Commitments and Contingencies

9 Months Ended

Sep. 30, 2024

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

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 accrued liabilities related to such obligations in the condensed consolidated financial statements when estimable and probable, as of September 30, 2024 and December 31, 2023.

Except as set forth below, the Company and its subsidiaries are not a party to, and their properties are not the subject of, any known material pending legal proceedings.

DCA Litigation

On April 9, 2021, Daiwa Corporate Advisory LLC (“DCA”), filed a complaint in the Supreme Court of the State of New York, New York County. The complaint related to an April 11, 2018 letter agreement (the “Letter Agreement”) entered into by DCA and Legacy Katapult.

On October 7, 2024, the Company reached a settlement with DCA to resolve any and all disputes that exist between the two parties for total consideration of $3.0 million with half paid on October 11, 2024 and the remainder paid over the next two years. On October 14, 2024, the case was formally discontinued, with prejudice. The Company recognized $2.25 million in estimated loss in accrued litigation settlement liability for the payments that are due within one year from September 30, 2024 and $0.75 million in other liabilities for the installment payments that are due after September 30, 2025 in its condensed consolidated balance sheet as of September 30, 2024. The Company recognized $3.0 million in operating expenses in its condensed consolidated statements of operations for the three and nine months ended September 30, 2024 as the lawsuit which gave rise to the DCA settlement occurred prior to September 30, 2024.

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 “New York 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 “Delaware Action”).

On May 20, 2024, the Company reached an agreement in principle to settle the New York Action and Delaware Action for total consideration of $12.0 million, comprised of: (1) a cash component of $8.5 million (the “Cash Component”); and (2) an additional component of $3.5 million comprised of the Company’s common stock (the “Settlement Shares”) and/or cash (the “Additional Component”). On July 3, 2024, the parties executed Stipulations of Settlement. In agreeing to settle, neither the Company nor any of the individual defendants made any admission of liability. On July 3, 2024, a motion for preliminary approval of the proposed settlement was filed in the New York Action and a proposed scheduling order for the proposed settlement was filed in the Delaware Action. On July 17, 2024, the Court in the Delaware Action approved the scheduling order and set a settlement hearing date of October 10, 2024. On July 24, 2024, the Court in the New York Action granted preliminary approval and a settlement hearing date has been set for December 13, 2024.

On October 10, 2024, the Delaware Court of Chancery approved the settlement of the Delaware Action, dismissing all claims asserted with prejudice..The number of Settlement Shares for the Delaware Action (the “Delaware Settlement Shares”) is 275,845 shares which was calculated by dividing $2.8 million by the volume-weighted average per share price (“VWAP”) of the Company’s common stock for the ten (10) consecutive trading days immediately preceding the hearing held on October 10, 2024 for the final approval for the Delaware Action (the “Delaware Settlement Hearing VWAP”). 108,048 of the Delaware Settlement Shares are considered the “Delaware Excess Settlement Shares.” The Company may either deliver the Delaware Excess Settlement Shares (reduced by the New York Unused Shares (as defined below)) or pay in cash the full value of the Delaware Excess Settlement Shares (reduced by the New York Unused Shares), calculated by multiplying the number of Delaware Excess Settlement Shares (reduced by the New York Unused Shares) by the Delaware Settlement Hearing VWAP. The Delaware Excess Settlement Shares or cash are due in two equal installments to be made on April 10, 2025 and October 10, 2025.

The final approval hearing in the New York Action is scheduled for December 13, 2024. The settlement of the New York Action requires final court approval. There can be no assurance that the Court in the New York Action will grant final approval. If final court approval of the proposed settlement in the New York action is granted, the number of Settlement Shares for the New York Action (the “New York Settlement Shares”) will be calculated by dividing $0.7 million by the VWAP of the Company’s common stock for the ten (10) consecutive trading days immediately preceding the date of the hearing on final approval for the New York Action (the “New York Settlement Hearing VWAP”); in calculating the New York Settlement Shares (1) to the extent the New York Settlement Shares are less than 43,839, the difference between the New York Settlement Shares and 43,839 shall be the “New York Unused Shares” and (2) any amount of New York Settlement Shares above 43,839 shall be considered the “New York Excess Settlement Shares.” For the settlement of the New York Action, the Company may either deliver the New York Excess Settlement Shares or pay in cash the full value of the New York Excess Settlement Shares, calculated by multiplying the number of New York Excess Settlement Shares by the New York Settlement Hearing VWAP. The New York Excess Settlement Shares or cash will be due in two equal installments six months and 12 months from the New York Settlement Hearing.

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, the Company had accrued a $12.0 million liability, including a $5.0 million litigation insurance reimbursement receivable, on its balance sheet for the year ended December 31, 2023 for the New York Action and the Delaware Action. In August 2024, the Company paid $3.5 million in cash and the insurer paid $5.0 million into an escrow account for the Cash Component of the settlements.

FlexShopper Litigation

On September 30, 2024, FlexShopper, Inc. (“FlexShopper”) filed a complaint against Katapult in the U.S. District Court for the Eastern District of Texas, Marshall Division. The complaint alleges patent infringement and seeks an injunction as well as damages for alleged lost profits and willfulness. The Company has not recorded any loss or gain contingencies associated with this litigation as it is not probable or reasonably estimable as of September 30, 2024. The Company intends to vigorously defend this case.