credit algorithms are constantly becoming more effective as we learn from additional data and sophisticated machine learning tools. which allows us to increase our approval rates over time while maintaining least performance that meets our hurdle rates. Finally, I would note that there are some elements that counter sick locality to our business. As we discussed on our last call, historically high savings rates and low delinquency rates earlier this year led to prime providers slightly stretching down the credit spectrum to capture some consumer transactions in our highest score band. Now, as the credit environment normalizes, any modest deterioration in macro consumer credit levels can be positive for our company as we expect prime credit providers will tighten their underwriting, leaving the higher-quality consumers coming down into our market and improving the overall quality of our customer pool. Turning to slide 9, overall operating expenses were up $10.3 million year-over-year. This operating expense growth can be largely split into two categories. First, additional expenses of being a public company, including D&O insurance premiums, accounting, and legal expenses. Second is investments and future growth, focused on technology and product enhancements and additional business development staffing. Our technology headcount, including contractors, is up from 32 professionals a year ago to 69 today, and our sales and marketing headcount is up from 19 to 37 full-time employees. We anticipate that these expenses will shrink as a percentage of our revenues as we scale new growth originations. We expect investments in growth to continue into 2022 as we invest to capitalize on the massive scale of the addressable market opportunity ahead of us. We believe that the potential payoff to those investments is significant over time, as Orlando will discuss further.