Thank you for standing by. And welcome to the Katapult Holdings, Inc. First Quarter 2022 Earnings Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Bill Wright, Vice President of Investor Relations. Please go ahead.

Thank you and good morning. Welcome to Katapult’s first quarter 2022 earnings results 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 quarterly report Form 10-Q for the year ended December 31. 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 financial 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.

Thanks, Bill. Good morning, everyone, and thank you for joining us. On today’s call, we will review the results of the first quarter 2022 and provide an update on our growth strategy. We are, as a company, first and foremost focused on bringing financial inclusion to underserved non-prime consumers. At Katapult, we provide an attractive solution for these non-prime consumers to access the essential products they need for everyday living. Our highly scalable proprietary technology enables us to provide both merchants and consumers with a clear and transparent lease purchase solution that facilitates transactions online or at the point of sale. We believe that our focus on non-prime consumers positions us to capture a significant share of the large virtual lease-to-own market. Our proprietary technology platform, along with our sophisticated risk and decisioning model, is designed to enable us to deliver value-added solutions to our merchants and customers. We have a robust suite of merchant solutions across a variety of integrated point-of-sale options that are designed to enable merchants to efficiently promote and sell incremental inventory. We believe Katapult’s seamless customer experience wins repeat business due to our simple application process, flexible and transparent payment options, and innovative lease financing solutions. We are committed to continually enriching the customer and merchant experience in order to gain share of the large addressable market we serve. Turning to Slide 5, we will focus on how our team is working to deliver on our longer-term ambitions while navigating a macro environment that is challenging for both our merchant partners and consumers. As we have mentioned on past calls, the current turbulence in macroeconomic conditions, including ongoing supply chain headwinds, the end of government stimulus, inflationary pressures, and changes to consumer spending, continues to impact the consumer and merchant economics. While we are not immune to the pressures from these issues, we are confident in our longer-term ability to weather these challenges and remain focused on capturing new volume opportunities from a large addressable market in order to create value for shareholders. Key highlights from the first quarter are: number one, we welcomed 27 new merchants in the quarter, the second highest amount in the history of our company, despite the macro backdrop. In addition, our merchant pipeline is building nicely and we are starting to see acceleration in client wins. Number two, our satisfaction metrics remain strong. Our net promoter score was 51 as of March 31, 2022, and repeat customers made up 49% of our Q1 2022 originations. And number three, we are continuing to invest in initiatives that support our long-term growth strategy. During the quarter, we added high-caliber talent in key leadership roles to facilitate the execution and support of our growth opportunities. We are also investing in strategic product and technology initiatives that are designed to enable us to capture market share. As we build on our already solid operating foundation, we believe we're in the initial stages of creating a sizeable, durable, and scalable financial services enterprise. I will now turn it over to Karissa, our CFO, who will provide more details on our financial performance.

Thank you, Orlando. As detailed on Slide 6, Q1 2022 results reflected the difficult macro environment, as inflationary pressures on consumers and supply chain challenges for merchants weighed on our key revenue drivers. Total revenue for the first quarter of 2022 was $59.9 million, which was down 26% year-over-year. Of the $20.7 million decline, $3 million relates to the adoption of ASC 842, which is discussed on the next slide. Gross originations were down 27% due to the impact of macro challenges noted above combined with targeted proactive underwriting tightening that lowered approval rates. Gross profit was down $16 million year-over-year due to lease margins and our adoption of ASC-842. Our net loss for the first quarter of 2022 was $5.6 million compared to net income of $8.1 million in Q1 2021, and adjusted EBITDA decreased by $18.8 million as we continue to invest for growth through the near-term headwinds combined with public company costs that were not incurred during Q1 2021, as we were not a public company a year ago. Turning to Slide 7, as a reminder, effective January 1st, 2022, the company adopted a revised standard for accounting for leases as required by GAAP, ASC-842. This is a leasing standard that, for Katapult, dictates the timing of recognition of leasing revenues and changes the accounting treatment of bad debt expense within the income statement. As a result of the adoption this year, going forward, the company now records revenues on a cash basis; it will no longer record rental revenue arising from lease receivables or any corresponding bad debt expense on the income statement. We adopted the accounting standard for the three months ended March 31st, 2022, using the modified retrospective approach and have adopted 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 have not recast or restated 2021 or prior periods to conform to the new standard, and the Q1 2022 line items affected by this transition may not therefore be comparable to prior periods. On this slide for illustrative purposes only, the table shows total revenue for the three months ended March 31st, 2021, as if the lesser accounting impacts of ASC-842 were in effect for this period, including the change in revenue recognition from accrual basis to when revenue was earned and cash is collected, and that bad debt expense is no longer reported. Q1 2021 total revenue would have been $3 million lower if ASC-842 were in effect for that period. Turning to slide eight, overall operating expenses were up $3.3 million year-over-year. Excluding bad debt expense, operating expenses were up $8.2 million year-over-year. The total operating expense growth is largely driven by two factors: one, higher compensation from the addition of 38 full-time employees year-over-year as part of investments in our sales and technology development teams to support our strategic growth plan; and two, increased general and administrative expenses related to public company costs and higher marketing spend. Looking at slide nine, impairment charges related to the property health release as a percentage of gross originations was 6.9% in Q1 2022. As we have previously detailed, the stimulus payments that occurred in 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. The significant inflationary pressures coupled with the absence of government stimulus funds has further pressured performance. In response to these data trends, we initiated proactive and targeted tightening of our underwriting in Q4 2021 and have continued to do so into 2022. We do anticipate impairment charges as a percentage of gross originations to continue to trend up to higher pre-pandemic levels as we move through 2022. It is worth noting that as the credit environment becomes weaker, we believe that prime-focused lenders will begin to tighten as well, leading to an increase in the volume of applications, as well as the overall increase in credit quality of customers looking to us for payment solutions. We anticipate this historical pattern to repeat itself at some point this year. I will now turn it over to Orlando to discuss our strategic investments.

Thanks, Karissa. Slide 10 details the strategic investments we are making to position us to capture the large growth opportunity ahead. We believe we have made impactful talent and technology strides in the first quarter of 2022. Most notably, we made key hires to our leadership team during the quarter, including a CMO, Vice President of Strategy and Corporate Development, and Vice President of Strategic Partnerships and Chief People Officer. Our new CMO, Colleen Gorsky, brings to Katapult more than 20 years of B2B2C marketing and partnerships experience in growth phase companies. Most recently, she served as VP of Partner Marketing at Klarna, where she established a cross-functional team to drive brand awareness in the U.S. and expand customer acquisition engagement through integrated merchants. Eric Harmon, Vice President of Strategy and Corporate Development, brings a wide range of experience to Katapult from market analyst to FinTech venture capitalist, most recently holding a position as Executive Director of Alternative Data Products at UBS. He has supported founders and boards of NextGen startups in developing new channels for accelerating growth. Continuing on the strategic side, Jay Diamonon, our Vice President of Strategic Partnerships, brings 15 years of FinTech experience to Katapult and previously held strategy-related positions at Visa, FirstData, and Ingenico. Prior to joining Katapult, Jay led the U.S. sales team for Adyen, a leading payments processing company. During his time there, he started and managed the partnerships team. Jorge Diaz, our new Chief People Officer, brings over 25 years of creating and executing successful talent strategies. He served as a management consultant and certified executive coach for fast-growing companies. Moving to the sales organization, we continue to work to optimize our sales process to penetrate this large addressable market. Guided by our new Vice President of Sales, Marino Ruiz, and in his first full quarter at Katapult, we are already seeing tangible progress across our key metrics, and our confidence is growing that it's the right decision to invest in and grow our sales team. We are confident that this enhanced approach, augmented by a robust pipeline of new product offerings and brand initiatives that will be launched in the coming quarters, will help us drive a re-acceleration of our growth and maximize our chances to land additional large merchant partners. We look forward to continuing to update you on our progress in the next quarter as we are seeing increased engagement from the retail community. Slide 11 lays out our high-level strategic ambitions for the next three years. We have built a solid platform and ecosystem for non-prime consumers to access high-quality merchants and expand their eCommerce product choice. Near-term, our plans are to continue to deepen relationships with our existing merchants and partners and to increase our new merchant pipeline. A growing and more efficiently engaged sales force and an exciting pipeline of product and technology enhancements give our leadership team confidence that, despite the current macro headwinds, Katapult is on the right path to capturing share in our addressable market. In conclusion, as we look ahead to the rest of the year, we remain confident that our company is well-positioned to take advantage of strong, long-term trends in digital commerce and alternative payment solutions. We believe that the anticipated continuing turbulence in macroeconomic conditions in the near-term will not limit our ability to strategically grow our company over the longer-term. We are managing our underwriting conservatively. We continue to deepen relationships with existing customers and merchants and are steadily adding new talent and technology-driven innovations that will enable our next phase of growth.

[Operator Instructions] Our first question comes from Josh Siegler with Cantor Fitzgerald.

So, it looks like you guys accelerated new merchant adds during the quarter, especially compared to Q4. Are you starting to see the benefit of the sales team rollout? And do you expect this number to accelerate further as we progress through 2022?

We are absolutely having meaningful conversations with many retailers. We are finding that this is a tough retail sales environment for many merchants, and Katapult is a solution that will actually help them increase sales and customer conversions. So we are seeing increased demand for these conversations, and we're really optimistic. Absolutely, just like you said, the investments that we've made both in headcount and in sales processes and investments in new capabilities are spurring more conversations and accelerating those. So we're really optimistic about what the second half of the year looks like.

And I know we've talked for a couple of quarters now about the potential positive impact of prime lenders tightening their underwriting and what impact that could have on Katapult’s book of business. Are you starting to see that play out in any way, or is that more of a back half of 2022 story?

At this point, we have not seen that play out. There's usually a lag where our consumers are impacted first by some of these macro headwinds, inflation, etc. But we're anticipating that at some point this year, it's going to move up the credit spectrum and impact more prime-type consumers where the prime lenders would ultimately have to tighten, but we have not seen it yet.

[Operator Instructions] Our next question comes from Anthony Chukumba with Loop Capital Markets.

Just wanted to -- and I know you're not providing specific guidance, but just wanted to get any sense for what you're seeing quarter-to-date, at least in terms of lease originations. Obviously, you were up against a really tough comparison from the first quarter of 2021, but comparison should, on a year-over-year basis, sort of ease. So, I was just wondering if you're seeing any benefit from the -- at least the easier comparison or all these merchant adds that you've brought on. Thanks.

So in general, many of our merchants are going through a tough time right now. So we haven't seen a lot of shift overall. That said, like I mentioned before, our investments are certainly pulling through, and the merchant adds are improving our new business side. So we are optimistic that despite these headwinds, we're going to have opportunities for long-term growth. And we're going to keep monitoring it as we see what's coming next to decide whether or not we continue to invest in these spaces or if we pull back.

And Anthony, to add a little more context: through today, we haven't seen much change in the macro trends that we were seeing through Q1. On top of that, we're continuing to stay very conservative with our underwriting. So we're also prudently managing our approval rate just like we did in Q1.

Got it. And then just one quick follow-up. You talked about these investments you've made and this headcount you've brought on. I guess, where are we in terms of that investment cycle? I mean, are those investments pretty much done at this point, or are there still investments that you're going to need to make?

Sure, hi, Anthony. It’s Orlando. We still plan on hiring a Chief Revenue Officer. That's the last of the key hires. And we have some really good candidates that we're considering for the position. We have made all the strategic hires, which I mentioned on the call: the CMO, the CPO, the Vice President of Strategy; those have all come in and started pretty strong. We're excited because the talent that we're getting is better than we expected, I guess we should say. So we're talking to really strong, experienced people both on the Chief Revenue Officer side, but obviously, as I mentioned, with the CMO coming from Klarna, we're getting a strong team together. Now it's about executing that strategy.

And on the technology and product side, we really feel good about the investments that we've made for long-term growth. All of this is just in response to listening to the voice of our customer and the retailers. Though they're going through a tough time, they're telling us exactly what they need to get back to growth. We really believe in the long-term growth opportunity in digital payments and digital shopping. So that being said, this spend is discretionary, and we'll continue to monitor. If we don't feel like we're going into ‘23 with lots of traction, we will look at pulling back some of this, but we're excited about some of the announcements we'll have later in the back half of the year.

Thank you. Our next question comes from Vincent Caintic with Stephens. Your line is open.

Thanks for taking my questions. First on funding. So I appreciate the discussion on your volume opportunities. And that's going to be my second question, but it seems like there's been a lot of broad industry issues with the ability to source funding and funding getting more expensive. And so just wondering if you could talk about that and the appetite, and your ability to fund the growth that you're anticipating? Thank you.

Sure. Great question. So we have an asset-backed facility with our lender that actually has over $76 million of capacity on it, and that's committed capacity to us. So it's an asset-backed facility; we get a 90% advance rate. So as we are growing originations, we would be able to leverage that facility to basically fund all the growth for the foreseeable future. So we feel like we're in a good spot with our lender in that arrangement that we have.

Okay, great. That's helpful. And then, so now talking about the volume opportunities, I was wondering, so it sounds like you're getting more engagement from merchants; you're signing on more of them. I was just wondering if you could talk about it because it seems like e-commerce sales have been difficult recently. We've seen even the biggest guys have weaker sales. So if you could talk about how you think about that dynamic versus the merchants, maybe wanting to save that off or trying to find other channels of growth, and sort of what the competition is? So as an example, I've seen that Wayfair has -- they've added Bread, they added Progressive back as well. So just kind of the discussions you're having and the traction you're getting with your merchants? Thank you.

Hi, Vincent. This is Derek. Just coming back and thanks for your question. We have definitely been having more meaningful conversations with our retailers. It all starts with having trusted relationships and partnerships with our existing customers, building longstanding relationships with our prospects and hearing what they are seeing in the market and what they see as the opportunity. It really cuts across three different areas. They are focused on the user experience, their operational experience, and how we can support them in marketing because, yes, during tough headwinds, they are really focusing on all three of those areas. Our team has done an amazing job as we have made investments in product and technology and in sales organization to be able to respond to that. I'd say in general, the conversations that we are having are more aggressive and intentional in terms of how we move forward and specific in terms of ways to be able to support merchants in their growth and get them back on that growth trajectory in some of those segments where they have had a tough time of late. But, yes, in general, we are seeing more engagement, and we all know that, as sales become a little harder to find, we are here to help them open up an entirely new segment, both from a financial inclusion standpoint and just from a convergent opportunity. We are a great partner for them to be able to grow their sales and access this market segment.

Vincent, this is Orlando. Hello. If I can add about Wayfair, we have always been in a competitive position with Wayfair, and I think what they look for is they are trying to provide financing at all levels. That's why they have multiple lenders at different levels. With us, the dynamics go to all parties equally. Our indicator for share is conversion rate, and we track this daily, if not hourly. We can see if there is any change. Quite frankly, since Progressive has joined, we haven't seen any material change in these rates.

Okay. That's perfect. Thank you. And if I can sneak one more in, you mentioned-- on the credit side, you mentioned that you have tightened your underwriting. Is your tightening complete, and if you could talk about early results from your tightening? Thank you. That's it for me.

We are always monitoring credit and changing things and testing things, but we did do some significant tightening in Q4 and then into Q1, with some of the data trends that we were seeing. I would say from where our approval rates sit, it's probably complete in terms of our approval rates; most likely not going to go down from the current run rate. Now it's all about building that back up based on how we can optimize approval rates and really understand the factors that are driving good performance and bad performance. So, that's where we are now. We are kind of in maintenance mode, tweaking and being a little bit more surgical on our approval rates and how we are going to manage those going forward.

Thank you. [Operator Instructions] We have a follow-up with Josh Siegler with Cantor Fitzgerald. Your line is now open.

Thank you. And thanks for taking my follow-up. It looks like Q1 revenue as a percentage of gross originations performed very well, especially considering there was one less Friday during the quarter. Can you please provide some color on some of the drivers of this high revenue performance?

The biggest driver was tax season. Tax season actually played out pretty well for us, considering there was some uncertainty about how large refunds would be this year with the Child Tax Credit initiative that happened in the second half of last year. So, we had a really strong tax season, which I think spurred some of that revenue better than expectations.

And it looks like the acceleration rate of impairment charges as a percentage of gross originations ticked up this quarter. Do you expect this acceleration to continue throughout the year until you reach pre-pandemic levels?

Yeah, that's the expectation right now is that we were at historically low levels during COVID, starting in the second half of 2020. We do think it's going to go back up to higher pre-pandemic levels, and that's where we think it'll stop growing and kind of just maintain that rate on a go-forward basis.

And I'm currently showing no further questions in the queue at this time. I'd like to hand the conference back over to Orlando for any closing remarks.

Thanks. Thanks for all the questions, guys; we appreciate it. We're really looking forward to the rest of the year. I think you're going to see some interesting announcements in the second half of the year on not only merchant adds, but also on the technology side. So we're very bullish about the second half of the year and the changes that might come to the company. So, thank you for your support and thanks for your time today.

Ladies and gentlemen, thank you for your participation. You may now disconnect. Everyone, have a wonderful day.